On July 21, 2026, the California Department of Tax and Fee Administration (CDTFA) held its first implementation workshop meeting regarding Senate Bill 122 (SB 122), which extends California’s sales and use tax to digital software and software-as-a-service (SaaS) effective Jan. 1, 2027. Signed by Gov. Gavin Newsom on June 29, 2026, SB 122 marks the most significant expansion of California’s sales and use tax base in decades.
The workshop drew more than 400 in-person and online participants, and the questions ranged from general scope of the new rules to specific, as-applied fact patterns. The CDTFA offered some clarification, acknowledged that numerous open issues would need to be resolved through emergency regulation, and repeatedly emphasized the limits of its authority — noting that certain relief stakeholders sought would require action by the legislature, rather than the department.
Senate Bill 122 in Brief
SB 122 makes several significant changes to the treatment of software for sales and use tax purposes. Specifically, the bill:
- Expands and broadens the definition of “tangible personal property” to include “digital products” – prewritten computer software, whether delivered on physical media, transferred electronically, or accessed remotely — thereby eliminating the historical distinction that had left electronically delivered and cloud-based software outside the tax base;
- Establishes new sourcing rules that generally source remote sales to the purchaser’s California address under a billing-address-first hierarchy, and place-of-use rules keyed to where the person accessing the product is located;
- Shifts the imposition from sales tax to use tax once a purchaser’s purchases of electronically delivered or remotely accessed software from a single retailer exceed $5 million in a calendar year, requiring the purchaser to self-assess and remit;
- Preserves the exemption for custom software and for products purchased solely for use outside California or in interstate or foreign commerce;
- Exempts certain services provided in electronic form that primarily involve human effort originating after the customer requests the services;
- Authorizes the CDTFA to approve alternative methods to calculate the tax, including on software used concurrently in multiple locations; and
- Grants the CDTFA two-year emergency regulatory authority to implement the new regime.
- Multiple Points of Use. Although SB 122 does not itself contain a multiple points of use (MPU) mechanism, the CDTFA indicated it might develop a purchaser-side exemption certificate and is evaluating apportionment approaches modeled on other states, including Massachusetts, based on user or device location. On the other hand, for purchases below the $5 million threshold, the CDTFA suggested that a real-time exemption certificate or a back-end refund process might be the vehicle for allocating tax between California and out-of-state use.
- Contracts and Renewals. The CDTFA confirmed that a taxable transaction on or after Jan. 1, 2027, requires both (1) a right to use, and (2) consideration given after that date; renewals occurring on or after the effective date would generally be taxable. The CDTFA declined to commit on whether the contract date or the payment/access date controls for renewals or agreements effective for multiple years.
- The $5 Million Threshold. The CDTFA clarified key mechanics of the liability shift: the threshold is vendor-specific, measured over a 12-month period, and shifts the collection obligation on the transaction that causes purchasers to exceed $5 million with that vendor. The associated direct-pay authorization would likewise operate on a 12-month basis.
- Custom Versus Prewritten Software. The CDTFA confirmed that its existing guidance distinguishing custom from prewritten software will continue to apply, and that custom software —software prepared to the special order of a single customer — remains outside the tax.
- Human Effort. The CDTFA framed the human-effort exemption as a “true object” inquiry — whether the customer is accessing software for its function (taxable) or accessing human effort delivered through software (exempt). While the department offered directional examples, it was candid that it has not yet defined the type or degree of human effort required to qualify and indicated it would include some illustrative examples in the emergency regulations while leaving more detailed line-drawing to the subsequent rulemaking.
- Bundled Transactions, Digital Infrastructure, and TTAs. The CDTFA addressed a range of additional issues, including the treatment of bundled offerings under the true object test, the boundary between taxable software and excluded “digital infrastructure,” considerations of when incorporation of software into a product may qualify as a sale for resale, and the continued but narrowed role of technology transfer agreements (TTAs). On several of these points, the department reiterated that its authority is limited to interpreting existing law and that some outcomes may ultimately require legislative action.
CDTFA Workshop Takeaways
The workshop generated substantial feedback from participants across industries. The recurring theme was that, while SB 122 sets the framework, much of the operative detail remains to be developed. The CDTFA stated candidly that it would rely heavily on currently existing sales and use tax principles and regulations where applicable and that while it would fill certain gaps through rulemaking, many issues would need to be addressed through legal opinions and, ultimately, litigation.
The most significant points addressed:
What Comes Next
The CDTFA has opened its public comment period and expects to circulate a discussion draft of its emergency regulations by the end of August, followed by an Interested Parties Meeting in late August or September, and submission to the Office of Administrative Law in early December in advance of the Jan. 1, 2027, effective date. A second round of rulemaking may occur next year to address issues that emerge after implementation.
Given the compressed timeline, businesses that sell or purchase software or SaaS in California may wish to begin assessing how the new rules apply to their offerings and arrangements and should consider whether to participate in the comment process while the operative details are still being shaped.
Greenberg Traurig attorneys attended the workshop and continue to monitor developments closely.