This article is for informational purposes only and does not constitute tax, legal, or accounting advice. Consult a qualified tax professional before making compliance decisions.

Policy

Users and Devices: What the CDTFA's First SB 122 Workshop Signals About Allocating Software Tax to Agents

Beardsley Rumble|2026-08-01|6 min read

On July 21, 2026, the California Department of Tax and Fee Administration held its first implementation workshop on S.B. 122, the trailer bill that makes prewritten software and SaaS taxable in California on January 1, 2027. We previewed that session the morning it convened and closed with three questions: would the CDTFA adopt a billing-address rule, a place-of-use rule, or a hybrid; would it create a multiple-points-of-use allocation election; and what documentation would support an allocation. Practitioner readouts published in the days since — the fullest being Eversheds Sutherland's — give partial answers to the second and third. They are worth reporting because the direction they signal is keyed to a unit of measurement that autonomous agents do not have.

What the Agency Actually Signaled

Nothing at the workshop was a decision. The CDTFA repeatedly noted the limits of its own authority and said much of the operative detail remains to be developed. With that caveat carrying real weight, the reported signals:

On allocation. S.B. 122 contains no statutory multiple-points-of-use mechanism. The CDTFA indicated it may develop a purchaser-side exemption certificate and said it is evaluating apportionment approaches modeled on other states — Massachusetts among them — based on user or device location. For purchases below the $5 million threshold, the department floated either a real-time exemption certificate or a back-end refund process as the vehicle for splitting tax between California and out-of-state use.

On the $5 million threshold. It operates on a vendor-specific, rolling 12-month basis. Once one purchaser's purchases from one retailer exceed $5 million, the retailer is relieved of collection and the purchaser must self-assess and remit use tax directly. Direct-pay authorization runs on the same 12-month clock.

On renewals. A taxable transaction requires both a right to use and consideration given after January 1, 2027. Renewals on or after that date are generally taxable. For multi-year agreements, the CDTFA declined to commit on whether the contract date or the payment and access dates control.

On the human-effort exemption. The department framed it as a true-object inquiry: is the customer accessing software for its function, or accessing human effort delivered through software? It acknowledged it has not defined the type or degree of human effort required and said illustrative examples would appear in emergency regulations.

On the calendar. A discussion draft is expected by the end of August 2026, an interested-parties meeting in late August or September, submission to the Office of Administrative Law in early December, and a second round of rulemaking anticipated during 2027.

The Denominator Problem

Massachusetts-style apportionment works because an enterprise software purchase has countable seats. You know how many licensed users sit in each state, you allocate the purchase price on that ratio, and the arithmetic defends itself under audit. Device-based allocation works for the same reason: laptops and workstations have locations that persist.

An AI agent operator has neither input in usable form. The seat count on a model API or a hosted tool provisioned by an agent is one, or zero, depending on whether you count the service account. The "device" is an ephemeral container that the scheduler placed in whichever region had capacity, and that a config change relocates next week. Apply a user-or-device formula to that fact pattern and you get one of two outcomes: a degenerate result that assigns the entire purchase to a single state because there is only one nominal user, or an arbitrary one that tracks cloud-region placement — an infrastructure artifact with no relationship to where the economic benefit lands. This is the same objection we raised to billing-address sourcing on July 21, arriving now from the opposite direction. The proposed cure has the same defect as the disease.

There is a second, quieter mismatch in the certificate mechanics. A real-time exemption certificate asks the purchaser to attest, at the moment of purchase, to a use footprint. An agent's use footprint is not knowable at purchase time — it is realized over the billing period, as the agent decides which tools to call and how often. Of the two vehicles the CDTFA floated, only the back-end refund path is mechanically available to an operator whose consumption pattern is determined after the fact. That is not a complaint; it is a planning conclusion. It means the compliance asset for agent operators is contemporaneous records, not an election made up front — which is exactly what we said in July, now with a reason attached.

The Threshold That Arrives Without Warning

The $5 million mechanic deserves separate attention because it is the one item from the workshop that changes who files, not just how much.

Five million dollars of annual spend with a single vendor sounds like an enterprise problem. For an agent operator running production inference at scale, it is an ordinary frontier-model bill. Cross it, and the vendor stops collecting and you start self-assessing and remitting California use tax directly. Three features make this a trap worth naming now:

It is per-vendor, not aggregate. Consolidating spend onto one provider — the normal response to volume pricing — makes you more likely to cross it, not less.

It is a rolling 12-month test. The obligation can attach mid-year, on a date determined by purchasing behavior rather than by a fiscal calendar.

The counterparty sees it before you do. Your vendor is tracking cumulative spend for its own collection purposes. Unless you are tracking the same number, the first notice may be an invoice that stops showing tax — a change easily read as a billing correction rather than as a transfer of liability.

Buyer-side use tax is settled law in every sales-tax state, and our position on it has not moved: when the seller does not collect, the buyer owes. What is new is a bright-line dollar amount that silently converts a large software buyer into a use-tax filer, and a class of buyer — the high-volume compute consumer — that is structurally likely to hit it.

Where This Leaves the Unsettled Questions

We are not moving anything. The enactment of S.B. 122 remains settled and its January 1, 2027 effective date is fixed; our comfort there is Substantial Authority. Sourcing and place-of-use for remotely accessed software bought by a distributed agent remains a watch item at More Likely Than Not, and the workshop does not change that — a signal of direction in a public meeting is not a regulation, and the CDTFA said as much itself.

The human-effort exemption is worth one caution. Framed as a true-object inquiry, it is close to unavailable to agent operators by construction: an AI agent is software function almost by definition, and the statute's services carve-out expressly excludes rights to access SaaS. Do not build a position on it. Whether the true-object test resolves mixed software-and-service offerings cleanly is an open question in our registry, and the CDTFA has conceded it has not yet defined the term.

What Agent Operators Should Do Before the End of August

The discussion draft is the next datable event, and it is weeks away.

Track per-vendor 12-month California-attributable software spend now. You need to know how close each vendor relationship sits to $5 million before the threshold decides for you.

Instrument use, not just purchase. Capture where runtimes execute and where benefit is realized, per transaction, per billing period. Whatever allocation rule emerges, it will demand contemporaneous records, and no rule under discussion can be satisfied by reconstruction.

Inventory multi-year agreements straddling January 1, 2027. The CDTFA declined to say whether contract date or access and payment dates control. Know which of your commitments the answer would move.

Read the discussion draft when it lands. That text, not the workshop, is the development that converts this analysis into a rule. Comment while the record is open.

If you are mapping which software inputs in your agent stack become taxable in California, how they should be sourced, and what the January 1, 2027 flip does to your effective cost, that classification and situs problem is what AgentTax is built to model — including the effective-dated change with no code work on your side.

What to Watch Next

Three signals. Whether the discussion draft contains an allocation election at all, or only a certificate-and-refund mechanic. Whether it defines the allocation denominator in terms broader than users and devices — anything that reaches consumption or benefit would be a meaningful improvement for agent operators. And whether the promised illustrative examples on human effort address software-delivered services with material automated components, or stop at the easy cases. The interested-parties meeting in late August or September is the venue where those get argued, and it is the last practical opportunity to affect the text before it goes to the Office of Administrative Law in December.

This analysis is for informational purposes only and does not constitute legal or tax advice. Consult a licensed tax professional for compliance decisions.