|
Compliance area |
Before January 1, 2017 |
Starting January 1, 2027 |
|---|---|---|
|
Cloud software (SaaS) |
Generally exempt from California sales and use tax |
Subject to California state and local sales and use tax |
|
Economic nexus threshold |
SaaS excluded from $500,000 nexus threshold |
SaaS counts toward $500,000 threshold for registration |
|
High-volume ($5M+) purchases |
Standard vendor billing rules |
Liability may shift to buyer |
|
Vendor invoices and AP Review |
No use tax required on prewritten software or SaaS subscriptions |
Businesses required to verify vendor tax accuracy and self-remit applicable use tax |
Yes. If your company sells prewritten software or SaaS to California customers and your total annual sales into the state exceed $500,000, you establish economic nexus. You are required to register with the CDTFA, calculate and collect state and local district taxes, and file periodic returns.
The law takes effect on January 1, 2027. Businesses should begin reviewing product taxability mapping, customer billing addresses, and ERP and checkout configurations as soon as possible to ensure systems are tested and ready for the first transaction window.
Under SB 122, if a customer purchases more than $5 million in taxable software from a single vendor in a calendar year, tax liability may shift from the seller to the purchaser. A buyer must obtain a use tax direct pay permit from the CDTFA, issue a valid direct payment certificate to the vendor, and remit applicable use tax directly to California.
SB 122 specifically targets prewritten computer software transferred electronically or accessed remotely. Fully custom software developed for a single client and stand-alone professional services generally remain nontaxable, provided these charges are separately stated on invoices.
If your company operates in California and uses software in the state, you remain legally obligated to report and pay California use tax if the vendor fails to bill you for sales tax. Automated AP tax review tools help identify these untaxed transactions.
California taxes software based on the customer’s billing address. Proposed rules would let customers with multistate users apportion out non-California use, which can impact the amount subject to tax. For enterprise subscriptions with distributed teams, businesses should document employee seat locations to avoid paying California tax on software used exclusively by out-of-state personnel.
While California is not a Streamlined Sales Tax member state, Avalara Select packages offer combined management for California alongside SST state-funded filing in participating member states, providing a cost-effective multistate compliance framework.
