California businesses may want to review their software and technology support agreements before January 1, 2027.

California is expanding its sales and use tax rules beginning January 1, 2027, with the changes potentially affecting prewritten software and remotely accessed software services, including certain Software-as-a-Service (SaaS) products. The new rules were enacted through Senate Bill 122 and represent a significant change to how certain digital products are treated for California tax purposes.

For businesses that rely on ongoing technology support, software, system maintenance, or related services, now is a good time to review existing agreements and consider whether a multi-year support contract makes sense.

Why Act Before 2027?

Beginning January 1, 2027, California sales and use tax generally applies to qualifying digital products, including certain prewritten software that is transferred electronically or accessed remotely.

That means businesses may see changes in the tax treatment of certain technology products and services they use.

A multi-year agreement negotiated before the effective date may provide an opportunity to establish pricing and contractual terms in advance. However, businesses should not assume that simply signing a contract or prepaying an invoice automatically eliminates future tax obligations. The final treatment can depend on what is being purchased, when the right to use the product begins, how the agreement is structured, and other factors.