Table of Contents
Sales tax treatment of digital products
Digital products as taxable personal property
Senate Bill 122 expands the definition of “tangible personal property” to include digital products and related intellectual property rights for sales and use tax purposes, effective January 1, 2027.
The bill defines a “digital product” as pre-packaged computer software that is provided on tangible storage media, transmitted electronically or accessed remotely. “Electronically transmitted” means that Buyer receives the Digital Product through means other than tangible media that allows Buyer to open, view, access, download, copy, possess, store, manipulate, update or otherwise use the Digital Product. Accordingly, the expanded tax would also cover software purchased from many traditional SaaS providers.
Especially a “digital product” excludes traditional digital goods, such as:
- Digital assets, such as non-fungible tokens (NFTs)
- Digital audio works, such as music
- Digital audiovisual works, such as streaming services
- Digital books, for example e-books
- Digital video game products, including electronically transmitted or remotely accessed video games
- Digital visual works, including works of art
Under certain conditions, digital infrastructure, including cloud-based services provided remotely and allowing a user to create, deploy, scale or run their own computer software on the service provider’s digital platform, is also excluded from tax.
Additional exceptions apply for purchases intended solely for use outside of California, for certain reproduction or resale rights, and for digital products that constitute services that require primarily human effort. Individual software is excluded.
Procurement rules
The bill contains rules to determine where sales of digital products should come from. These rules vary depending on how the product is delivered.
- Tangible storage media: Sales generally occur at the physical location where the transfer occurs.
- Personal Transactions (Intangible Delivery): The sale usually takes place at the seller’s place of business.
- Remote or electronic delivery: Sales are generally made to the customer’s billing address.
If a corresponding California address cannot be determined, the sale may be treated as if it occurred out of state and not subject to tax.
The law establishes a framework under which retailers can be relieved of the collection obligation by transferring the responsibility for remitting the use tax to the buyer when a buyer exceeds an annual threshold of $5 million for purchases of digital products from a retailer. In these cases, the buyer is obliged to estimate the applicable use tax himself and pay it directly.
Changes to business and personal income taxes
Senate Bill 122 extends the temporary $5 million tax credit cap under the individual and corporate income tax provisions for an additional three years through the 2029 tax year. This cap was originally scheduled to expire at the end of 2026. The legislation also maintains provisions related to the annual election to receive a refundable tax credit for 20% of the amount of qualified credits in excess of the $5 million cap. Consistent with current law, the refundable credit amount would not be available until the third taxable year following the election, and any unused credits affected by the limitation would receive an additional year of carryforward for each year in which the limitation applies.
Beginning with the 2030 tax year, the business tax credit is permanently capped at $5 million or 70% of a business’s tax liability, whichever is greater. Taxpayers can continue to claim refundable credits generated under the previous year’s temporary restrictions in addition to the credit cap beginning in 2030.
Other changes include:
- Taxation of payments from the US Department of Justice Anti-Weaponization Fund at 100%
- Reducing the minimum annual franchise tax to $400 for the first year of operation in tax years 2027 through 2029
https://rsmus.com/insights/tax-alerts/2026/california-expands-sales-tax-to-electronically-delivered-software.html
