California’s New Software Sales Tax: What Businesses Need to Know Before January 1, 2027
California businesses that rely on software subscriptions, cloud-based applications, or other digital technology should prepare for an important sales tax change taking effect January 1, 2027.
Under legislation enacted as part of California’s 2026–2027 budget, certain digital products that were previously exempt from sales and use tax will become taxable. This change could affect many businesses that rely on software for their everyday operations.
At DBMCPA, we encourage our business clients to review their software purchases and subscriptions before year-end to better understand how the new rules may affect their operating expenses.
What Is Changing?
Historically, California generally did not impose sales tax on software delivered electronically or accessed remotely, provided the transaction did not include taxable physical property.
Beginning January 1, 2027, California will expand its sales and use tax rules to include many digital products, regardless of whether the software is downloaded, delivered electronically, or accessed through the internet.
This includes Software-as-a-Service (SaaS) subscriptions, which allow users to access software hosted on a provider’s servers rather than installing it directly on their computers.
What Types of Software Could Be Taxable?
Businesses may encounter sales tax on commonly used applications, including:
- Accounting, bookkeeping, and tax preparation software.
- Payroll and human resources management platforms.
- Customer relationship management (CRM) systems.
- Project management and workflow applications.
- Cloud-based document management software.
- Certain online communication and collaboration platforms.
For example, a California business paying $500 per month for a taxable software subscription could see its annual costs increase by several hundred dollars, depending on the applicable sales tax rate.
Are All Digital Products Taxable?
No. The new law includes exclusions for certain digital products.
Digital books, music, movies, certain video games, and digital assets such as cryptocurrency are generally excluded from the expanded tax rules.
Qualifying custom-developed computer software and certain cloud infrastructure services may also remain exempt.
However, businesses should not assume that a product is exempt simply because it is delivered electronically or described as a service. The specific product and the terms of the transaction will help determine whether sales tax applies.
What About Existing Contracts?
The timing of a software purchase may affect whether the transaction is taxable.
For example, purchasing a subscription before December 31, 2026, does not necessarily avoid sales tax if access to the software begins in 2027. Similarly, certain ongoing subscriptions that began in 2026 may become taxable for periods extending into 2027.
Businesses should review their contracts, billing cycles, and software access dates to determine how the new rules may apply.
How Can Businesses Prepare?
At DBMCPA, we recommend that businesses take time before year-end to:
- Review current software subscriptions and anticipated renewals.
- Evaluate potential increases in technology expenses.
- Identify software used by employees in multiple states.
- Review invoicing and sales tax collection procedures if they sell digital products.
- Monitor additional guidance from the California Department of Tax and Fee Administration (CDTFA).
Looking Ahead to 2027
Although the added tax on one software subscription may seem relatively small, the combined cost of multiple software platforms could be significant.
DBMCPA can help businesses evaluate how these changes may affect their tax obligations and financial planning. Reviewing software agreements and technology budgets now can help businesses prepare for the new rules before they take effect.
