New California software tax rules take effect January 1, 2027.
For UC Davis departments: This page explains how to prepare for California’s new digital products tax rules and where to get help with university purchases or sales.
California is expanding sales and use tax to certain digital products, including prewritten computer software transferred electronically or accessed remotely. Learn how UC Davis is preparing for changes to tax determination, purchasing categories, sourcing, use-tax processes and department budgeting.
1. Overview
Senate Bill 122 (Stats. 2026, Ch. 23) expands California's definition of tangible personal property to include qualifying digital products. Beginning January 1, 2027, sales and use tax generally applies to the retail sale or California use of taxable digital products whether they are transferred on tangible storage media, transferred electronically or accessed remotely. For more information, visit the CDTFA, or California Department of Tax and Fee Administration, Tax Guide for Retailers and Purchasers of Digital Products.
This represents a significant change from California's historical treatment of electronically delivered software. For UC Davis, the change may affect software subscriptions, SaaS, enterprise applications, cloud-based platforms and other remote-access software, including purchases that previously did not result in California sales or use tax.
UC Davis campus rate: 7.25%
The statewide base rate is 7.25%. The total rate at the point of use can be higher because of local and district taxes; use CDTFA's address lookup for the applicable rate.
Initial campus planning estimate: >$1.5M
Preliminary annual tax exposure based on 2025 SCM software expenditure data and current planning assumptions; this is not a final liability or budget forecast.
2. What Departments Should Do
- Budget for potential tax. Include potential California sales/use tax when planning 2027 software purchases and renewals.
- Identify R&D purchases early. Review whether qualifying research software may meet the R&D reduced-rate requirements before submitting the requisition.
- Review contracts crossing January 1, 2027. Flag SaaS, software maintenance, multi-year and bundled arrangements for Procurement and Contracting Services review.
- Do not guess at mixed transactions. When an invoice combines software and services, retain the contract and statement of work and seek review as needed.
- Pay attention to location information. For software used by employees in multiple locations, do not assume the billing address answers the sourcing question.
- Use the purchasing process. Select the appropriate purchasing category and R&D field in Aggie Enterprise and attach required documentation.
3. What is Taxable?
Under the current CDTFA guide, the expanded tax generally reaches digital products that are prewritten computer software and are transferred electronically or accessed remotely. The definition of prewritten computer software includes software held or existing for general or repeated sale or lease. For more information, refer to CDTFA definitions.
| Transaction type | Planning treatment | Notes |
|---|---|---|
| Downloaded prewritten software | Potentially taxable | Tax applies regardless of electronic delivery method beginning 1/1/2027. |
| SaaS / remotely accessed prewritten software | Potentially taxable | Includes the right to access or use provider software remotely. |
| Software on physical media | Potentially taxable | Covered by the expanded digital-product framework. |
| Custom computer software | Generally excluded | Custom software is generally exempt except for basic operating programs; modifications are custom only to the extent of the qualifying modification. CDTFA retailer guidance |
| Software + service/maintenance/support | Review required | Bundled or mixed transactions may require component-level analysis; CDTFA guidance is continuing to develop. |
| IaaS / PaaS | Pending guidance | CDTFA's rulemaking specifically addresses digital infrastructure and related issues. |
4. Exclusions and Exceptions
The new rules do not make every digital transaction taxable. Departments should review the nature of the product and the rights being purchased before assuming tax applies.
Generally excluded / exempt categories
- Custom computer software, subject to statutory limitations.
- Certain digital audio works, audiovisual works, books, video games, visual works and digital assets identified by CDTFA.
- Certain digital infrastructure arrangements.
- Qualifying software purchased for use solely outside California, subject to documentation.
- Certain transactions involving rights to reproduce or copy a digital product for distribution to third parties.
Important qualification points
- The same invoice can contain taxable and nontaxable components.
- Separately stated charges and contract language matter.
- Software modifications are custom only to the extent of the qualifying modification.
- Exclusions do not eliminate the need to document the reason a transaction is treated as nontaxable.
CDTFA's current digital-products guide should be used for the latest definitions and exceptions. UC Davis guidance will be updated as regulations and administrative procedures are finalized. CDTFA Digital Products Guide
5. R&D Reduced Sales/Use Tax Rate
Because SB 122 brings qualifying software into California's taxable property framework, the University's existing research and development partial exemption may become relevant to certain software purchases. California's R&D partial exemption generally applies to qualifying tangible personal property used primarily in qualifying research and development activities. California specifically includes computer software within the qualified-property framework. See CDTFA Regulation 1525.4, Manufacturing, Research and Development, and Electric Power Equipment.
The partial exemption is currently available through June 30, 2030. The exemption reduces the applicable state tax component by 3.9375 percentage points, resulting in a 3.3125% rate before applicable district taxes. Qualifying purchasers are generally subject to the program's eligibility, use and annual purchase limitations. For more information, review CDTFA Publication 541 and CDTFA Partial Exemption Certificate.
UC Davis purchasing process
- Identify potential R&D eligibility. Confirm the software is qualifying property and will be used primarily for qualifying research and development activity.
- Request the treatment on the Requisition. Select the R&D Reduced Tax option in the Billing section of the Aggie Enterprise Requisition.
