Guide · California · New York · Texas
California starts taxing SaaS on 1 January 2027
·8 min read
Does California charge sales tax on SaaS?
Not until 1 January 2027. From that date, Senate Bill 122 extends California sales and use tax to prewritten software and software as a service, ending a long-standing position that remotely accessed software was not tangible personal property. Custom software written for one customer remains exempt.
There has been no California SaaS sales tax for more than thirty years, and not because anyone decided software should be exempt. California taxes tangible personal property, and hosted software is not tangible. So a SaaS company could put $600,000 a year into the largest market in the United States and appear nowhere on its books. Senate Bill 122 ends that on 1 January 2027, and it ends it twice over.
In this article
- What SB 122 actually changes, and the one date it changes on
- Why two separate things flip together: taxability, and the $500,000 threshold
- The trap in California's measurement window, which reaches back before the law starts
- Who is caught, who is not, and where custom software still sits
- What to do in the months before it lands, in the order worth doing it
What the law changes
One bill, one date, and a change that is easy to state and easy to underestimate.
The bill and the date
SB 122 was signed in July 2026 as part of the 2026-27 budget package. From 1 January 2027, prewritten software and SaaS are subject to California sales and use tax. Software written specifically for one customer stays exempt, as it always has been.
The rule it replaces was never a written exemption. California taxes tangible personal property, and the state's long-held position was that software a customer accesses remotely, and never receives on any medium, is not that. SB 122 does not repeal an exemption so much as close a definitional gap.
Why this state and not another
About twenty states do not tax SaaS, and a seller exempt in one of them is usually still counting toward its registration threshold anyway, because most states measure that threshold on gross or retail sales. California has been the genuine exception, and at $500,000 it is also the largest.
- Californiasales tax$500,000Preceding or current calendar year
- Texassales tax$500,000Preceding 12 calendar months
- New Yorksales tax$500,000and 100 transactionsPreceding four sales-tax quarters
The live figures TaxesRadar monitors. California and Texas both sit at $500,000; the difference has never been the number, it has been what the number counts.
The part that catches people: two changes, one date
Taxability and the registration threshold are different questions with different answers, and SB 122 moves both of them at midnight on the same night.
Change one: the sale becomes taxable
The obvious half. From 1 January 2027 a sale of prewritten software to a California customer attracts California sales tax, at the state rate plus whatever the district rates add on top of it.
Change two: the sale starts counting toward $500,000
The half that is easy to miss. California's economic-nexus test counts total combined sales of tangible personal property delivered into the state. Note what that is not: it is not a taxable-sales test. Exempt sales of tangible property have always counted toward it.
So software was outside the $500,000 test for the same reason it was untaxed, and both facts fall together. On 1 January 2027 a SaaS seller's California revenue starts counting toward a threshold it has never counted toward before.
New York, which looks identical and is not
New York's threshold is worded the same way: $500,000 of receipts from sales of tangible personal property. It behaves the opposite way, because New York's tax law defines tangible personal property to include prewritten software regardless of how it reaches the buyer.
SaaS receipts have therefore always counted in New York and have always been taxable there. Two states, near-identical threshold wording, opposite answers. Reading the threshold text alone gets New York confidently wrong.
Who is caught
The change is broad, but not universal, and the edges matter.
Caught
- Subscription software sold to California customers, whether businesses or consumers
- Prewritten software delivered by download, and prewritten software configured for a customer without being written for them
- Sellers already over $500,000 of California revenue who have never registered there, because nothing required it
Not caught, or not yet
- Custom software written for a single customer, which remains exempt
- Sellers whose California revenue stays well under $500,000, who continue to have no registration duty
- Anything happening before 1 January 2027 - the change is not retroactive, and a 2026 sale does not become taxable later
The middle category is where the judgement sits, and it turns on prewritten versus custom rather than on how the software is delivered. Heavily configured enterprise software, implementation services billed alongside a licence, and bundled hardware all raise questions this post cannot answer for a specific contract.
What to do before it lands
There are a handful of months. The work divides cleanly into what to find out now and what to do closer to the date.
In order
- 1Find your California numberTotal sales delivered into California for the current and preceding calendar year. This is the figure that decides whether the date matters to you at all, and most sellers have never had reason to compute it.
- 2Decide which side of prewritten you are onIf everything you sell is written for one customer at a time, SB 122 largely passes you by. If any of it is a product sold repeatedly, it does not.
- 3Work out your registration date, not just your crossing dateCrossing a threshold and being required to be registered are different moments, separated by a rule about when the obligation begins. That gap is the planning window.
- 4Get collection ready before January, not afterTax you were required to collect and did not is tax you owe out of your own revenue. Retrofitting it to sales already made is the expensive path.
