Is SaaS Taxable in California? Not Until January 1, 2027 — and the Statute That Taxes It Then Has a Human in It Twice

Key Takeaway: California has not taxed remotely accessed software for 54 years, because a regulation written for punched cards says a customer who reaches a computer "by means of remote telecommunication" has not leased anything. S.B. 122 ends that on January 1, 2027. In the enacted text, two rules decide what an agent operator owes: an exemption for electronic services that requires human effort applied after the customer asks, and a place-of-use rule that locates a transaction where "the person accessing" the software stands. Neither sentence has an answer for software no person operates.

Today: Exempt, and the Reason Is a Time-Sharing Rule

California's sales and use tax reaches tangible personal property. Software delivered without media is not tangible personal property, so it falls outside the base — an absence of imposition rather than an exemption, which is why it was so easy to legislate away. The operative text is Cal. Code Regs. tit. 18, § 1502, Computers, Programs, and Data Processing. Subdivision (c)(7) is the whole modern cloud industry in one sentence: "Charges made for the use of a computer, on a time-sharing basis, where access to the computer is by means of remote telecommunication are not subject to tax." Subdivision (i) says it from the other direction — a lease "does not include a contract whereby a person secures access by means of remote telecommunication to a computer which is not on his or her premises."

Downloads are exempt too under § 1502(f)(1)(D), and services are not enumerated: subdivision (g) lists consulting, system design, feasibility studies, supplying analysts and programmers, and training, and calls them all nontaxable.

The regulation was adopted February 17, 1972, and last amended effective July 1, 2014. Its vocabulary is coding sheets, punched cards, magnetic tape and proof listings — the fifth state record we have read this quarter whose operative digital-services text does not mention the technology it governs, after New York's mimeograph sentence, Ohio's electronic-information-services definitions, Michigan's delivery rule and Illinois's nonpossessory lease.

January 1, 2027: S.B. 122 Makes Software Tangible

Senate Bill 122 (Stats. 2026, ch. 23) was approved by the Governor and filed with the Secretary of State on June 29, 2026, as a budget trailer bill. Nearly every sales-tax section it touches closes with the same line: the amendments "shall become operative on January 1, 2027."

The mechanism is a definition. R&TC § 6016 is amended so "tangible personal property" means either personal property perceptible to the senses or "a digital product and any copyright or patent interests associated therewith." Because Bradley-Burns and the district transactions-and-use taxes conform automatically — and because new §§ 7202.1 and 7254 expressly source digital products to the same rule — the local layers arm at the same instant. This is not a 7.25 percent event. It is a 7.25-to-10.75 percent event.

New § 6016.1(a) defines "digital product" as "prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely," and new § 6016.2(a) defines "accessed remotely" as having "accessed for consideration by use of a digital code, password, or other means prewritten computer software that resides on the vendor's server or the server of a third party." An API key is a digital code; a hosted model is prewritten software on the vendor's server. Model access sits inside the definition without strain.

Amended § 6006(i) makes a "sale" include "any permanent or temporary transfer of the right... to open, view, access, download, copy, update, possess, store, manipulate, or otherwise use" such a product, and § 6009(b) makes those same verbs a taxable "use." They are verbs a machine performs.

What Stays Out

Three exclusions matter more to agent operators than the imposition does. Digital assets are excluded — § 6016.1(c)(4) defines them as value recorded on a cryptographically secured distributed ledger, so stablecoin settlement of an agent payment is not itself a digital product. Custom software stays outside "sale" and "purchase" entirely: S.B. 122 amended § 6010.9 rather than repealing it, defining custom computer software as software "prepared to the special order of a single customer," with modification of prewritten software custom "only to the extent of the modification."

"Digital infrastructure" is excluded, and that is the boundary to plan around. Section 6016.1(c)(8) defines it as a cloud-based service "that allows a user to create, deploy, scale, or run the user's own computer software on the service provider's digital platform without managing, operating, or maintaining the user's own infrastructure." Read the operative words: the user's own computer software. Rent GPUs and run your own model weights on them and you are buying excluded digital infrastructure. Call someone else's hosted model over an API and you are accessing prewritten software remotely — a taxable digital product. Identical silicon, opposite answers, and the discriminator is whose software is executing.

The First Find: The Services Exemption Requires a Human, and Requires the Human to Be Late

New § 6372.1 is the only exemption S.B. 122 writes for services delivered electronically. It exempts a digital product "that represents a service provided in electronic form" where both conditions hold:

(1) The service primarily involves the application of human effort by the service provider.

(2) The human effort described in paragraph (1) originated after the customer requested the service.

Then subdivision (b) closes the obvious workaround: the exemption "does not apply to the sale or purchase of the right to use the provider's computer software running on a cloud infrastructure or the right to access that software from various client devices through either a thin client interface, including a web browser, or a program interface."

Take the conditions in order. An agent operator's human effort is real and enormous — data curation, training, evaluation, tool design, guardrails, on-call engineering — and all of it originated before any particular customer asked for anything. That is the commercial point: the effort is amortised across every request. Paragraph (2) does not merely require a person in the loop; it requires that person's work to begin after the request arrives. And even if an operator could show per-request human involvement, subdivision (b) names the delivery channel and removes the exemption anyway. "A program interface" is an API.

California's only services exemption for digital products is therefore unavailable to machine-performed work by two independent routes. A paralegal reviewing a contract after you send it is exempt; a model reviewing the same contract in four seconds is taxable. The statute does not say it is taxing automation — it says it is exempting human effort, which is the same rule from the other end. We have written before about the difference between a robot tax and an agent tax; this is the first enacted American sales-tax provision we have read whose exemption turns on whether a person did the work.

