California software tax: a guide to SB 122

A renewal identical to last year's arrives at finance with one extra line. The product, the customer and the amount are the same. What changed is the billing address, in Los Angeles, and from 01/01/2027 that field decides whether the invoice carries California software tax.

California did not create a tax with that name. SB 122 changed the definition of tangible personal property to include digital product, and that change reaches prewritten software and SaaS on 01/01/2027.

Anyone selling from Brazil or another Latin American country to US customers sits on the sale side, not the remittance side. The January invoice is not decided by the rate but by who the seller is in that transaction. Direct sale, merchant of record and marketplace put registration, certificates and the US$ 5 million threshold per seller and buyer pair in different places.

What SB 122 does, in three layers

California software tax is decided in three layers: the definition of tangible personal property (RTC 6016), the three delivery modes (RTC 6016.1(a)) and the seven categories outside (RTC 6016.1(b)). No new tax: SB 122 widened the taxable object, and the place of sale is the customer address (RTC 6010.5).

RTC 6016.1(a) reaches prewritten software on tangible storage media, by electronic transfer or by remote access (RTC 6016.2). Prewritten software is that which is maintained or existing for sale or general or repeated lease, even if it was initially developed to order or for internal use, including the combination of two or more programs (RTC 6016.1(c)(11)). The CDTFA guide lists SaaS inside: access to the provider's software in the cloud sustains California SaaS tax.

The dates do not coincide: SB 122 is dated 29/06/2026, Statutes of 2026, chapter 23; the RTC changes on digital product are operative on 01/01/2027, and the revenue-splitting prohibition in Government Code (GC) 53084.5 has been in force since publication.

Four questions classify any SKU, in this order:

1. How does the product arrive: tangible storage media, electronic transfer or remote access (RTC 6016.1(a))?
2. Does the product fall into one of the seven exclusions in RTC 6016.1(b), or is it custom software (RTC 6010.9)?
3. Does an exemption under RTC 6372, 6362.4 and 6372.1 apply, or is it a sale for resale under Regulation 1668?
4. Who is the seller and who registers (RTC 6203).

This piece describes the law and the guidance published by the CDTFA. It does not assess any specific company's situation and does not replace tax advice on your case, which depends on contract, customer address, certificates and volume per buyer.

What sits outside is not an exemption

Seven categories in RTC 6016.1(b) sit outside the definition of digital product, and being outside is not the same as being exempt. The product never entered the base, so there is no certificate to keep. An exemption is a different route and requires qualification.

The list is closed: digital asset, digital audio work, digital audiovisual work, digital book, digital infrastructure, digital video game product and digital visual work. Digital infrastructure is the cloud service where the user runs their own software: IaaS and PaaS outside, SaaS inside.

RTC 6010.9 keeps custom software outside the base, including the custom part of a prewritten product: only the modified extension stays out, and a charge that is not separately stated applies the tax to the full amount, unless the modification is significant enough that the new software qualifies as custom. The 50 percent tests sit in Regulation 1502(f)(2)(B), in force; the 01/09/2026 proposal carries them into Regulation 1502.2(d): the new software qualifies as custom when the price of the prewritten software was 50 percent or less of the price of the new one; where there was no commercially available prewritten software, the new software qualifies when the charge for the modification exceeds 50 percent of the contract price.

RTC 6372 looks at where the product is used, not where the seller is: the exemption serves the product bought for use exclusively outside the state or in interstate and foreign commerce, and it does not reach tangible storage media. The burden of proof is the seller's, and a good-faith certificate replaces it. A seller abroad licensing for use in California does not qualify; one who certifies and uses the product in the state answers as a retailer, with the product cost as gross receipts.

The RTC 6372.1 exemption does not reach SaaS: it requires preponderant human effort after the customer's order and excludes the right to use the provider's software in the cloud or to access it from several devices through a thin client, including a browser, or through a program interface.

RTC 6362.4 covers the right to reproduce or copy for distribution to third parties, not the license of use to an end customer nor the sale to a reseller without that right. A sale to a reseller who only resells is a sale for resale, not retail, when the seller accepts, in good faith and on time, a valid certificate under Regulation 1668. Exemption is not registration: registration comes from RTC 6203.

The customer address decides where the sale happens

A digital product transferred electronically or accessed remotely is sold at the buyer's known address in California, and RTC 6010.5(b) fixes the order of search in the seller's records. With no address in the state, the sale occurs outside the state.