- Attach supporting documentation. Complete the Partial Sales and Use Tax Exemption for Equipment Eligibility Checklist and attach it to the Requisition.
- Allow Tax and Procurement review. Tax Reporting & Compliance reviews eligibility and Procurement & Contracting Services incorporates the appropriate treatment into the purchase order when approved.
6. Purchasing, Contracts & Systems
Departments do not need to independently redesign tax categories, but the new rules will require coordinated campus changes. Supply Chain Management and Tax, Compliance and Controls are evaluating how purchasing categories map into OneSource and how tax determinations should be supported within Aggie Enterprise.
Contracts and renewals crossing January 1, 2027
Existing agreements and renewals should be reviewed because transaction timing can affect taxability. CDTFA's current digital-products guidance continues to develop, so departments should avoid making assumptions about prepayments, renewals, multi-year contracts or bundled services without a tax review.
Large vendor purchases
For remotely accessed digital products, the retailer/purchaser responsibilities can change when the retailer's aggregate gross receipts from digital products to the same purchaser exceed $5 million. CDTFA's current guide states that the purchaser may then become responsible for direct reporting and payment of use tax, subject to the rules and any waiver process. See CDTFA purchaser guidance for more information.
7. Sourcing, Location of Use and P-Card Transactions
Sourcing or purchaser location is one of the most important unresolved implementation issues. CDTFA's current rules establish address-based sourcing concepts, while also recognizing that purchasers may have use-tax obligations based on where digital products are actually used. CDTFA has stated that additional information will be provided on multiple points of use and local/district use-tax reporting. See CDTFA purchaser guidance for more information.
Why this matters at UC Davis
A Procurement Card transaction may contain a cardholder billing address that differs from the campus location where the software is actually used. Enterprise software may also be billed centrally while being accessed by employees working at multiple California locations. Departments should not assume that the billing address alone establishes the correct tax treatment.
UC Davis Tax, Compliance and Controls is evaluating the data needed to support sourcing, including how Aggie Enterprise, OneSource, cardholder information and other systems should work together.
Questions?
Contact Ricardo Buenrostro, Director, Tax, Compliance and Controls.
[email protected] | 530-752-6155
Frequently Asked Questions
- Does this mean all software purchases will be taxed?
- No. The law generally targets qualifying prewritten digital products. Custom software and several specified digital product categories remain excluded or exempt, and mixed transactions may require further analysis. CDTFA definitions and retailer guidance
- Does SaaS count as software for this purpose?
- Many SaaS arrangements can fall within the expanded tax base when they provide a right to access or use prewritten software remotely. The specific contract and product still need to be reviewed.
- Are IaaS and PaaS taxable?
- The treatment of infrastructure and platform offerings remains an area requiring careful review. CDTFA's rulemaking includes digital infrastructure and related provisions, and UC Davis will update guidance as those rules are finalized.
- What about software maintenance and support?
- Not every service component is automatically taxable. Maintenance, updates, support, implementation and training may receive different treatment depending on the transaction. CDTFA guidance is continuing to develop, so bundled agreements should be reviewed rather than classified solely from the invoice description.
- What if a software invoice includes professional services?
- Provide the contract, statement of work and invoice to the appropriate tax/procurement reviewers. Separately stated service components may be treated differently from taxable software. The classification depends on the actual transaction.
- Can software used for research receive the R&D reduced rate?
- Potentially. California's R&D partial exemption includes computer software within the qualified-property framework when the statutory eligibility and use requirements are met. UC Davis is developing implementation guidance for qualifying software. CDTFA Publication 541 and Regulation 1525.4
- What is the Davis campus rate?
- The statewide base rate is 7.25%. The total rate at the point of use may be higher because of local and district taxes. The R&D partial exemption reduces the applicable state tax component by 3.9375 percentage points, resulting in a reduced state rate of 3.3125% plus applicable district taxes when the purchase qualifies.
- Will my P-Card billing address determine where tax is charged?
- Not necessarily. Sourcing is an evolving area, and billing address can be part of the sourcing hierarchy while use-tax responsibilities may still depend on actual use. Departments should not rely on a cardholder's billing address as a substitute for understanding where software is used. CDTFA purchaser guidance
- What happens if the vendor does not charge California tax?
- UC Davis may have a use-tax obligation in circumstances where a vendor does not collect the required tax. CDTFA's purchaser guidance also provides special direct-reporting rules for certain high-volume digital-product purchases. CDTFA purchaser guidance
- Should departments accelerate renewals before January 1?
- Departments should not accelerate or restructure purchases solely for tax reasons without reviewing the contract and applicable guidance. Timing can matter, but the rules for transactions that span January 1 are still being implemented.
- Where can I find the latest state guidance?
- The CDTFA Digital Products guide and the CDTFA Business Taxes Committee rulemaking page are the primary state sources. UC Davis will update this page as relevant guidance is incorporated. CDTFA Digital Products Guide and CDTFA rulemaking page
- What if my department sells software?
- Departments that sell or license prewritten software, SaaS, or access to software platforms may need to collect California sales tax beginning January 1, 2027. Custom software and certain services may remain excluded. Contact Tax, Compliance and Controls before making software sales (prior to January 1, 2027) so we can review the arrangement and determine the appropriate tax treatment.