- 5Check the states next door while you are in thereLouisiana, Maryland and Washington all moved recently. A review triggered by California is the cheapest time to look at them.
Where do you stand in California today?
Your sales into each, in its own currency. Nothing is sent anywhere.
Details that change the answer
Gross, retail and taxable are three different measures
Of the 48 US jurisdictions running an economic-nexus test, thirty measure gross sales, twelve measure retail sales, and six measure taxable sales alone. Only in those six does being exempt keep a seller off the line. The widespread belief that exempt means invisible is wrong in forty-two places, and it is wrong in the direction that produces a backdated registration.
California's rate is not the state rate
The state rate is the floor. District taxes are added on top and vary by delivery address, so any exposure figure computed at the state rate alone is a minimum rather than an estimate. This matters more in California than almost anywhere, because its district layer is unusually deep.
A merchant of record changes who is selling
If your California sales run through a merchant of record such as Paddle or a similar reseller, the sale into California is theirs rather than yours. Those sales do not count toward your own threshold in any state, which is a different answer from a marketplace facilitator sale, where you remain the seller and roughly half the states count it.
Registering is not the same as owing
In a state measuring gross or retail sales, an exempt seller can be required to register and then file returns reporting zero tax indefinitely. It feels like an administrative error and it is not. Until 2027 California is the rare state where an exempt software seller genuinely owes nothing and files nothing.
Frequently asked questions
When exactly does California start taxing SaaS?
1 January 2027. SB 122 was signed in July 2026, but nothing changes until the start of the 2027 calendar year. Sales made in 2026 are not affected and the change is not retroactive.
I have sold more than $500,000 into California. Do I have to register now?
Not on the basis of software revenue, not in 2026. Hosted software does not currently count toward California's threshold, because that threshold counts sales of tangible personal property. From 1 January 2027 it does count, and because the test looks at the preceding or current calendar year, a seller in that position should be planning for the date rather than waiting to be surprised by it.
Does this apply to custom software?
No. Software written for a single customer remains exempt. The change covers prewritten software, which includes most of what is sold as a subscription product, and configuration of prewritten software does not usually make it custom.
What if I sell through Paddle or another merchant of record?
Then the sale into California is the merchant of record's rather than yours: they bought from you and resold to the customer. Those sales do not count toward your own California threshold, and the tax on them is not yours to collect. This is different from a marketplace facilitator, where you remain the seller.
Are other states doing the same thing?
Several have recently widened what they tax: Louisiana from January 2025, Maryland from July 2025, Washington from October 2025. California is the one that matters most to software sellers because it is the largest market that was genuinely outside the net, on both taxability and the threshold at once.
The date to put in the calendar
1 January 2027 is a single date on which two things change for the same seller: California software revenue becomes taxable, and it starts counting toward a $500,000 line measured over a window that reaches back into the year before. A business that has never had a reason to know its California number has a few months to find out what it is, and the cost of finding out late is a registration backdated to a crossing nobody was watching for.
Sources
- California Department of Tax and Fee Administration - Wayfair and use tax collection requirements - The $500,000 threshold and its measurement on total combined sales of tangible personal property delivered into California.
- California Senate Bill 122 (2026) - The budget trailer bill extending sales and use tax to prewritten software and SaaS from 1 January 2027.
- New York Tax Law section 1101(b)(6) - Defines tangible personal property to include prewritten software regardless of the medium of delivery, which is why New York behaves the opposite way to California on identical threshold wording.
- New York Department of Taxation and Finance, TSB-M-19(4)S - New York's $500,000 and 100-transaction economic-nexus test, stated in terms of sales of tangible personal property.
Figures on this page are generated from the rules TaxesRadar monitors and each links to the authority that publishes it. Rules change - check the source before acting.
Published by
TaxesRadarMaintains the threshold database
TaxesRadar maintains the registration rules behind this site: 76 VAT, GST and sales-tax thresholds, each read from the authority that publishes it, each carrying the date it was last checked and a link to the source. Where two sources disagree, the rule is marked unknown and the product says nothing rather than averaging them.
See how the rules are maintained - every source, every check date, and what is still unknown.
Never miss a tax threshold
Connect Stripe or Paddle and TaxesRadar watches every threshold in this article - and 73 more - warning you before you cross rather than after.
Read next
The UK VAT registration threshold for overseas sellers
The UK VAT registration threshold is £90,000 - but only for businesses established in the UK. If yours is not, there is no threshold. Here is the real test.
Monitoring and guidance, not tax or legal advice. Threshold figures on this page are read live from the rules TaxesRadar tracks and were last verified against their official sources. Rules change - check the linked authority before acting.