The Second Find: Place of Use Is Where the Person Accessing Is Standing

New § 6010.5.1(a) is one sentence long:

The place of use of a digital product shall be the place where any right or power is exercised over the digital product. The right or power to remotely access a digital product is exercised at the place where the person accessing the digital product is located.

This is the eighth time this quarter we have found the same gap, and the first time it sits in enacted statutory text rather than a bulletin or a form. Chicago's apportionment affidavit counts users; Michigan built a multiple-points-of-use certificate regime and repealed it in 2009; New York's Tax Bulletin ST-128 tells sellers to split a receipt by employees, and the NetDocuments decision we covered yesterday shows what happens when a taxpayer cannot produce those headcounts. Maryland's statute is the exception that proves the point: Tax-Gen. § 11-101(e-1)(1)(ii) defines primary use location by reference to the buyer's end users "including employees, or equipment that makes use of" the service. Maryland named machines. California, legislating five months ago, wrote "the person accessing."

An agent runs on rented capacity in a region chosen by a scheduler, invoked by an orchestrator, for a buyer whose own users may be anywhere. There is no person accessing. Under § 6010.5.1 as written, either the transaction has no California place of use or the reader must construct one by attribution — and the statute supplies no attribution rule.

The sourcing side is concrete and belongs in billing systems now. Amended § 6010.5(b)(3) sources a non-in-person sale to "the purchaser's known address in this state shown in the seller's records," on a fixed cascade — billing, then shipping or delivery, then the address on the payment instrument, then mailing. Under (b)(4) an unresolved address puts the sale "outside of this state."

One hook for a multi-location answer exists, and it is discretionary. Section 6372(e)(1) lets the department "set forth, authorize, or require alternative methods to calculate the sales or use tax due in this state... including on licenses of digital products concurrently available for use in multiple locations." That is California's multiple-points-of-use power: a "may," belonging to the department rather than the taxpayer, and unexercised. The regulation package now being drafted is where it gets answered — we read the CDTFA's discussion-paper exhibits on September 7 and found no machine-shaped denominator in them. Comments close September 24, 2026.

The $5 Million Line, and Nexus

S.B. 122 does something unusual at the top of the market. Under new § 6052, once a retailer's remotely accessed digital-product sales to a single purchaser exceed $5,000,000 in a calendar year, the retailer is relieved of sales-tax liability and the purchaser becomes liable for use tax, self-assessed under a direct payment permit per § 7051.3. That is not a de minimis exemption — it transfers the compliance obligation to the buyer.

Economic nexus is unchanged and does not need changing. R&TC § 6203, as amended by A.B. 147 (Stats. 2019, ch. 5), requires a remote retailer to register and collect once combined sales of tangible personal property for delivery into California exceed $500,000 in the preceding or current calendar year — no transaction count. Because § 6016 will define digital products as tangible personal property, software and model-access receipts start counting toward that threshold on January 1, 2027 without further amendment. Operators comfortably under $500,000 today may cross on software revenue alone in the first quarter.

How AgentTax Computes California

Verified against the live engine this session, $1,000, buyer role.

• Everything in the software layer computes exempt today. SaaS, API access, model access, compute, storage and subscription into any California ZIP return $0, with the S.B. 122 basis and its effective date in the response rather than a bare zero. Data processing and information services return $0 on their own footing — California does not enumerate them.

• The 2027 flip is dated and it fires. The same call replayed at an as_of_date of January 15, 2027 returns tax at the full combined rate including district taxes, not the bare 7.25 percent state rate: Los Angeles $97.50 on $1,000, Oakland $107.50.

• And 18 of our 26 California ZIP anchors are wrong. Reconciled against CDTFA's own published table for rates effective July 1, 2026: nine under-collect, nine over-collect. The largest miss is Fountain Valley, a full point light at 7.75 percent against a published 8.75. Mountain View, Sunnyvale and Palo Alto are each 0.625 points light — precisely Santa Clara County's Measure A, approved in November 2025 and operative April 1, 2026. Stockton over-collects by 0.75 points. This is a curation defect rather than drift: the April 2026 CDTFA table carries the same figures as the July one, so these numbers did not match on the day they were entered. Rate values are guardrail-class here and are never edited by an agent, so the correction is filed for human approval and our wrong numbers are published alongside the right ones. They cost nothing today, because California applies a zero rate to this category. They arm on January 1, 2027 — and two Los Angeles anchors step up on October 1, 2026.

• We do not apportion, and California has not yet said how. Our answer is correct for a single-location buyer and an explicit ceiling for a multistate one. What we produce on day one is the per-transaction audit trail — counterparty, buyer state and ZIP, resolved category, taxability basis, exemptions evaluated — the record class every apportionment regime we have read eventually asks for.

Try it against your own transaction types. Run a California calculation now with no account, or get a free API key. Compare California with the 50-state SaaS taxability guide, the AI agent sales tax hub, the seat-based denominators in New York and Illinois, and the Texas rule exempting a credentialed professional's judgment.

What to Watch

Three dates. September 24, 2026, when written comments on the CDTFA's emergency regulation package close — the department's only chance to define a denominator before the tax starts, and where § 6372(e)(1) becomes real or stays theoretical. October 1, 2026, when a published district-rate step takes effect. January 1, 2027, when the largest software market in the United States starts taxing software, the same day Colorado's HB 26-1223 does.

The question underneath all three is whether § 6372.1's human-effort test and § 6010.5.1's accessing person survive contact with what California's economy actually sells now. Both sentences were written in 2026. Neither was written about machines.

This analysis is for informational purposes only and does not constitute legal or tax advice. This post reflects AgentTax's current interpretation of evolving law. Consult a licensed tax professional for compliance decisions.