Is SaaS taxable in California? Not today, but it will be from January 1, 2027. Senate Bill 122 (Statutes of 2026, Chapter 23, signed June 29, 2026) adds "digital products" to the definition of tangible personal property, and defines a digital product as prewritten computer software that is transferred on storage media, transferred electronically, or accessed remotely. Remote access is SaaS. The statewide rate is 7.25% plus district taxes, sourced to your customer's address, so a San Francisco customer pays 8.625% and a Los Angeles customer 10.25%. Colorado's HB 26-1223 brings software delivered by download or remote access into its sales tax on the same day.
This guide is for US SaaS founders and finance leads with customers in California or Colorado. It covers what the new law taxes and leaves out, who has to register, how a subscription that spans January 1 is treated, what to change in Stripe or your billing system, and the part most compliance pages skip: whether to absorb the tax or add it on top, with the effect on gross margin and net revenue retention.
This is not tax advice. Everything below comes from the bill text, the California Department of Tax and Fee Administration (CDTFA) and the Colorado legislature and Department of Revenue, all read on October 22, 2026. CDTFA's implementing regulations were still in draft on that date. Confirm your own position with a sales tax advisor before January 1.
What changes on January 1, 2027
Until now, California taxed software only when it was delivered on a physical medium. SB 122 changes the base itself. Every section of the bill that touches sales and use tax says it "shall become operative on January 1, 2027" (SB 122 chaptered text, read October 22, 2026). The pieces that matter for a SaaS company:
- Revenue and Taxation Code (RTC) section 6016: tangible personal property now includes "a digital product and any copyright or patent interests associated therewith."
- RTC 6016.1: a digital product is "prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely." Prewritten software is software "held or existing for general or repeated sale or lease," even if it was first built custom or for in-house use.
- RTC 6016.2: "accessed remotely" means accessing, for consideration, prewritten software that sits on the vendor's server or a third party's server, using a code, password or other means. That is a login to a SaaS product.
- RTC 6006(i): a "sale" includes any permanent or temporary transfer of the right to access or use a digital product for a consideration, beginning January 1, 2027. A monthly subscription is a temporary transfer of that right.
CDTFA's own notice removes any doubt about SaaS. Special Notice L-1036 (September 2026) lists "Prewritten Software-as-a-Service (SaaS) providers" among the businesses affected (CDTFA L-1036).
What is taxable and what is not
The law separates items that are not digital products at all from digital products that are exempt. Both end with no tax, but the exemptions come with conditions.
| Item | Treatment from Jan 1, 2027 | Source |
|---|---|---|
| SaaS (prewritten software accessed remotely), business or consumer | Taxable | RTC 6016.1, 6016.2, CDTFA L-1036 |
| Downloaded prewritten software, including apps | Taxable | RTC 6016.1 |
| Digital infrastructure: a cloud service where the customer builds, deploys or runs its own software (IaaS, PaaS) | Not a digital product | RTC 6016.1(b)(5), (c)(8); draft Reg. 1600 |
| Digital assets, audio, audiovisual works, books, video games, visual art | Not digital products | RTC 6016.1(b) |
| Custom software (prepared to the special order of one customer) | Not a sale, so not taxed | RTC 6010.9 |
| Separately stated charges to modify prewritten software for one customer | Custom, to the extent of the modification | RTC 6010.9(b)(4) |
| A digital product that "represents a service" mainly involving human effort that starts after the customer asks | Exempt, but the exemption expressly does not cover SaaS | RTC 6372.1 |
| Rights to reproduce and distribute copies to third parties | Exempt | RTC 6362.4 |
| Software bought solely for use outside California | Exempt, with a certificate taken in good faith | RTC 6372 |
Two details catch SaaS companies out. First, "we are a service, not software" does not work: RTC 6372.1(b) says the service 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 accessing it through a web browser or an API. Second, a product built for one customer and then sold to others becomes prewritten. Only the custom modification, separately stated, stays out.
If you sell a developer platform where customers run their own code, you may fall under the digital infrastructure exclusion. CDTFA's draft regulation gives cloud-based infrastructure as a service and platform as a service as the examples (CDTFA discussion paper and draft regulations, September 1, 2026). A mixed product, part platform and part application, is exactly the case to put in front of an advisor.
