California's 2027 Software Tax: What Restaurant Operators Should Know

Key Takeaways:

• California's SB 122, signed June 29, 2026, extends sales and use tax to prewritten software delivered electronically or accessed remotely, effective January 1, 2027.
• SaaS tools restaurants rely on daily, including point-of-sale systems, scheduling software, payroll platforms, and inventory management systems, will generally become taxable.
• The tax applies at California's 7.25% base rate plus local district taxes, sourced to the customer's California billing address.
• Custom software built for a single organization and cloud infrastructure where the customer runs its own applications remain exempt.
• CDTFA guidance on sourcing and multi-year contract treatment is still developing, so operators should build a reasonable budget estimate now and revisit it as rules are finalized.

For more than thirty years, California left prewritten software alone when it came to sales tax. Senate Bill 122, signed by Governor Gavin Newsom on June 29, 2026, closes that gap. Starting January 1, 2027, sales and use tax will apply to prewritten software that's delivered electronically or accessed remotely, which, in practice, means most software as a service (SaaS) products. Restaurant operators should take notice because much of what keeps the business running falls squarely into that category.

What Is Changing Under Senate Bill 122?

Think about the tools most locations already rely on: point-of-sale systems, scheduling software, payroll platforms, and inventory management systems. If it's an off-the-shelf product delivered electronically, it's likely taxable under the new law. There are exceptions. Custom software built for one specific organization remains exempt, as does cloud infrastructure in which a customer runs their own applications on someone else's platform. Streaming services, digital books, and digital assets like cryptocurrency are also untouched by this change.

The tax itself isn't a new concept — it works the same way sales tax already applies to physical goods. California's 7.25% base rate applies, plus whatever local district taxes are in effect, sourced to the customer's California billing address. Larger operators should take note of one additional wrinkle: If digital product purchases from a single vendor cross $5 million in a year, the responsibility to remit tax can shift from the vendor to the purchaser. That means registering directly with the California Department of Tax and Fee Administration (CDTFA).

The details are still being sorted out. CDTFA held a public workshop in July, released a discussion paper on September 1, and met with stakeholders on September 10. More guidance is expected before the law takes effect, especially around sourcing rules and how multi-year contracts will be treated. For operators who want to follow along directly, CDTFA's special notice on digital products and it's Tax Guide for Retailers and Purchasers of Digital Products are worth bookmarking.

None of this is a small line item for a group running multiple locations on multiple platforms. And because the rules are still taking shape, they're likely to shift more between now and January. The operators who get ahead of this will be working with a number they understand. Everyone else will find out what they owe when the invoice tells them.

What to Do Before Year-End?

• Map the software stack. List every subscription in use across locations and note how each is delivered — physical media, electronic download, or remote access. This determines what's truly in scope.
• Call your vendors. Ask how the tax will show up on invoices starting in 2027, and whether they've already built the change into their billing systems.
• Check contract renewal dates. Any multi-year agreement coming up for renewal deserves a second look, since most of its term will fall after the effective date.
• Watch the $5 million threshold. Larger operators approaching that mark with any single vendor should confirm whether the registration and remittance burden will fall on them.
• Build it into next year's budget. Even a rough estimate now beats an unplanned cost increase in January.

It’s important to note the CDTFA has not finished its guidance yet, so the exact scope and mechanics, including sourcing, bundling, and multi-year contract treatment, are still being worked out. Having time to prepare for the coming tax change and build a reasonable estimate gives you and your restaurant a chance to get ahead of the change and make a proactive strategy. EisnerAmper’s restaurant group is prepared to help your restaurant prepare for California’s new software tax. Looking to get started? Connect with our team below.