California Senate Bill 122 amends the California Revenue and Taxation Code (RTC) to expand the state’s sales and use tax base to include prewritten computer software transferred on tangible storage media, transferred electronically or accessed remotely, operative January 1, 2027. While the statute left a significant amount of operative detail to be developed, additional guidance is now available in draft form. On September 1, 2026, the California Department of Tax and Fee Administration (CDTFA) released a Discussion Paper on the proposed emergency rulemaking action to clarify the application of tax to the sale and use of digital products, together with draft regulatory language. The language draft is now under discussion and is expected to govern the application of tax to software in California beyond the January 1, 2027, operative date.
The package covers eight regulations, three amended and five new. Taken together, the proposals revise California’s software tax guidance rather than add digital products to the existing framework.
Before SB 122, whether software was taxable in California depended on how it was delivered. Regulation 1502 treated prewritten software sold on physical media as taxable, while the same software delivered electronically or accessed remotely was not. Custom software remained nontaxable regardless of delivery method. SB 122 eliminates this distinction, making portions of Regulation 1502 obsolete.
In response, the CDTFA proposes removing software provisions from Regulation 1502 and relocating them to new regulations. Regulation 1502 would be limited to data processing services and renamed accordingly. Rules governing prewritten software, including optional maintenance contracts, would move to proposed Regulation 1600, while the rules for custom software would be transferred, with minimal substantive changes, to proposed Regulation 1502.2.
Proposed Regulation 1600 would serve as the primary imposition regulation for digital products. It defines the key terms, including “digital products,” “accessed remotely,” “prewritten computer software” and “transferred electronically,” and provides examples of items that do and do not qualify as digital products. The regulation also establishes when a digital product sale or purchase occurs, sets forth sourcing rules for determining the place of sale or purchase, clarifies that first use occurs where the purchaser first exercises any right or power over the digital product, and identifies applicable exemptions.
RTC section 6016.1 defines a “digital product” as prewritten computer software transferred on tangible storage media, transferred electronically or accessed remotely. RTC section 6016.2 defines these delivery methods:
This distinction determines whether software is subject to tax. SB 122 also replaced the terms “computer program” and “custom computer program” with “computer software” and “custom computer software.” Under RTC section 6010.9, “computer software” is a set of coded instructions designed to cause a computer or other automated data processing equipment to perform a task. “Prewritten computer software” includes software held or existing for general or repeated sale or lease, even if it was originally developed for a specific customer or internal use and includes combinations of prewritten programs. “Custom computer software” is software created for the special order of a single customer and includes separately stated charges for customer-specific modifications to existing prewritten software. However, prewritten software remains taxable regardless of customization, except to the extent of the separately identifiable modification itself.
RTC section 6016.1(b) excludes seven categories from the definition of a digital product, and section 6016.1(c) defines each one: Digital asset: A digital representation of value recorded on a cryptographically secured distributed ledger or similar technology designated by the Secretary of the Treasury.
Each of these categories is limited to products transferred electronically or accessed remotely.
SB 122 added three exemptions that are further addressed in proposed Regulation 1600. RTC section 6372 exempts digital products purchased solely for use outside California or in interstate or foreign commerce. This exemption does not apply to digital products transferred on tangible storage media.
RTC section 6372.1 exempts digital products that represent services delivered electronically when the service primarily involves human effort performed in response to a customer’s request. However, the exemption does not apply to the right to use or access a provider’s software hosted in a cloud environment. Accordingly, access to cloud-based software, standing alone, does not qualify for the exemption.
RTC section 6362.4 exempts transfers of digital products where the purchaser acquires reproduction or distribution rights for resale to third parties, even if a copy of the product is transferred concurrently. Any tangible storage media used to transfer the product is treated as incidental to the transaction. This exemption is particularly relevant to reseller, distributor and original equipment manufacturer (OEM) arrangements. Traditional exemptions, including sales for resale and sales to exempt entities, continue to apply in the same manner as they do for other tangible personal property.
