California Expands Sales Tax to Digital Products Beginning January 1, 2027

What software providers, SaaS companies, and digital product purchasers need to know

Digital products has long been a complex and evolving area of sales tax across the U.S. California, which historically exempted many electronically delivered digital products from sales tax, is making a significant policy change that will affect software companies, technology providers, and businesses purchasing digital products.

Under legislation enacted through California Senate Bill 122, the definition of tangible personal property for California sales and use tax purposes will expand effective January 1, 2027, bringing many digital products within the scope of taxation. The CDTFA recently issued Special Notice L-1036 outlining the new rules and compliance requirements.

What Is Changing?

Beginning January 1, 2027, California will subject certain digital products to sales tax, regardless of whether they are delivered on physical media, transferred electronically, or accessed remotely. The law specifically includes digital products and associated copyright or patent interests within the state’s sales tax framework.

This change is expected to impact:

• Sellers of prewritten computer software
• Software-as-a-Service (SaaS) providers offering prewritten software
• Businesses licensing or providing remote access to software
• Purchasers of digital products used in California

What Qualifies as a Taxable Digital Product?

The new law broadly defines a digital product as prewritten computer software that is taxable, regardless of whether it is delivered on tangible media, transferred electronically, or accessed remotely.

Importantly, software that was originally developed as custom software but later offered for repeated sale may be treated as prewritten software and therefore may fall within the taxable category.

What Is Not Taxable Under the New Rules?

While the legislation expands taxation of software-related products, several categories remain outside the definition of taxable digital products, including:

• Cryptocurrency and other digital assets
• Music and audio recordings
• Movies and audiovisual works
• Electronic books (eBooks)
• Digital video game products
• Digital artwork and visual works
• Certain cloud infrastructure platforms that allow customers to build, deploy, or run their own applications

These exclusions indicate that California’s focus is primarily on software and software-enabled functionality rather than all forms of digital content.

Key Exemptions Remain Available

The legislation also preserves several important exemptions. The following generally remain exempt from California sales and use tax:

• Digital products representing a service (excluding SaaS)
• Custom computer software
• Digital products transferred with reproduction and distribution rights
• Digital products purchased exclusively for use outside California

As with many sales tax exemptions, documentation and contract language may become increasingly important to support exempt treatment.

Registration and Compliance Requirements

Businesses selling taxable digital products into California may need to register, collect, and remit sales or use tax beginning in 2027.

Companies that have historically not collected California tax on software subscriptions, licenses, or remote-access products should begin assessing the impact now.

GreerWalker SALT Perspective

California’s expansion of sales and use tax to digital products represents one of the most significant state tax developments affecting technology companies in recent years. Businesses should evaluate:

• Whether their offerings constitute taxable digital products under the new law;
• Whether any exemptions may apply;
• The impact on customer pricing and contracts;
• Registration and collection obligations; and
• Potential exposure for historical and future transactions.

With an effective date of January 1, 2027, companies have a limited window to review product classifications, update billing systems, and implement compliance procedures before the rules take effect.

How GreerWalker Can Help

The GreerWalker State & Local Tax Team assists businesses with multistate sales tax compliance, software and SaaS taxability analyses, nexus studies, audit support, and tax automation strategies. If you would like to discuss how California’s new digital products tax rules may affect your organization, please contact a member of our SALT team.

Source: California Department of Tax and Fee Administration Special Notice L-1036, “Sales and Use Tax Applies to Digital Products Beginning January 1, 2027” (September 2026).