SB 122 makes SaaS taxable in California starting Jan. 1, 2027. The CDTFA is still writing the regulations, but there are things you can do now, and Anrok can help with each one.
On June 29, 2026, Governor Newsom signed SB 122, redefining "tangible personal property" to include "digital products." "Digital products" is defined as prewritten software, however it's delivered. Starting Jan. 1, 2027, remotely accessed software and SaaS are subject to California's 7.25% statewide rate plus local district taxes, pushing taxes upwards of 10% overall.
After three decades as the one large state where SaaS wasn't taxable, California is now in the same category as the 20+ states that already tax it. And it's the biggest one. For most SaaS companies, California is the single largest state on the revenue map.
This piece walks through seven concrete steps you can take now, ahead of the January 1 deadline. For a live walkthrough, join our California SaaS tax countdown session.
What we know
1. Get registered
Physical nexus in California is a trigger from day one. It is hard to find a company that doesn't have an employee in California these days, so don't get caught behind. If you have an employee in the state, go ahead and plan on registering now.
For those without an employee in the state, the economic nexus test hasn't changed: $500,000 in California sales in the current or prior calendar year. What changed is that your software revenue will begin to count towards that.
The catch is timing. You can't just file a permit application today and sit on it. California expects a seller permit application to reflect an imminent start date, not one 12 months out. Registering too early creates filing obligations before you have anything to report; registering too late means you risk exposure.
Do this now: confirm whether you have physical or economic nexus in California, and if the answer is yes, go ahead and submit your registration.
How Anrok helps: see your exposure in real time. Through Anrok's HRIS integrations monitoring for physical nexus and our economic nexus tracker, you can see whether you have California nexus today.
Anrok will submit the registration in Anrok and handle the timing to make sure you are licensed and ready to collect on Jan. 1, 2027. We'll file it inside California's expected window so your permit is active on January 1 and not a day of exposure earlier or later. Anrok handles the paperwork, the account setup, and the filing calendar that follows.
2. Find the customers who could cross $5 million with you
Once a single customer's purchases from you pass $5 million in a 12-month period, you stop collecting, and they start self-assessing. Get this wrong in either direction, and it's a problem: collect when you shouldn't, and you've overcharged your largest account; fail to collect when you should have, and the liability is yours.
Do this now: pull your 2026 California revenue by customer. Flag anyone at or near $5 million, plus anyone whose run-rate would put them there. It's usually a very short list and it's your most important customer list.
How Anrok helps: Anrok already has your full transaction history by customer and jurisdiction, so the list is a report, not a project.
Anrok is already building a tracker for this exact use case. Because the threshold is measured on a rolling 12-month basis per vendor, Anrok tracks each customer's cumulative California purchases against it as the year progresses, so the account that crosses in August doesn't surprise you.
Prepare a few email outreach templates to keep your customers informed as these changes take effect.
3. Classify your product before someone else does it for you
This is the piece with the most judgment in it, and the piece most likely to be revisited on audit. The compliance question has shifted from how it is delivered to what it is, exactly.
Some questions worth answering in writing:
Do this now: map every SKU to a position, and write down the reasoning. Not the conclusion, the reasoning. That's what you'll need if the emergency regulations land somewhere unexpected.
How Anrok helps: Anrok's tax engine maintains product tax codes for every jurisdiction, and California's new rules are being built into it ahead of the effective date. Our tax research team is following the CDTFA rulemaking, and when the emergency regulations land, taxability updates flow through automatically. You don't rebuild your logic. If you're unsure how to classify a particular SKU, reach out to us and we can assist or recommend partners that can as well.
5. Read your contracts before your customers do
Look for multi-year deals and renewals crossing the effective date. A taxable transaction requires both a right to use and consideration given on or after Jan. 1, 2027. Renewals on or after that date are generally taxable. The CDTFA has not committed on whether the contract date or the payment date controls for multi-year agreements, so know which of your contracts sit in that gray area, and how much revenue is in them.
Do this now: pull your California contracts renewing in Q4 2026 and Q1 2027. Check the tax clause. Flag the multi-year agreements that straddle the effective date.
