California will tax SaaS starting January 1, 2027

California will tax prewritten software transferred on physical media, transferred electronically, or accessed remotely, starting January 1, 2027, under SB 122. A $50-a-seat product sold into Los Angeles will cost buyers about $55 once the tax applies. California expects roughly $2 billion a year from the change.

Governor Gavin Newsom signed the bill June 29, 2026. SaaStr's breakdown, published September 5, puts the rate at 7.25% state tax plus local district tax, reaching about 10.75% in some metros.

Custom software, IaaS, and PaaS all stay exempt. Seat-priced AI subscriptions get taxed. Consumption-based AI pricing, billed per token or per API call, is left unresolved in the statute itself.

That gap sits on top of a pricing argument that's a year old. Seats don't map to how agents consume compute, and vendors have known that for months without switching. A 10.75% cost increase to California buyers, arriving on a fixed date, is a different kind of pressure.