The order is rigid: billing, delivery, mailing address of the payment instrument and mailing address; with no address, the most recent ones apply. A product bought outside the state and used in California within 90 days is presumed bought for use in the state (RTC 6010.5.1).

In that case, RTC 6054 releases the retailer who shows the CDTFA reasonable effort to obtain a correct and complete address. The rate follows the same address: 7.25 percent statewide plus districts from 0.10 percent to 2.00 percent, and areas with more than one district. The revenue-splitting prohibition in GC 53084.5(c) has been in force since 29/06/2026, not since 01/01/2027.

For anyone invoicing from Brazil, the customer address defines the rate here, and the cost of importing software under the tax reform defines the Brazilian buyer's math. Address became tax data.

The date that defines 2027 is the renewal date, not the payment date

The transition rule, proposed in Reg. 1600(f)(2) and not final, looks at the start of the right of access, not the payment date: access from 01/01/2027 is taxed even with payment in 2026, and immediate access in 2026 is not taxed with payment in 2027.

The proposed rule brings five examples. A right acquired on 15/12/2026 with access only from 01/01/2027 is taxed. A contract of 15/12/2026 with access on 01/01/2027 and payment in 2027 is taxed. Immediate access on 15/12/2026 with payment on 01/01/2027 is not taxed. A subscription of 12 months, paid monthly, starting on 15/12/2026, is taxed only for the periods from 01/01/2027. A sale on 15/12/2026 with access at the time and payment in cash or financed is not taxed, regardless of the payment date.

The consequence is contractual: a periodic subscription is a continuing sale, and the tax reaches payments for periods from 01/01/2027, not the ones before.

Who collects California software tax

The retailer of the retail sale collects, and the channel says which one: direct sale, the vendor; merchant of record, whoever contracts with the customer; marketplace, the facilitator. The US$ 5 million threshold per seller and buyer pair (RTC 6052 and 6201.55) is not a registration threshold: it shifts who pays, and registration stays in RTC 6203.

California law does not use the expression merchant of record: it knows the sale for resale (RTC 6091 and Regulation 1668), the retailer and the marketplace facilitator (Marketplace Facilitator Act). The label does not decide: who makes the retail sale does, detailed in how to choose a merchant of record.

The count is per seller and buyer pair: gross receipts from digital product transferred electronically or accessed remotely. In 2027 only 2027 counts: what was invoiced in 2026 brings nobody closer to the threshold. A pair that passed US$ 5 million in 2026 only gets relief by passing it again in 2027, from the transaction that broke the threshold, not from 1 January. From 01/01/2028 the measurement looks at the current or the prior year. The US$ 5 million holds from 2027 to 2031, with CPI recalculation up to 01/10/2031 and adjustment on 01/01/2032.

Once past the threshold, the buyer owes use tax: it obtains the use tax direct payment permit (RTC 7051.3, 12 months) and gives the retailer the Use Tax Direct Payment Exemption Certificate, without which collection stays with the retailer. The certificate does not hold if the retailer knows the pair did not pass the threshold (Reg. 1699.6(f)(3), proposed). The alternative is a CDTFA waiver, requested by the buyer and granted when the CDTFA finds it serves the efficient administration of the tax: the retailer goes back to being liable, and the buyer tells it the places of first use, which become the place of sale.

The merchant of record moves who registers, who keeps the certificate trail and who absorbs the US$ 5 million threshold. It does not eliminate the tax.

The Marketplace Facilitator Act (AB 147, Statutes of 2019, chapter 5) makes the facilitator the seller and the retailer of the sale it facilitates from 01/10/2019, liable for collection; with digital product becoming tangible personal property on 01/01/2027, the structure of the Act reaches those sales, and the CDTFA digital product guide sends the facilitator to the MF Act guide. A seller's registration relief requires a registered facilitator or one required to register, and that all retail sales go through it; a seller that sells direct may need registration, and the facilitated sale counts toward the US$ 500,000 nexus.

Nexforce Marketplace is a distribution channel for Latin America, with local currency and invoice, and is not a California marketplace facilitator nor the seller of record of the US sale. What Nexforce registers, collects or remits in any jurisdiction, and its tax position on Brazilian import, sit outside this analysis.

The Brazilian parallel, and what it does not prove

The comparison starts at the taxable event. In Brazil, whoever imports software for own use withholds and collects on the remittance, and the foreign vendor is paid net; in California, the tax falls on sale and use, and the retailer answers, or the buyer at the threshold.