Rates: 7.25% plus district tax, sourced to the customer
The statewide rate is 7.25%, and local district taxes add 0.10% to 2.00% on top, with some areas stacking more than one (CDTFA sales and use tax rates). Examples from CDTFA's table effective October 1, 2026 (CDTFA city and county rates):
| City | Combined rate |
|---|---|
| San Diego | 7.750% |
| San Francisco | 8.625% |
| Palo Alto | 9.750% |
| San Jose | 10.000% |
| Los Angeles | 10.250% |
| Oakland | 10.750% |
| Lancaster, Palmdale (highest on the table) | 11.750% |
Which rate applies depends on where the customer is. Under amended RTC 6010.5(b), a remote sale of a digital product is sourced to "the purchaser's known address in this state" in your records, checked in this order: billing address, shipping or delivery address, the address tied to the payment method, then mailing address. If the customer gave no address at the sale, you use the most recent ones they gave you before, in the same order. If none of those is in California, the sale is treated as outside the state, and RTC 6054 protects you if you can show a reasonable effort to collect a complete address. Local and district taxes follow the same rule (RTC 7202.1 and 7254). In practice: collect a full billing address, not just a country and ZIP code.
Who has to register and collect
CDTFA's notice splits sellers in two (L-1036):
- Sellers in California that are not already registered "must register for a seller's permit, file sales and use tax returns, and report and pay tax."
- Out-of-state sellers "engaged in business in this state" under RTC 6203 must register for a Certificate of Registration, Use Tax, and collect use tax from California customers.
"Engaged in business" includes physical presence, such as an office or representatives in California, and an economic test: total combined sales of tangible personal property for delivery in California, by you and related companies, above $500,000 in the preceding or current calendar year (RTC 6203(c)(4)). From January 1, 2027, SaaS sold into California counts as tangible personal property for that test. We could not find CDTFA guidance on whether 2026 SaaS receipts, earned before SaaS was tangible personal property, count toward the "preceding calendar year" in early 2027. Ask CDTFA or your advisor if you sit near the line.
The physical-presence side of RTC 6203 covers an office or place of business in California and agents or representatives operating there. Whether a single remote employee who does not sell counts depends on the facts, so put that question to your advisor. If you are under the threshold and have no presence, your California business customers still owe use tax on what they buy from you; the law does not make the purchase tax-free, it only changes who reports it.
The $5 million rule for large customers
RTC 6052 and 6201.55 relieve the seller of collecting when sales of electronically delivered or remotely accessed digital products by that seller to that one purchaser exceed $5,000,000 in the calendar year (from January 1, 2028, in the current or preceding year). The purchaser then self-assesses and pays CDTFA directly, including local and district taxes, under a use tax direct payment permit. The purchaser can ask CDTFA for a waiver, in which case you collect after all. The threshold is indexed to California CPI every five years starting October 1, 2031. Some summaries describe this as a rule for any company buying more than $5 million of software in total; the text is per seller and purchaser pair, and it does not apply when the purchaser is an insurer. For most startups no customer is that large, so plan to collect on everyone.
Timeline
| Date | Event | Source |
|---|---|---|
| June 4, 2026 | Colorado HB 26-1223 signed and takes effect (software change applies from Jan 1, 2027) | Colorado final fiscal note |
| June 29, 2026 | California SB 122 signed, Chapter 23 | leginfo, CDTFA L-1036 |
| September 1, 2026 | CDTFA publishes draft emergency regulations (proposed Regs. 1600 to 1600.3, 1502.2) | CDTFA discussion paper |
| September 24, 2026 | Comment deadline on the CDTFA drafts | CDTFA discussion paper |
| October 22, 2026 | Drafts still listed as an open rulemaking topic, no adoption date posted | CDTFA Business Taxes Committee page |
| January 1, 2027 | California and Colorado start taxing SaaS and downloaded software | SB 122; HB 26-1223 section 9 |
| January 1, 2028 | California's $5M purchaser test also looks at the preceding calendar year | RTC 6052, 6201.55 |
Subscriptions that span January 1
CDTFA's draft Regulation 1600(f) treats a recurring subscription as a "continuing sale and purchase": tax "does not apply to payments received for subscription periods prior to January 1, 2027" and "applies to payments received for subscription periods on or after January 1, 2027." Its example is a 12-month subscription sold on December 15, 2026: the 2026 months are not taxed, the 2027 months are. So moving annual renewals into December does not, on the draft's reading, take the 2027 months out of tax. A one-time license sold and accessible in 2026 is not taxed even if the customer pays in 2027. These are drafts. Check the adopted text before you invoice January renewals.
Absorb it or pass it on: the margin math
US software prices are normally quoted before tax, and Stripe's recommended Automatic setting treats USD prices as tax-exclusive, adding the tax on top. The real decision is for customers who already have a price: do you add 7.75% to 11.75% to their next invoice, or keep their total the same and let the tax come out of your revenue?
Under US GAAP, sales tax you collect is not revenue if you make the ASC 606-10-32-2A policy election to exclude it from the transaction price, which most companies do (Deloitte Roadmap 6.7). That makes the two choices very different on the P&L. Adding it on top leaves your revenue alone. Absorbing it is a price cut.
