California Governor Gavin Newsom signed SB 122 on June 29, 2026, which imposes sales and use tax on prewritten software and SaaS products starting January 1, 2027. This tax applies regardless of how the software is delivered—downloaded, streamed, or accessed via browser. The combined state and local tax rate ranges from 7.25% to approximately 10.75%, with most customers in metropolitan areas facing an 8-10% increase in software costs, according to saastr.com.
SB 122 amends the definition of "tangible personal property" to include "digital products," covering prewritten software transferred physically, electronically, or accessed remotely. California had previously taxed software only when delivered on physical media, but this law removes that distinction. The state projects that this change will generate roughly $2 billion annually in combined state and local revenue. The tax affects both buyers and vendors, with many B2B software founders yet to adjust to the new requirements, saastr.com reported.
This move makes California the last major U.S. state to tax SaaS products comprehensively, joining more than 20 states with similar policies. The change is significant for the SaaS and AI software market, where products are typically prewritten and sold repeatedly. The tax could increase costs for businesses relying on cloud-based software and AI tools, potentially influencing purchasing decisions and vendor pricing strategies. The law aligns California with national trends in taxing digital goods, as detailed by saastr.com.
The tax will take effect on January 1, 2027, impacting all SaaS and AI tool transactions within California. The state expects to collect about $2 billion annually from this measure, marking a substantial new revenue source and a notable shift in software taxation policy, according to saastr.com.