The Governor of California has proposed extending the state’s sales and use tax to prewritten (canned) software, regardless of how it is delivered. If enacted, the change would take effect January 1, 2027.
Currently, California’s sales tax applies only to prewritten software sold on tangible media. Software that is downloaded or accessed remotely (SaaS) is not taxed. Under the proposal, all retail sales of prewritten software would be taxable, regardless of how it is delivered. Custom software would remain exempt.
Key Considerations for Software Businesses
- New collection obligations: If you sell downloadable software or SaaS subscriptions to California customers, you may be required to collect and remit California sales tax for the first time starting January 1, 2027.
- Business-to-business purchases: A large share of newly taxed transactions would likely be business-to-business sales, which can raise costs for consumers indirectly and create economic inefficiencies.
- Other digital products not covered: The proposal focuses on software only, leaving other digital products outside the new tax base
Given the influence of California on the tech industry, software businesses should monitor this sales tax expansion proposal closely. As this could significantly impact their collection obligations starting in 2027.
Nothing is final, and the proposal may change during the legislative process. Given California’s size and influence, software businesses should keep this on their radar.
To learn more, visit the California Legislative Analyst’s Office.
