In June 2026, California Governor Gavin Newsom proposed expanding the state's sales tax rules to cover all sales of prewritten software as part of the 2026–2027 budget. On June 29, 2026, he signed Senate Bill 122, bringing certain digital products within the scope of California's sales and use tax.
Beginning January 1, 2027, sales and use tax will apply to digital prewritten software. To explain how the rules work, the California Department of Tax and Fee Administration (CDTFA) has published a tax guide for retailers and purchasers of digital products.
Main Sales Tax Rules for Digital Products
Under Senate Bill 122, the definition of tangible personal property now includes digital products, whether they are transferred on physical storage media, delivered electronically, or accessed remotely. The tax also applies to copyright and patent interests sold with these products.
Retailers selling taxable digital products for use in California will generally need to register with the CDTFA, report and pay applicable sales tax or collect use tax, maintain adequate transaction records, and correctly allocate local and district taxes. Out-of-state retailers may also have registration and tax collection obligations if they are considered to be engaged in business in California.
The new rules include a USD 5 million gross receipts threshold that can move the responsibility for paying tax from the retailer to the purchaser. A retailer may be relieved of the obligation to pay sales tax or collect use tax on electronically transferred or remotely accessed digital products once its aggregate sales to the same purchaser exceed USD 5 million. This threshold applies to sales made during the 2027 calendar year and, from January 1, 2028, will be assessed based on the current or preceding calendar year.
Once the threshold is exceeded, the purchaser must report and pay use tax directly to the CDTFA on the transaction that triggers it. Purchasers may also owe use tax directly to the CDTFA on digital products stored, used, or consumed in California when the retailer is out of state and is not registered to collect use tax, or fails to collect it, or when the purchaser provided an exemption certificate but later used the product in a taxable manner.
What This Means for Businesses
The CDTFA's new guide serves as a crucial resource for businesses adjusting to California's expanded sales tax scope on digital products. As the January 1, 2027, effective date approaches, both retailers and high-volume purchasers should review their sales thresholds and compliance processes to ensure a smooth transition under Senate Bill 122.
