How Do Sales Taxes Apply to Business Software in California?

 Posted on June 24, 2026 in Taxation Law

Because tax laws change regularly, it is important for business owners to understand what taxes may apply to products and services they purchase or sell. One issue that may affect California businesses in the near future involves sales taxes that apply to software. The state legislature is planning to implement a change that will remove the tax exemptions for certain types of software. This may require software sellers to begin collecting sales taxes, and it may affect the prices of software for other businesses.

The tax issues that can affect small businesses and other types of companies can be complex, and staying on top of changes to tax laws is not always easy. By reviewing these issues with the help of a skilled tax attorney, a business can make sure taxes will be collected and paid correctly, and it can also take steps to avoid or mitigate potential tax penalties.

California Sales Taxes on Downloaded Software and SaaS

Under California’s current tax laws, sales taxes only apply to software that is delivered on physical media. A company that sells software delivered to customers on tangible media like discs or USB drives is required to collect sales tax. Software that customers download or access remotely is exempt from sales tax.

The California state legislature is currently considering a proposal that would expand how sales taxes apply to software. Under SB 122 and SB 176, sales taxes will apply to all prewritten software, regardless of the delivery method. The state’s base sales tax rate of 7.25% will apply, as well as any applicable local taxes. It seems likely that this proposal will pass, and it will go into effect on January 1, 2027.

This change to the tax law will expand the types of software that is taxable. Any programs that are sold online and downloaded by customers will now be taxed. Sales taxes will also apply to software-as-a-service (SaaS) systems that people access remotely by logging into websites or other digital platforms. The types of software that may now be taxed include payroll systems, customer relationship management (CRM) tools, marketing software, productivity tools, accounting platforms, human resources tools, data analytics software, and other types of subscription-based services.

Notably, sales tax will only apply to prewritten software that companies make available to customers. Custom software created for individual clients will continue to be exempt from sales taxes, regardless of whether it may be delivered through tangible media, downloaded, or accessed remotely.

How Businesses Can Address New Sales Taxes on Software

To ensure that the proper sales taxes will be collected and paid, software vendors may need to begin assessing their offerings. They can determine which types of software and services may be taxable to ensure that they can begin applying sales taxes by January 1, 2027. It may be necessary to assess how products and services are bundled, including how taxes may apply to packages that combine software with technical support or other services, as well as any custom software that may be exempt from sales taxes.

Businesses that purchase software or subscribe to digital services may need to determine how pricing may change once sales taxes begin being collected. The prices of different types of software may increase significantly, and planning for these increases can help businesses determine how to budget for ongoing costs.

Contact Our San Jose, CA Business Tax Lawyer

Staying on top of changes to tax laws is not always easy, but failure to consider how these issues may affect a business can result in unexpected financial losses. At John D. Teter Law Offices, our San Jose tax attorney can work with software providers to make the necessary changes to begin collecting sales taxes by January 1, 2027, and he can also provide guidance for other types of businesses on how they may be affected by new tax laws. To schedule a consultation and get assistance with taxes that may affect California businesses, contact us at 408-866-1810.