Worked example
Illustrative inputs, not benchmarks: a SaaS company at $50,000 MRR, 30% of it ($15,000) from California customers, a blended California rate of 9.5% (between San Francisco's 8.625% and Los Angeles's 10.25%), 78% gross margin ($11,000 a month of COGS). It has an office in California, so it must collect; with $180,000 a year of California sales and no presence it would sit under the $500,000 test.
Net revenue when absorbed = Price paid ÷ (1 + tax rate)$15,000 ÷ 1.095 = $13,698.63; the other $1,301.37 is tax
| Monthly | Before 2027 | Absorb (keep totals) | Pass through, 5% of CA MRR churns |
|---|---|---|---|
| California customers pay | $15,000 | $15,000 | $15,603.75 (on the $14,250 that stays) |
| Revenue | $50,000 | $48,698.63 | $49,250.00 |
| COGS | $11,000 | $11,000 | $10,835 (scales with revenue) |
| Gross profit | $39,000 | $37,698.63 | $38,415.00 |
| Gross margin | 78.0% | 77.4% | 78.0% |
| Annual gross profit lost | - | $15,616 | $7,020 |
Absorbing costs 2.6% of total revenue and 0.6 points of gross margin, every month, for as long as the price stays put. Passing it through costs nothing unless customers leave. Each $1,000 plan becomes $1,095 on the invoice.
The useful number is the break-even churn: how much California MRR would have to leave because of the tax before absorbing it is cheaper.
- On revenue: $1,301.37 ÷ $15,000 = 8.7% of California MRR.
- On gross profit, if COGS scales with revenue: $1,301.37 ÷ ($15,000 × 78%) = 11.1% of California MRR.
At 3% churn the pass-through loses $450 of MRR, at 10% it loses $1,500, and only above about 11% does it do worse on gross profit than absorbing. For business customers the case for passing it on is stronger still: a California company that buys from a seller who does not collect owes use tax on the same purchase anyway, so a compliant buyer is not paying more than the law already required.
What it does to net revenue retention
Take a cohort that starts 2027 at $50,000 MRR and grows to $52,000 by December, a 104% NRR before tax, with 30% of it in California. Measured on net revenue:
- Absorb: the California part of ending MRR is $15,600 billed, $14,246.58 net, so ending MRR is $50,646.58 and NRR drops to 101.3%. Nothing changed in the product or the customers. Investors comparing your 2027 NRR to 2026 will see a 2.7-point fall that is really a pricing decision.
- Pass through with 5% California churn: ending MRR is $51,220 and NRR is 102.4%.
- Pass through with no churn: NRR stays at 104%.
If you do absorb, do it on purpose and write it down: a footnote in the board deck that 2027 MRR is reported net of California and Colorado tax saves a confusing conversation later. Model both cases before you email customers; the same price-change mechanics are in our SaaS pricing guide, and Adlega lets you run the absorb and pass-through cases side by side and see the effect on MRR, margin and runway.
Implementation checklist
- Decide whether you must register. An office or representatives in California, or more than $500,000 of California sales; Colorado more than $100,000 of retail sales in the current or previous year. Register with CDTFA through its online services before you collect.
- Add the registration to your tax engine with a January 1 start. In Stripe Tax, add it under Tax, Locations and choose "Schedule tax collection" with the effective date; Stripe only collects where you have added a registration, and it can file the registration for you in US states other than your home state (Stripe Tax registrations). Stripe Tax charges 0.5% per transaction where you are registered when used with Billing, Checkout or Invoicing (Stripe Tax pricing), roughly $75 to $82 a month on the example's California billings.
- Set the right product tax code. Stripe lists txcd_10103001 for SaaS for business use and txcd_10103000 for personal use, and tells US sellers not to use the generic txcd_10000000 because it misses state distinctions (Stripe Tax for digital products).
- Choose tax behavior per price. Exclusive adds tax on top; inclusive keeps the customer's total fixed. Stripe does not let you change tax_behavior once a price is set to either, so absorbing means creating new prices and moving subscriptions (Stripe tax behavior).
- Collect full billing addresses. Sourcing follows the billing address first. Back-fill addresses for existing California and Colorado subscribers before the first January invoice.
- Show tax on invoices and order forms. State the tax as a separate line, and if you quote tax-included prices, say so in the order form.
- Collect exemption certificates. Resellers need a resale certificate; customers using your software solely outside California need CDTFA's out-of-state use certificate, which CDTFA says it will publish "as it becomes available." Stripe points to the EXEMPTAX app for certificate storage.
- Update contracts and price terms. Check that order forms and terms say prices exclude applicable taxes and that the customer pays them. Send California and Colorado customers notice of the change in November or early December, with the date and the rate they should expect.
