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If you’re selling a digital product such as software or SaaS in the U.S., California is almost certainly one of your largest markets. And as a self-proclaimed tech-friendly state, California customers have never paid sales tax on purchases of electronically delivered software and digital goods.
That changes on January 1, 2027.
Governor Gavin Newsom signed Senate Bill 122 in June 2026. Starting in January, California will require businesses to charge sales tax on most software sold to California customers — and every invoice, receipt, and renewal notice your California end users receive will look different than it does today.
Here’s what’s changing, and what it means for software and SaaS sellers and their end users:
What SB 122 Does, Plainly
Until now, California has taxed software based on how it reached the customer. Software that shipped on physical media (such as a disc or USB) has been taxable for decades because the state’s definition of taxable property covered things you could see or touch. The same software downloaded or accessed through a browser was not.
SB 122 ends that distinction. Beginning January 1, 2027, prewritten software is taxable in California no matter how it’s delivered. The delivery method stops mattering.
What becomes taxable:
- SaaS and subscription applications.
- Electronically downloaded software.
- Prewritten enterprise software.
What stays exempt (at the moment):
- Custom software.
- Digital books.
- Music, audio, and video, including streaming.
- Video games.
- Digital art and visual works.
- Cryptocurrency and digital assets.
- Cloud infrastructure: Infrastructure as a Service (IaaS).
The Rate Your End Users Will Actually Pay
California’s base state rate is 7.25%, the highest in the country. And once you add local and district taxes on top, combined rates run from 7.25% up to 11.25% depending on a user’s location. There’s no one rate that fits all in California.
Which rate applies depends on the customer’s address in your records, in the order SB 122 sets: billing, then shipping, then the address tied to the payment method, then any other address on file. A Los Angeles billing address means charging the Los Angeles rate.
What This Looks Like for B2C and B2B Buyers
Consumer Buyers See a Price Increase
For individual customers, this is simple and unwelcome. They’ll see a price increase on all applicable products, even on subscription purchases. Their $50 purchase first made back in 2023 renews this January at ~$55. There’s no mechanism for them to recover it.
Expect two things: added friction at checkout on new purchases, and support tickets from existing subscribers asking why their price went up. It didn’t — but that’s not how it reads on a credit card statement.
Business Buyers Don’t Get a Free Pass
A common assumption is that B2B sales are exempt. They aren’t. When a company buys your software for its own employees to use, that purchase is taxable like any other.
Exemptions do exist, but California is narrower than most states on this, and business buyers routinely assume protection they do not have. Here are a few scenarios where exemptions usually apply:
- Resale: This is when a buyer purchases your software to resell rather than to use itself.
- Federal government: Sales to the U.S. government are exempt.
- Nonprofits: Unlike most states, California grants no blanket sales tax exemptions based on 501(c)(3) status. An IRS determination letter does not make a nonprofit’s purchase tax-free here. A few narrow, activity-specific exemptions exist, but a nonprofit’s status by itself is not one of them.
None of these apply automatically, and California’s documentation standard is specific.
For example, for a resale claim, California requires a signed resale certificate (form CDTFA-230 or a signed document with the required five elements under Regulation 1668). The seller is responsible for confirming the resale certificate is valid, keeping it in its records and providing it to the state if requested. A buyer handing you a permit number, or simply telling you the sale is not taxable, does not relieve you of the tax. Every other business buyer sees a tax line on the invoice.
One Wrinkle for Very Large Accounts
SB 122 includes an unusual reversal: Once your sales of digital products to a single purchaser exceed $5 million in the aggregate in a calendar year, you’re relieved of the obligation to collect and remit, and that purchaser becomes liable instead.
From that point, the buyer is responsible for self-assessing use tax and paying California directly. To do that, they have to obtain a use tax direct payment permit and give you an exemption certificate — so the switch isn’t automatic on either side.
If You Sell Direct, the Tax Obligation Is Yours
What decides the tax obligation isn’t which payment company you use — it’s who is the seller of record on the transaction.
