For years, California generally treated prewritten software differently depending on how it reached the customer. Software delivered on physical media could be taxable. Software downloaded from the internet or accessed through the cloud generally was not.
That framework changes on January 1, 2027, when Senate Bill 122 takes effect for digital product transactions. Governor Gavin Newsom signed the bill on June 29, 2026. The law brings many electronically delivered and remotely accessed forms of prewritten software into California’s sales and use tax system.
For property owners, developers, contractors, universities, nonprofits, and professional firms, this is a cost-of-operations issue. The increase may not appear as one large bill. It will show up across project management platforms, accounting systems, estimating tools, communication software, building systems, and recurring subscriptions.
The right time to build the cost into your budget is before the next renewal cycle, not after the first taxable invoice arrives.
What SB 122 changes
SB 122 defines a digital product to include prewritten computer software that is:
- Delivered on tangible storage media
- Downloaded electronically
- Accessed remotely through the internet or a cloud platform
- Provided through a license, lease, or subscription arrangement
The law also treats the right to open, access, download, copy, update, store, manipulate, or otherwise use qualifying software as a taxable transaction when provided for consideration.
That means the delivery method no longer controls the result in the way it once did. A software platform does not avoid tax simply because the customer logs in through a browser instead of installing a program on a local computer.
The California Legislative Analyst’s Office explains that California previously taxed prewritten software transmitted on tangible media but generally excluded downloaded software and software accessed remotely. SB 122 extends the tax to many prewritten software transactions regardless of delivery method.
This is not a new tax rate. It expands the property subject to existing state and local sales and use taxes.
Which software costs may increase?
Organizations should review any recurring platform that provides access to prewritten software. Common categories include:
- Customer relationship management systems
- Accounting and finance platforms
- Productivity suites
- Communication and collaboration tools
- Design and drafting applications
- Human resources and payroll systems
- Project management platforms
- Estimating and takeoff software
- Cybersecurity subscriptions
- Marketing and analytics tools
- Artificial intelligence software
- Building management and facilities platforms
Products similar to Microsoft 365, Salesforce, Adobe Creative Cloud, QuickBooks Online, Slack, and related cloud services may receive sales tax treatment beginning in 2027. That does not mean every product will be treated identically. The contract, invoice, service structure, user rights, and final administrative guidance will matter.
For a construction company, the software stack can stretch across estimating, scheduling, accounting, procurement, field reporting, document control, payroll, safety management, customer communications, and warranty tracking. For a property owner, it may also include rent systems, access control, work-order management, energy monitoring, and tenant communication tools.
The individual subscriptions may look manageable. Together, they form another operating system for the business. A small percentage applied across that system becomes a real budget line.
What could the added cost look like?
The combined rate depends on the purchaser’s location and applicable state, local, and district taxes. California’s Department of Tax and Fee Administration explains that the total rate includes the state rate, local rate, and any district taxes in effect at the relevant location.
Using a combined rate near 10 percent for planning purposes:
| Annual software spend | Approximate added tax |
|---|---|
| $5,000 subscription | $500 |
| $50,000 platform | $5,000 |
| $100,000 software portfolio | $10,000 |
| $250,000 software portfolio | $25,000 |
| $500,000 software portfolio | $50,000 |
These are planning examples, not tax calculations. The actual amount depends on the software classification, transaction structure, purchaser location, use location, and applicable rate.
The effect can be especially sharp for organizations with fixed budgets. A nonprofit may have to choose between software, staffing, and programs. A contractor may absorb the increase in overhead or reflect it in future bids. A property manager may need to account for higher administrative costs without assuming that the expense can be passed directly to tenants.
Businesses and nonprofits do not receive a general exemption
SB 122 does not create a broad exemption simply because the purchaser is a business, university, nonprofit, foundation, or professional firm.
That distinction matters. The software may support construction, housing operations, education, healthcare, or community services. The purchaser’s mission does not by itself determine whether the software is taxable.
There are specific exclusions, however. SB 122 excludes qualifying digital books, digital audio works, audiovisual works, digital artwork, video game products, digital infrastructure, and certain other defined categories from the new digital product definition.
The law also preserves different treatment for custom software. Software prepared specifically for one customer generally remains outside the sales and use tax treatment that applies to prewritten software. Separately stated charges for qualifying modifications to existing prewritten software may receive different treatment from the underlying platform.
That makes contract language important. A single invoice may contain software access, implementation, configuration, training, consulting, data migration, and custom development. Those components should not automatically be treated as one undifferentiated charge.
Services primarily involving human effort that begins after the customer requests the service may also receive separate treatment. But the statutory exemption does not apply simply because a software provider describes its product as a service. A right to use the provider’s software through a browser or application interface can still fall within the taxable category.
Location and multi-office use will require attention
SB 122 establishes sourcing rules for electronically delivered and remotely accessed digital products.
