Overview
- On June 29, 2026, Governor Gavin Newsom of California signed Senate Bill 122 (SB 122), which expands the State’s sales and use tax base to certain digital products.
- The bill impacts most businesses and consumers, which are increasingly reliant on cloud-based tools, streaming platforms, and other digital solutions.
Expanding the Tax Base
SB 122 focuses on taxing software accessed electronically or remotely akin to its related physical goods.1 California defines digital product as “prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.”2 However, the state is not imposing sales and use tax on digital books, movies, music, or cryptocurrency. The state specifically excludes the following digital items from its definition of a taxable digital product: digital assets, audio works, audiovisual works, books, infrastructure, video games, or visual works.3 California includes any copyrights or patent interest associated with digital products in its newly implemented taxation of digital products.4 The changes are effective January 1, 2027.
Forvis Mazars Insights: With these changes, many more businesses will be required to collect and remit sales tax on newly taxable software sales. As a result, most commercial and individual software applications will likely be taxable for California purchasers.
California aligns itself with other states by expanding the sales tax base to capture and focus more on digitally delivered value in addition to tangible goods.
Sourcing and Practical Considerations
California sources sales of digital products, which are not sold in-person at the seller’s location, to the purchaser’s known address as maintained in the seller’s records.5 The State defaults to billing address as the highest priority when it comes to sales sourcing when multiple addresses are provided by the customer. For use tax purposes, California sources digital products to where a purchaser exercises any right or power over the digital product.6
Forvis Mazars Insights: Companies that operate across multiple states must pay close attention to these sourcing rules. California is unique amongst states to default to billing address for sourcing digital products. As a result, companies must be careful to determine adequate sourcing where the billing address and the address of delivery or use differ. These businesses must ensure their systems can accurately capture this information to follow these rules correctly.
Economic and Exemption Thresholds
The new legislation does not affect California’s $500,000 sales tax economic nexus threshold for out-of-state sellers. Smaller businesses will continue to benefit from reduced compliance requirements while larger businesses should reevaluate their tax determination logic to ensure continued compliance.
However, when a retailer sells more than $5 million in taxable digital products to a single purchaser in the current year, the retailer is no longer required to collect sales tax on digital products for that year for that purchaser. Purchasers will then be liable for use tax.7
Forvis Mazars Insights: This $5 million limitation on digital goods sales tax collected by a single purchaser is a unique provision that will create an additional layer of complexity. Sellers and purchasers of software will need to communicate when approaching the threshold. Purchasers should be prepared to remit use tax directly to the state if sellers cease collecting sales tax.
How Forvis Mazars Can Help
Forvis Mazars can assist in evaluating the impact of California’s new sales tax laws on your business, including software classification and sales and use tax compliance. Support also includes review of system and ERP configuration updates, multistate tax analysis, audit readiness, and planning strategies in advance of the January 1, 2027, effective date.