If you sell directly from your own site and use a payment service provider (such as Stripe, PayPal, Adyen, Worldpay, etc.) to monetize your software or SaaS, you are the seller of record. Several of them offer tax calculation, which is useful, but just calculating the taxes is not transferring the liability. Stripe’s own documentation is direct about it: You register with the tax authority, you file, and you remit the taxes.
That means:
- You register with California and maintain that registration.
- You determine which of your products, bundles, and add-ons are taxable.
- You collect, validate, and store exemption documentation from business buyers.
- You file sales tax returns on the state’s schedule and pay what’s due by the deadline.
- You are the one an auditor will contact, and under-collection penalties and interest are also yours.
With a merchant of record such as FastSpring, the entire above list belongs to us to handle. It’s the same sale, the same end user, and the same invoice — but entirely different risk exposure for you.
Selling Through a Marketplace Is a Different Structure
If your product goes out through the Apple App Store, Google Play, or a similar storefront, then in the U.S., the platform is considered a marketplace facilitator (MPF). And MPF rules deem both the platform and seller responsible for any tax obligations.
Sometimes tax is collected and remitted, and sometimes it’s not. The user is left to identify and understand any gaps.
A marketplace doesn’t take the compliance question off your desk — it just shares in it.
If You Sell Through FastSpring, This Is Already Handled for You
FastSpring is your merchant of record. The obligation to charge, collect, and remit California sales tax is ours, not yours — and it’s already taken care of.
SB 122 is one less thing on your list. Our in-house tax team handles it for you, start to finish.
The only real pain point left might be questions from your end users — but again, if you’re using FastSpring, our consumer support team will be ready to answer those questions. You should expect questions about why there’s suddenly tax on an invoice that never had it before. But that’s a support conversation, not a compliance one, and FastSpring will be there to help with that too — because FastSpring also handles consumer support related to purchases.
Your Sale to FastSpring Is a Resale
When you sell through FastSpring, we purchase your software and resell it to the end user. That’s what makes us the seller, or merchant of record. Sales for resale remain excluded under SB 122, so your sale to FastSpring isn’t a taxable transaction.
FastSpring provides you with a completed and signed California resale certificate meeting the Regulation 1668 requirements above. You can download it here and keep it on file with your tax records.
To learn more about other states’ sales tax rules and find additional state exemption certificates, visit our documentation section on United States sales tax.
California Isn’t the Only One
If SB 122 looks like a one-off, it isn’t.
Colorado got there first. Governor Polis signed HB 26-1223 on June 4, 2026, and it takes effect the same day as California’s law — January 1, 2027. It repeals Colorado’s downloaded-software exemption and treats software as taxable property regardless of delivery method, reaching downloaded software, remotely accessed software, and mobile applications.
Colorado is messier than California in two ways worth knowing:
- The state rate is only 2.9%, and that number understates the change. Colorado has roughly 70 self-collecting home rule cities that administer their own sales tax independently of the state. Many of them already tax software and SaaS and have for years. Denver taxes SaaS used in the city today. What HB 26-1223 changes is the state layer, not the local one.
- Home rule cities are not required to follow the state. A city that currently exempts downloaded software has to pass its own ordinance change to tax it. Alignment between the state base and 70 local bases is not coming automatically.
Two of the largest state economies in the U.S., both previously among the most prominent holdouts, are changing on the same day.
More than twenty states already tax SaaS in some form. Virginia introduced a broad digital services tax in its 2026 session that died in committee — the kind of bill that tends to come back. And as states watch California and Colorado as they start collecting, the competitive argument for staying exempt gets weaker every year.
These laws usually move in one direction: More states tax more types of products, not fewer. The real question isn’t whether more states will follow — it’s whether you want to rebuild your tax stack every time one does.
Talk to our team about what moving to a merchant of record looks like before January 1.
Are you looking for a merchant of record that will partner with you to grow your business internationally? FastSpring provides an all-in-one payment platform for SaaS, software, video games, AI, eLearning, and other digital goods businesses, including VAT and sales tax management, payment localization, and consumer support. Learn more about FastSpring’s tax compliance services here.
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