On June 29, 2026, California Governor Gavin Newsom signed Senate Bill 122, which expands the state’s sales and use tax rules to include prewritten software and software-as-a-service (SaaS) offerings.
If you have employees in California, this new law could have substantial compliance, operational, and financial implications.
Prior to SB 122, California generally did not impose sales tax on electronically delivered software or SaaS transactions. SB 122 changes that approach dramatically by expanding the state’s definition of taxable tangible personal property to include these digital products, regardless of how they are delivered or accessed.
Businesses that sell, purchase, license, or use software in California may need to reconsider tax strategies, contracts, billing systems, and compliance processes before the law takes effect on January 1, 2027. California sales and use tax ranges from 7.25% to 11.25%, and with large software spend, sales tax can be a high unplanned cost.
Companies Should Act Now
There are some actions you can take to manage the amount of tax you pay on software. Implementing purchase reviews is the most effective way to control and monitor your tax spend. Automated accrual systems are useful, but they don’t automatically account for complex scenarios or purchases with multiple points of use.
While SB 122 significantly broadens California’s sales tax base, businesses should avoid a one-size-fits-all approach. Many states still consider electronically delivered software and SaaS as exempt or subject to reduced rates. States including MA, NY, PA, and TX allow for apportionment of tax based on where the users are located.
Purchase reviews and using user allocations can help identify where you are overpaying and where you may be able to minimize taxes and recoup taxes paid on software purchases.
GTM’s automated process using Alteryx, RPA, and AI can eliminate the manual effort of reviewing purchases to make tax determinations. Rules are customized and optimized to minimize tax where possible. Transaction scope and thresholds can be set to focus on complex purchasing areas and those that can have the most impact.
Our purchase review services automate document collection, taxability determinations, and transaction archiving. We can help you identify sales tax overpayments on purchases so you can focus on obtaining the correct tax treatment and minimizing the amount overpaid.
The Bottom Line
California’s enactment of SB 122 represents one of the most significant sales and use tax developments affecting technology and software businesses in recent years. Organizations that proactively assess the impact now will be better positioned to minimize risk, manage costs, and maintain compliance when the new rules take effect on January 1, 2027.
Need Help Navigating the Change?
Talk to us about implementing an automated purchase review process!
Our SALT Indirect professionals are trained to evaluate software taxability, identify exempt and taxable purchases and subscriptions, and develop implementation strategies tailored to your business for optimizing your sales and use tax processes.
A proactive review today can help your organization prepare for California’s evolving taxable software landscape. Talk to us about these upcoming changes, what you need to do to prepare, and how our processes can help minimize the tax paid on software purchases.