- Book it correctly. Record collected tax as a liability, not revenue, and keep MRR and ARR net of tax so the metrics stay comparable with 2026.
- Calendar the first returns and recheck CDTFA's adopted regulations before January invoices go out.
If you sell through a merchant of record instead, the tax collection moves off your books. Paddle describes itself as the reseller and "seller on record," responsible for collecting and paying the tax, and calculates it at checkout from the customer's location (Paddle help center). You pay for that in the fee. Our Paddle vs Stripe comparison and the billing software hub cost both routes at each stage, Stripe Billing pricing covers the platform fee, and the billing fees calculator runs the numbers for your volume.
Colorado: also January 1, 2027
Colorado's HB 26-1223 was signed and took effect on June 4, 2026, and its software change applies to sales on or after January 1, 2027 (Colorado General Assembly, HB 26-1223; final fiscal note, September 3, 2026). The act:
- Treats computer software as tangible personal property, and defines software as instructions "delivered by any means, including compact disc, download, or remote access through the internet," including mobile apps (CRS 39-26-102(15)(c), as amended).
- Exempts software "governed by a negotiable license agreement or developed for use by a particular user" (CRS 39-26-713(3)). A negotiated license must be individually bargained and signed by both sides before or when access starts. Standard or boilerplate terms, click-through, browse-wrap and acceptance by account creation do not count; a DocuSign-style signature on an individually negotiated contract does.
The state rate is 2.9%, and out-of-state retailers with $100,000 or more of Colorado retail sales in the current or previous year must get a license and collect (Colorado DOR sales tax guide). Local taxes are the hard part. Colorado's home-rule cities administer their own sales taxes and the state does not collect them, and the fiscal note says state-collected local governments only pick up the change if they conform through a local vote. So the local rate on software can differ by city in 2027.
What is not settled: the Department of Revenue was still developing rules for HB 26-1223 (its stakeholder workgroup met in August 2026) and had published none by October 22, 2026. The statute's wording reaches software accessed remotely, but how the rules treat self-serve SaaS and which home-rule cities follow is not confirmed. In practice, a self-serve SaaS company selling on click-through terms should prepare to collect the 2.9% state tax from January 1 and check each home-rule city it sells into. Enterprise contracts signed after negotiation may fall under the exemption; keep the signed copies.
California SaaS sales tax FAQ
Is SaaS taxable in California?
Not before January 1, 2027. From that date, yes: SB 122 defines prewritten software accessed remotely as a digital product, digital products are tangible personal property, and CDTFA's notice names SaaS providers as affected. Custom software, digital infrastructure (IaaS, PaaS) and software used solely outside California are not taxed.
What is the sales tax rate on software in California?
The statewide 7.25% plus any district tax at the customer's address, from 7.25% in areas with no district tax up to 11.75% (Lancaster and Palmdale) on CDTFA's October 1, 2026 table. San Francisco is 8.625% and Los Angeles 10.25%.
Do I need to collect California sales tax if my company is not in California?
Yes if you are "engaged in business" there: an office or representatives operating in the state, or more than $500,000 of sales of tangible personal property (which will include SaaS) into California in the current or preceding calendar year. Below that, your California business customers owe use tax themselves.
Do annual subscriptions paid in 2026 get taxed?
Under CDTFA's draft Regulation 1600, a subscription is a continuing sale: the periods before January 1, 2027 are not taxed and the periods from January 1, 2027 are, even if the contract was signed in 2026. The regulation was not adopted as of October 22, 2026.
Does Stripe automatically start charging California tax on SaaS?
Only if you have added a California registration in Stripe Tax and your products carry a SaaS tax code. Stripe calculates and collects only where you have told it you are registered; you can schedule the registration to start on January 1.
Is SaaS taxable in Colorado in 2027?
HB 26-1223 makes software delivered by download or remote access taxable at the 2.9% state rate from January 1, 2027, unless it is custom or under a negotiated, signed license. The Department of Revenue had not issued its implementing rules by October 22, 2026, and home-rule cities set their own treatment.
Should I raise prices or absorb the tax?
Adding tax on top leaves revenue, gross margin and NRR unchanged. Absorbing it cuts net revenue by the tax rate on every California dollar. In our example it only pays to absorb if more than about 9 to 11% of California MRR would leave because of the tax.
Sources: SB 122 (2025-2026) chaptered text on leginfo.legislature.ca.gov; CDTFA Special Notice L-1036, Tax Guide for Retailers and Purchasers of Digital Products, September 1, 2026 discussion paper and draft regulations, rate tables effective October 1, 2026; HB 26-1223 final act and final fiscal note on leg.colorado.gov; Colorado Department of Revenue sales tax guide; Stripe Tax documentation and pricing; Paddle help center. All read October 22, 2026. This page is general information, not tax or legal advice.