California Taxes the Cloud: The New Sales Tax on Software, with Neil Bass

Frazer Rice talks with CPA Neil Bass about California Senate Bill 122, signed June 29, 2026, which from January 1, 2027 applies sales and use tax to prewritten software, including software as a service, regardless of how it is delivered. The episode covers which products are taxable and which are excluded, how bundling can pull exempt items into the tax, how invoices that straddle the January 1 date get split, and the nexus and sourcing rules for out-of-state vendors. It closes with the stakes for AI companies, a parallel change in Colorado, and whether the tax pushes businesses out of California.

1. Beginning January 1, 2027, prewritten software is taxable in California whether delivered on a disk, by download or through the cloud; custom software remains exempt.
2. Bundling different types of software together can expose the whole package, so sellers are advised to separate items on the invoice.
3. Taxability follows the period of use, so an invoice covering December 15 to January 15 may be partly taxable regardless of invoice date.
4. When a seller's annual sales of these products to one customer exceed $5 million the buyer remits use tax directly, and out-of-state vendors with California sales above $500,000 have economic nexus.