For a remote transaction, the sale is generally tied to the purchaser’s known California address in the seller’s records. The law gives priority to the billing address, followed by shipping or delivery information, the address associated with the payment instrument, and other mailing information.
The place of use is generally where a person exercises a right or power over the digital product. For remote access, that means the location where the person accessing the software is located.
This creates a practical issue for organizations with offices, jobsites, employees, or properties in multiple jurisdictions. A contractor may have a home office in Oakland, project staff in San Francisco, and field teams throughout the Bay Area. A property company may administer buildings in Alameda, Contra Costa, and San Mateo counties from one central office.
Do not assume that one billing address tells the whole story. Review how licenses are assigned, where users access the platform, and whether the vendor or the purchaser is responsible for calculating and remitting the tax.
For very large purchases, SB 122 includes a $5 million threshold that can shift responsibility from the retailer to the purchaser through use tax self-assessment. Organizations approaching that level should involve their tax advisers early and review whether a use tax direct payment permit or another administrative process applies.
The construction budget lesson
Construction budgets are built in layers. Direct labor sits alongside materials, equipment, permits, insurance, supervision, temporary facilities, and project administration. Software belongs in that same operating structure.
The mistake is to treat technology as a collection of unrelated monthly charges. The better approach is to map the software portfolio to the work it supports.
A general contractor should identify which platforms support estimating, scheduling, cost control, procurement, field documentation, and closeout. A developer should review systems used for feasibility, design coordination, approvals, financing, and asset management. A building operator should include work-order systems, access control, energy monitoring, tenant communication, and preventive maintenance tools.
This is similar to sequencing a project. First establish the scope. Then identify dependencies. Then price the work. Finally, reserve contingency for items that remain uncertain.
What organizations should do before December 31, 2026
Use the remaining time to create a clean baseline.
Inventory the portfolio. List every recurring software subscription, enterprise license, cloud platform, lease, renewal, and implementation agreement.
Classify each arrangement. Separate prewritten software access from custom development, consulting, training, data migration, and other services.
Review the contract terms. Look for renewal dates, prepayment provisions, price escalators, tax clauses, user-location requirements, and multi-year commitments.
Estimate the 2027 exposure. Apply a planning rate to likely-taxable purchases, then refine the estimate with your tax adviser and vendor documentation.
Review legitimate 2026 purchasing options. Some organizations may consider prepayments or renewals before January 1, 2027. Do not accelerate a purchase solely for tax reasons without reviewing cash flow, contract terms, accounting treatment, and whether the transaction actually qualifies under the law.
Map user locations. Document California offices, jobsites, properties, and employees outside California who access shared platforms.
Coordinate internally. Procurement, finance, information technology, legal, project management, and building operations may each hold part of the information needed to classify a subscription correctly.
Update the budget. Put the expected increase into 2027 operating budgets before approvals are final.
Monitor CDTFA guidance. The CDTFA sales and use tax resource center provides links to regulations, proposed changes, tax bulletins, forms, and filing resources. Guidance may clarify how specific software arrangements should be handled.
The practical takeaway
California’s new software tax is a quiet line-item change with a wide footprint. It reaches the tools that help organizations estimate work, manage projects, run buildings, close books, communicate with teams, and serve customers.
The cost will not be the same for every organization. Some digital products are excluded. Custom software and human-effort services may receive different treatment. Location and contract structure will affect the result.
But the planning task is straightforward. Build the inventory now, separate the components, identify renewal dates, estimate the exposure, and give the 2027 budget a sound foundation.
Sources
- California Senate Bill 122, Chapter 23, Statutes of 2026
- California Legislative Analyst’s Office, “The 2026-27 Budget: Sales Tax on Prewritten Software”
- California Department of Tax and Fee Administration, Sales and Use Tax in California
- Atlas Premier Services and Consultants, Construction Services
- Atlas Premier Services and Consultants, Design-Build
- Atlas Premier Services and Consultants, Property Maintenance
Ready to move your project from concept to completion?
Contact Atlas Premier Services and Consultants today.
Atlas Premier Services and Consultants
Strategic Solutions. Trusted Execution.
Lake Merritt Plaza
1999 Harrison Street, 18th Floor
Oakland, CA 94612
Phone: (800) 994-9028
Email: info@atlas-premier.com
Disclaimer: This content is for general informational purposes only and does not constitute legal, financial, engineering, construction, regulatory, or other professional advice. Reading this content does not create a client or contractual relationship with Atlas Premier Services & Consultants. Because every project and property is different, consult qualified professionals regarding your specific circumstances. Atlas Premier Services & Consultants makes no warranties regarding the accuracy or completeness of this information and is not responsible for third-party content or references. Testimonials, examples, and case studies are illustrative only and do not guarantee similar results.