California’s New Focus: Technology and Wealth

Published: Aug 11, 2026
By: Heather Le Clair; Camille Adams
Topics: Tax
Share

California recently enacted legislation expanding sales and use tax to many digital products, including Software as a Service (SaaS). Voters will decide this November whether to approve a one-time tax on certain billionaires. While one measure is now law and the other remains a proposal, both are responses to changes in the state’s economy and focus on areas that have experienced significant growth in recent years. As California’s economy changes, the state’s tax policy will continue to evolve.

Key Takeaways

California’s SB 122 expands sales and use tax to many SaaS and digital software transactions beginning January 1, 2027.
Businesses should review software contracts, billing systems, sourcing rules, and tax compliance processes before the law takes effect.
SB 122 also changes the tax treatment of technology transfer agreements by including certain digital products and related rights in tangible personal property.
Proposition 40, if approved by voters, would impose a one-time tax on certain California billionaires and may require planning around valuation, liquidity, ownership, and residency.

California Expands Sales Tax to SaaS and Digital Products

California enacted Senate Bill 122, expanding sales and use tax to many digital products beginning January 1, 2027. The legislation applies sales tax to prewritten software delivered electronically or accessed remotely, commonly referred to as SaaS. Historically, California taxed prewritten software transferred on tangible media but exempted electronically delivered software and SaaS. SB 122 now taxes both, but continues to exempt custom software. The law also excludes digital assets, audio and audiovisual works, books, digital infrastructure, video games, and visual works.

Key Compliance Rules for Sellers and Purchasers

The legislation also creates sourcing and payment rules. Electronically delivered or remotely accessed software generally is sourced using the purchaser’s California address in the seller’s records. For use tax purposes, remotely accessed software is used where the person accessing it is located. Software purchased only for use outside California or in interstate or foreign commerce may qualify for an exemption if the parties maintain the required documentation. Additionally, when a purchaser’s electronically delivered or remotely accessed digital product purchases from one retailer exceed $5 million during the calendar year period, the retailer is relieved of collection responsibility. The threshold applies per customer, per seller, per year, and is indexed for inflation beginning in 2031. The liability for assessing and remitting sales and use tax then shifts to the buyer to self-assess applicable use tax.

The bill reflects changes in how businesses acquire software. Rather than purchasing software installed on physical media, businesses now use cloud-based subscriptions to handle accounting systems, manage customer relationships, monitor cybersecurity, and support day-to-day operations. SB 122 responds to this shift by expanding California’s sales tax to many software transactions that previously were not taxable.

The new law also changes the treatment of technology transfer agreements (TTA). Digital products and associated copyrights and patent interests are now included within the definition of tangible personal property. Accordingly, the software component of a TTA is no longer treated as nontaxable intangible property.

SB 122 Changes the Treatment of Technology Transfer Agreements

For example, a California technology company that licenses cloud-based ERP, CRM, and cybersecurity software may see vendors begin collecting California sales tax on subscriptions that were not previously taxable. Before the law takes effect, the company should review vendor contracts, evaluate indirect tax processes, and determine how the additional tax may affect budgeting and technology costs. Software providers should determine whether their products will become taxable and evaluate billing systems, tax engines, customer contracts, and invoicing procedures. The California Department of Tax and Fee Administration is expected to issue more guidance before the effective date.

How Businesses Should Prepare for California’s SaaS Tax

Proposition 40 Would Create a One-Time Tax on Billionaires

California voters will consider Proposition 40 during the November 2026 election. If approved, the measure would impose a one-time 5% tax on the net worth of California billionaires who were California residents on January 1, 2026. Covered assets generally include business interests, securities, intellectual property, artwork, and collectibles, while real property and certain retirement assets generally would be excluded. Taxpayers could elect to pay the tax over five years.

The proposal focuses on another area of the economy that has changed over time. For many founders and business owners, wealth is no longer tied primarily to annual compensation. Instead, it is often concentrated in ownership interests in privately held businesses, investment portfolios, and intellectual property. If approved, Proposition 40 would apply to certain taxpayers whose wealth is held in those assets.

Planning Considerations for Founders, Investors, and Family Offices

Consider the same California technology company. While the business may be evaluating the new sales tax rules for its software subscriptions, its founder may also be evaluating whether Proposition 40 could apply because much of the founder’s wealth is tied to ownership of the business rather than annual salary. Although relatively few taxpayers would be directly affected, founders, family offices, private equity and venture capital firms, and closely held businesses should continue monitoring the proposal as they evaluate ownership structures, valuation, liquidity needs, succession planning, and residency considerations.