RTC section 6052 relieves a retailer from liability to pay sales tax on a digital product transferred electronically or accessed remotely when the retailer’s aggregate sales of those products to a single purchaser exceed $5 million during the current calendar year, or, beginning January 1, 2028, during the current or preceding calendar year. Once the threshold is exceeded, the purchaser becomes liable for the use tax on the transaction that triggered the threshold and must self-assess and remit the tax directly to the department.
A purchaser that exceeds the threshold must obtain either a use tax direct payment permit under RTC section 7051.3 or a waiver from the CDTFA. Proposed Regulation 1600.1 clarifies the threshold amount, establishes when liability shifts from the retailer to the purchaser, outlines the waiver request process and confirms that if a purchaser provides a waiver to the retailer, the retailer remains responsible for paying the sales tax or collecting the applicable use tax.
SB 122 does not include a statutory multiple points of use (MPU) provision. Instead, the authority derives from RTC section 6372(e), which authorizes the department to permit or require alternative methods of calculating tax on digital products used in California, including licenses concurrently used in multiple locations.
Proposed Regulation 1600.2 would define “multiple points of use” and “user,” establish an alternative method for calculating the taxable measure, and provide that a seller is relieved of liability for the portion attributable to out-of-state use if it timely obtains a valid MPU certificate from the purchaser in good faith. The regulation also prescribes the required contents of the certificate and applicable recordkeeping requirements. The regulation would become operative on January 1, 2027.
Purchasers with users in multiple states should develop a reasonable allocation methodology and maintain supporting documentation before the rules take effect. Because the MPU certificate serves as the seller’s protection, sellers should incorporate certificate collection and validation procedures into their billing and tax compliance processes before the operative date.
Proposed Regulation 1600.3 implements RTC section 6372, which exempts a digital product purchased solely for use outside California or in interstate or foreign commerce. The seller bears the burden of substantiating the exemption unless it obtains a properly completed exemption certificate from the purchaser in the form prescribed by the department. The certificate relieves the seller of liability only if accepted in good faith.
If a purchaser certifies that the product will be used exclusively outside California and subsequently uses it in California, the purchaser is liable for the tax as though it had made a retail sale at the time of that use. The exemption does not apply to digital products transferred on tangible storage media.
Technology transfer agreements have historically allowed taxpayers transferring copyright or patent rights with tangible personal property to exclude the value of those intellectual property rights from the taxable measure. Software licensors have often relied on this treatment to reduce the taxability of software licenses that convey rights in underlying intellectual property.
SB 122 eliminates that approach for software transactions. RTC section 6016 now defines tangible personal property to include both a digital product and any associated copyright or patent rights, making those rights part of the taxable item rather than a separable component. As a result, the department has concluded that the technology transfer agreement provisions in Regulation 1507 no longer apply to sales of prewritten computer software. The proposed amendment instead directs taxpayers to Regulation 1600 for the applicable tax treatment.
For a remote sale, RTC section 6010.5 sources the transaction to the purchaser’s known California address shown in the seller’s records, using a hierarchy of records that includes the billing address, shipping or delivery address, the mailing address associated with the payment instrument and the purchaser’s mailing address. If none of those rules apply, the place of sale is deemed to be outside California.
RTC section 6010.5.1 provides that a digital product is used where the purchaser exercises any right or power over it. For products accessed remotely, the place of use is the location of the individual accessing the product.
The CDTFA has acknowledged that not all the questions or comments raised will be addressed through this initial emergency rulemaking and has indicated that it will continue to provide clarification through an ongoing industry guide and future rulemaking. At this time, businesses should evaluate the proposed rules and the currently available guidance while continuing to monitor future developments.
Sellers should inventory their offerings against the proposed definitions, separating prewritten software from custom software and from the excluded categories, and confirm that their billing systems can source transactions using the statutory address hierarchy. Purchasers should identify their largest software vendors and evaluate whether any relationship is likely to cross the $5 million threshold, and should determine where their users are located, since that drives the place of use and any multiple points of use allocation.
The department has invited written suggestions and comments, including proposed regulatory language, and comments are due September 24, 2026.
If you have questions about California’s taxation of SaaS and digitally delivered software, please reach out to a member of the Withum SALT Team.
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