California Sales Tax on Digital Products: What’s Changing in 2027

Digital products are a common part of doing business, from software and SaaS to online technology solutions. Beginning January 1, 2027, California is changing how certain digital products are treated for sales and use tax purposes.

Under Senate Bill 122, California's definition of tangible personal property will expand to include certain digital products and related copyright or patent interests. As a result, sales of qualifying digital products may become subject to California sales and use tax.

Who Could Be Affected?

The new rules may impact both businesses selling digital products and businesses purchasing them. In particular, businesses that:

• Sell prewritten computer software
• Provide certain prewritten SaaS products
• License or provide remote access to software
• Purchase digital products for use in California

For sellers, the change could create new registration, collection, and reporting requirements. Purchasers may also have use tax obligations when tax is not collected by the seller.

What Counts as a Digital Product?

Under the new law, digital products generally include prewritten computer software that is transferred on physical media, electronically, or accessed remotely.

• Excluded: Digital books, music, movies, video games, cryptocurrency, digital infrastructure, and digital visual works.
• Exempt: Certain digital products representing a service, custom software, products transferred with reproduction and distribution rights, and products purchased solely for use outside California.

For a complete list of digital products that are excluded or exempt under the new law, visit the California Department of Tax and Fee Administration's guidance on digital products.

A $5 Million Threshold Could Shift Tax Responsibility

Businesses with significant digital product purchases should also be aware of the $5 million threshold.

When a retailer's qualifying digital product sales to a purchaser exceed $5 million during the calendar year or preceding calendar year, the responsibility for reporting and paying the tax may shift from the retailer to the purchaser. In some cases, the purchaser may need to register for a Use Tax Direct Payment Permit.

What Should Businesses Do Now?

The new rules may require businesses to take another look at their current sales and use tax processes. Consider asking:

• Are the products we sell or purchase subject to the new rules?
• Do we have the appropriate California registrations?
• Are we collecting and reporting tax correctly?
• Could the $5 million threshold affect our business?
• Are our billing and tax systems ready for the change?

The answers may not be as simple as determining whether a product is "digital." California's new rules include specific definitions, exclusions, and exemptions that can affect the taxability of a transaction.

With the January 1, 2027, effective date approaching, now is the time to understand how these changes could affect your business.

If you have questions about California's new digital product rules or need help evaluating your sales and use tax obligations, contact Allyn at tax@allynintl.com.

Contributor: Megan Bryarly

Tips for the Taxpayer

In recent years, states are becoming more insistent in the world of sales and use taxes with both regulation changes and enforcement. It is more important than ever for businesses to be aware of how sales tax affects them. Without an understanding of the varieties of sales and use tax, there is more potential for mistakes and audits. Businesses need to have policies and procedures in place that help them determine where, how much, and from whom to collect. Many companies may not have the knowledge, expertise, or time to build this foundation. An expert resource may be the best choice to help manage the world of sales and use tax and guarantee your business is tax compliant.

How Can We Help?

Allyn’s experienced tax team provides comprehensive compliance and consulting for large US and global corporations. We handle all Federal, multi-state, and local tax needs.

Key Services:

• Filing Sales and Use tax returns in all U.S. jurisdictions.
• Routine nexus reviews and proactive compliance improvement.
• Business registration (Secretary of State & Department of Revenue).

Tax process management and audit defense. Our dedication to customer service is rated 350% higher than industry averages. Contact us for a customized solution: tax@allynintl.com.

---

About Allyn International

Allyn International provides high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit  www.allynintl.com.