How Anrok helps: Anrok calculates tax at the invoice level based on the actual transaction date, so once the treatment of a given renewal is settled, it's applied correctly without manual intervention. Exemption functionality in Anrok can help document invoices related to a pre-2027 contract invoice and exempt it from tax accordingly, with a statement supporting that position, which will help as an audit trail on a potential audit years down the road.
6. Build your exemption certificate process now, not in December
Two categories of exempt sales will matter immediately. The first is digital products purchased solely for use outside California or in interstate commerce. The second is some form of multiple-points-of-use relief for customers with distributed workforces, depending on where the CDTFA lands.
The complication is that California's statute doesn't include a multistate allocation method. The CDTFA has signaled it may create a purchaser-side exemption certificate, or handle allocation through a back-end refund process, but that's unresolved. What is clear is that if you accept a certificate, you need to be able to produce it.
Do this now: decide who owns exemption certificate collection and storage, and how a certificate gets attached to the right transactions. If you're already doing this in other states, extend the process. If you're not, this is the state that will make you.
How Anrok helps: Anrok collects, validates, and stores exemption certificates, and applies them automatically to the right transactions, so an exempt sale is exempt at invoice time, not corrected in arrears. Anrok has support already built in for partial MPU allocation, so we are ready to support all exemption functionality when the CDTFA decides how this will be operationalized.
7. Determine your largest vendors for your own use tax obligations
The $5 million threshold is a two-way street. If your company purchases more than $5 million of digital products from a single vendor over a rolling 12-month period, your vendor may stop collecting, and you have to self-assess and remit use tax directly to the CDTFA. The untaxed invoices didn't get cheaper, the liability just moves to you, quietly, and shows up on audit if no one was watching for it.
Do this now: pull your California software spend by vendor for the trailing 12 months, from AP, procurement, or your spend-management tool. Treat it like the buy-side version of the customer list in Section 2.
How Anrok helps: once you've identified the use tax amount you owe, you can input it into Anrok. We will report and remit it on the California returns we already file for you, accruing your self-assessed use tax on the return so it's captured in the same filing cadence, not tracked in a spreadsheet and missed.
What's still unanswered
The CDTFA held its first implementation workshop on July 21 with more than 400 people in attendance and was candid that a lot of the operative detail is still open. It has two-year emergency regulatory authority and expects to circulate a discussion draft by the end of August, hold an Interested Parties Meeting in late August or September, and file with the Office of Administrative Law in early December.
A few of the biggest unresolved questions that the CDTFA has yet to address:
Multiple points of use
SB 122 has no MPU mechanism but provides the authority for the CDTFA to create one. The CDTFA is evaluating a purchaser-side exemption certificate and apportionment approaches modeled on other states, but nothing is settled.
Renewals and multi-year contracts
A taxable transaction requires both a right to use and consideration given on or after Jan. 1, 2027. Renewals on or after that date are generally taxable, but the CDTFA declined to commit on whether contract date or payment date controls.
Mechanics of the $5M shift
Will an exemption certificate or direct pay permit be required to support the shift? Is there a unique direct pay permit specific to these SaaS transactions that purchasers of software should obtain and that the CDTFA will issue? The law reads like yes, but the CDTFA has issued no details.
The statute also reads that the purchaser has the option to petition the CDTFA to have the seller keep charging sales tax, alleviating their use tax obligation. There are no specifics as to what this process would look like or how long it might take.
The human-effort exemption
Framed as a "true object" test: are you buying software's function, or human effort delivered through software? The department hasn't defined how much human effort qualifies.
Some of this will hopefully get answered in the emergency regulations. Some of it may not get answered until years from now, in final regulations or through litigation.
The time to get ahead is now
California gave everyone about six months, and it's spending part of that time deciding what the rules actually are. That's uncomfortable. But the uncertainty is concentrated in a few areas: MPU, $5M transition, and renewal timing. None of this work waits on them.
The companies that will have a quiet January are the ones registering on the right timeline, cleaning up address data, writing down their taxability positions, and calling their largest California accounts before those accounts call them.
Anrok is tracking the CDTFA rulemaking through every comment period and Interested Parties Meeting, and building the changes into the engine as they're finalized. If you'd like to talk through where your business sits, get in touch.
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