Starting January 1, 2027, California will apply sales tax to prewritten software delivered electronically or accessed through the cloud. The change, enacted through Senate Bill 122, brings software subscriptions and licenses that previously generally went untaxed into California’s sales and use tax system, which is similar to how most states tax software.
For our clients with California billing addresses this means you should expect sales tax on taxable software licenses and subscriptions, including everyday tools such as Microsoft 365 and Google Workspace.
The applicable rate starts at California’s 7.25% statewide rate, plus any district taxes that apply to your location. The amount added to your invoice will depend on your taxable software charges and applicable tax rate.
How We’re Helping Limit the Impact
Our goal is to apply the new tax only to taxable charges while keeping qualifying, separately provided support services outside the taxable software amount. This helps avoid unnecessary tax on your service costs and keeps the impact on your overall bill as limited as the law allows. To do this, from 1 January we will separate the software license charges that were bundled as part of our support plans on your invoices. This will make it clear what you’re paying for software and what you’re paying for the support and advice our team provides, and make sure you only pay tax on the software, per the new law.
What You Should Do
As you prepare your 2027 technology budget, allow for sales tax on your software licenses and subscriptions. Beginning in January, look for software and support listed separately on your invoices, with applicable tax shown on taxable charges.
If you have questions about how this change will affect your monthly bill, contact our team. We can walk you through your software subscriptions and explain what to expect.
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