On Sept. 10, 2026, the California Department of Tax and Fee Administration (CDTFA) held its second Interested Parties Meeting to discuss proposed emergency regulations implementing state Senate Bill 122 (SB 122), which will extend California sales and use tax to prewritten software and software as a service (SaaS) beginning Jan. 1, 2027.
While the proposed regulations provide a roadmap for implementation, the discussion underscored that impacted parties have remaining questions regarding sourcing, contract-transition rules, multistate software deployment, and the administration of SB 122’s direct-pay and multiple-points-of-use (MPU) provisions.
Background on SB 122
As discussed in our July 2026 GT Alert, SB 122 represents a significant expansion of California’s sales and use tax base. Beginning Jan. 1, 2027, the statute will generally treat prewritten computer software as taxable tangible personal property, regardless of whether it is delivered on physical media, transferred electronically, or accessed remotely.
The proposed regulations mark CDTFA’s first effort to implement those changes.
Stakeholders Focused on Sourcing
During the meeting, the most extensive discussion focused on California’s purchaser-address sourcing hierarchy, which will generally look first at a purchaser’s billing address. Multiple stakeholders questioned how the hierarchy will operate in practice, particularly where sellers maintain multiple addresses for a customer over time. The discussion focused on whether historical California addresses might create audit exposure years later, whether current transaction documents should control, and how multistate businesses should reconcile California’s approach with sourcing rules used by other states. CDTFA appeared receptive to concerns regarding administrative burdens and indicated that additional examples may be helpful.
Questions Remain Regarding Existing Contracts and Renewals
Stakeholders repeatedly requested additional guidance on multi-year SaaS agreements, fixed-price contracts, annual billings, renewals, and contract true-ups spanning Jan. 1, 2027. CDTFA stated that, in California, taxability generally turns on when the right to access transfers, rather than when payment occurs. CDTFA representatives also indicated that contracts granting a fixed right to access before Jan. 1, 2027, may be treated differently from renewals or newly granted rights occurring after the effective date. CDTFA may add further examples before finalizing the regulations.
MPU Provisions Continue to Draw Attention
The proposed regulations would permit taxpayers to allocate software use between California and non-California location using reasonable methodologies. While stakeholders generally welcomed CDTFA’s willingness to recognize multistate usage, substantial discussion focused on the practical administration of MPU certificates, seller reliance, purchaser reporting obligations, and the interaction between MPU allocations and other provisions of the statue.
Questions About Digital Infrastructure, Bundled Transactions, and Human Effort Persist
Participants repeatedly sought additional guidance regarding the distinction between taxable software and excluded digital infrastructure, including infrastructure as a service, platform as a service, cloud storage, AI-enabled offerings, and other hybrid offerings. Stakeholders also requested additional examples addressing California’s traditional “true object” analysis and application of the statute’s human-effort exemption, particularly where software functions primarily as a delivery mechanism for services or information. CDTFA acknowledged that additional examples may be warranted in future guidance.
Administration Issues Remain Under Review
Stakeholders asked about how the state plans to administer the statute’s new purchaser liability and direct-pay rules, including permit timing, waiver procedures, and vendor-by-vendor threshold calculations. They also requested further information about how SB 122’s direct-pay framework will operate in practice. CDTFA acknowledged some of these operational questions and indicated further guidance may be necessary.
Practical Considerations
Written comments on the proposed regulations are due Sept. 24, 2026. CDTFA is expected to proceed with emergency rulemaking thereafter with final regulations anticipated before the Jan. 1, 2027, effective date. While the proposed regulations answer some questions raised following SB 122’s enactment, the Interested Parties Meeting demonstrated that sourcing, contract-transition issues, MPU administration, and classification questions remain unresolved areas of focus ahead of implementation. Businesses affected by SB 122 may wish to monitor developments closely and should consider participating in the regulations’ rulemaking process.