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VideoCalifornia’s Software Sales Tax Expansion Raises Sourcing Questions for Multistate Businesses
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Beginning January 1, 2027, California will significantly expand its sales and use tax to include many electronically delivered and remotely accessed software products, including software as a service (SaaS). While the expansion of California’s tax base is straightforward, the law raises a more complex question for multistate businesses: How should software purchased centrally but used across multiple states be sourced for tax purposes?
Key Takeaways
- California will expand its sales and use tax to many electronically delivered and remotely accessed software products, including software as a service (SaaS) beginning January 1, 2027.
- For multistate businesses, the biggest question is how software purchased centrally but used across multiple states will be sourced for tax purposes.
- Businesses should begin reviewing software contracts, billing addresses and user-location data now while monitoring additional guidance from the California Department of Tax and Fee Administration (CDTFA).
On June 29, 2026, Governor Gavin Newsom signed SB 122 into law, extending California’s sales and use tax to many prewritten software products that historically fell outside the state’s sales tax base because they were delivered electronically or accessed remotely.
For companies operating in multiple states, the taxability question may be the easy part. The more challenging issue is determining how California’s new sourcing rules apply when enterprise software is purchased through a single contract but used by employees and business units throughout the country.
What Changes in 2027?
SB 122 expands California’s definition of tangible personal property to include certain digital products, including prewritten software transferred electronically or accessed remotely. The legislation also broadens the definitions of “sale,” “purchase” and “use” to encompass activities such as accessing, downloading, copying, updating, storing and otherwise using qualifying digital products.
As a result, many software and SaaS transactions that previously fell outside California’s sales tax base will become taxable beginning January 1, 2027.
Importantly, SB 122 is not a tax on all digital products. The legislation primarily applies to prewritten software and SaaS. Digital books, digital music, digital video, video games, cryptocurrency, certain digital infrastructure offerings and custom software generally remain outside the expanded tax base.
Why Multistate Businesses Should Care
Enterprise software is often purchased through a centralized procurement process with one contract, one billing address and one accounts payable function, even though the software may be used by employees in dozens of states.
California’s sourcing rules generally rely on the purchaser’s address information, beginning with the billing address and then looking to other customer address information if necessary. While this approach may be relatively straightforward for sellers to administer, it does not always reflect where software is actually used.
Consider a company headquartered in California that purchases a nationwide SaaS license for 5,000 employees located across 20 states. The software agreement may identify only a single California billing address even though most users are located elsewhere. That raises an important practical question: How should California tax software that is purchased in one state but used throughout the country?
Where Uncertainty Remains
Some states provide taxpayers with a clear framework for allocating software used in multiple jurisdictions. Texas, for example, generally allows multistate purchasers of taxable data processing services to allocate the taxable amount based on where the benefit of the service is received, provided the allocation is supported by appropriate business records.
California’s new law takes a different approach. While SB 122 includes place-of-use provisions and authorizes additional administrative guidance, it does not expressly provide a broad statutory multiple-points-of-use election similar to those available in some other states.
That does not mean every software purchase billed to a California address will automatically be taxed entirely by California. Rather, the statute leaves important implementation questions unanswered, and additional guidance from the California Department of Tax and Fee Administration (CDTFA) is expected. CDTFA has already announced a public workshop to address sourcing and place-of-use issues under the new law.
Until additional guidance is issued, multistate businesses could face increased compliance burdens, uncertainty regarding seller collection responsibilities and the potential need to pursue refunds or other adjustments if tax is collected differently than the software’s ultimate use.
Preparing for California’s New Software Sales Tax Rules
Businesses should begin preparing well before the January 1, 2027, effective date.
Software sellers should:
- Identify products that may become taxable
- Review the customer address information collected during the sales process
- Evaluate whether billing systems and tax engines can correctly apply California’s new rules
Software purchasers should:
- Review significant software contracts and vendors
- Compare California billing addresses to where software users are actually located
- Preserve documentation supporting user locations, seat counts and other reasonable measures of software use
- Coordinate with procurement, IT and accounts payable teams to ensure billing information and user-location data are readily available
- Monitor future CDTFA guidance addressing sourcing and implementation
What Comes Next for Multistate Businesses
California’s expansion of sales tax to electronically delivered and remotely accessed software represents one of the state’s most significant sales tax changes in recent years. While determining whether software is taxable may be relatively straightforward, applying those rules to enterprise software used across multiple states is likely to be considerably more complex.
Businesses with centralized software procurement and multistate user populations should begin evaluating their software purchases, billing addresses, user-location data and contract terms now. As CDTFA issues additional guidance, those organizations will be better positioned to support the most accurate tax treatment and avoid unnecessary compliance challenges.
Contact us to discuss how the changes may affect your organization and what steps to consider before the January 1, 2027, effective date.
Authored by Marshall Ferris and Blake Fuqua
©2026