The Brazilian software exporter is not a taxpayer in this stack. CIDE at 10 percent applies to technical services, and Cosit Consultation Rulings 191/2017 and 99/2018 place SaaS in that base for the end customer; the exemption in §1º-A of art. 2º of Law 10.168/2000 reaches only the segregated pure license, with no transfer of technology. IRRF is 15 percent, reduced only by an internalized treaty that reaches the transaction. PIS, COFINS and ISS are in transition under LC 214/2025: the first two are extinguished in 2027 and ISS leaves between 2029 and 2032, extinguished in 2033.

In Brazil the tax falls on the remittance for technical service and on the payment, with withholding by the payer; in California, on the retail sale of prewritten software, treated as tangible personal property. Different events, and the comparison stops there. The Brazilian stack is in taxes on SaaS remittance.

The same year, another mechanism in Latin America

The 2027 change does not begin or end in California: another country in the region moves software rules in the same year, through another mechanism entirely. Mexico charges at source on the payment, not on the sale, with the buyer withholding.

The Mexican route is in ISR withholding on software sales in Mexico in 2027. No conclusion here holds for another US state.

What to do before 31/12/2026

The decision is about channel and role, and it comes before the math: without classifying the product and the seller's role, the calculation errs in the premise, not in the rate. The six steps below cover the remaining ground before 31/12/2026, in the order that matters.

1. Classify each SKU in the three delivery modes, the seven exclusions and custom software (RTC 6016.1(a), 6016.1(b), 6010.9) and the seller role (RTC 6203).
2. Separately state the custom modification charge in the contract and on the invoice: without it, the tax falls on the total.
3. Review the trail of resale and out-of-California use certificates (Regulation 1668 and RTC 6372), including who signs and when.
4. Audit the customer address field against the order of billing, delivery, payment instrument and mailing address, and the reasonable effort when the address is missing.
5. Model the US$ 5 million threshold per seller and buyer pair before it breaks, with who calculates, which permit and which certificate.
6. Align the renewal calendar with the access start date, not the payment date (Reg. 1600(f)(2), proposed).

The SaaS compliance by country in Latin America map shows what changes in another country in the region. With no final regulation, step 6 may change. Start with step 1.

Frequently asked questions

What does SB 122 do, in one sentence?

It depends on the product. Under RTC 6016 and RTC 6016.1, SB 122 treats digital product, including prewritten software and SaaS, as tangible personal property, and the sale is located by the customer address (RTC 6010.5). Software sales tax here is reclassification, not a new tax.

Is SaaS included in the base?

It depends on what the contract delivers. If the customer accesses the provider's prewritten software remotely, in the cloud, the CDTFA guide lists SaaS inside RTC 6016.1(a). If the vendor delivers digital infrastructure for the customer to run its own software, RTC 6016.1(b) keeps the product outside.

Is custom software exempt?

It depends on how the charge is designed. Under RTC 6010.9, custom software stays outside the base, and the custom modification of prewritten software stays out only in the modified part. With no separate statement on the invoice, the tax falls on the full amount, unless the modification is significant enough that the new software qualifies as custom (Regulation 1502(f)(2)).

Who pays when the sale goes through a merchant of record or a marketplace?

It depends on who the law sees as the retailer. In the marketplace, the facilitator is the seller and the retailer of the facilitated sale (Marketplace Facilitator Act), and the seller's registration relief is conditional. In the merchant of record case the label does not decide: whoever makes the retail sale does.

What counts, the payment date or the access date?

It depends on when access happens, under the rule proposed in Reg. 1600(f)(2), not final. Access from 01/01/2027 is taxed with payment in 2026, and immediate access in 2026 is not taxed with payment in 2027. A subscription that crosses the date is taxed only for the periods from 01/01/2027.

References

SB 122, Statutes of 2026, chapter 23, signed on 29/06/2026, cited from the CDTFA reproduction. CDTFA, Special Notice L-1036, September 2026. CDTFA, Tax Guide for Retailers and Purchasers of Digital Products. CDTFA, Tax Guide for Marketplace Facilitator Act. CDTFA, Discussion Paper, 01/09/2026, with the proposed regulations. CDTFA, California City & County Sales & Use Tax Rate Information. Accessed on 22/10/2026.

Next step

The channel choice comes before the return: it is a procurement decision, not a spreadsheet one. For anyone distributing in Latin America, Nexforce Marketplace concentrates contract, invoice and billing in local currency. It is not a California marketplace facilitator, does not change who answers for the US tax and does not replace local advice.