California SB 122’s Impact on Digital Products and Tax Credits

California Senate Bill 122, signed by Gov. Gavin Newsom on June 29, 2026, makes significant tax changes as part of California’s 2026–2027 budget package. Most notably, the bill expands the sales and use tax treatment of certain digital products, including specified electronically delivered and remotely accessed software, beginning Jan. 1, 2027, and extends California’s business tax credit limitation through 2029, before establishing a permanent limitation framework beginning in 2030. Although SB 122 generally took effect immediately as a budget-related measure, many of its most consequential provisions apply in later tax years.

Key Changes to Sales and Use Tax

One of the most notable changes is the expansion of California sales and use tax to certain digital products. Beginning Jan. 1, 2027, the law treats sales or purchases of specified digital products as tangible personal property for sales and use tax purposes. The new law contains the following provisions:

• A “sale” or “purchase” will include “any permanent or temporary transfer of the right to open, view, access, download, copy, update, possess, store, manipulate, or otherwise use a digital product transferred electronically or accessed remotely for a consideration.”
  • A “sale” or “purchase” generally will not include the design or development of custom computer software, other than a basic operational program.
• The term “digital product” generally includes “prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.”
  • “Digital product” does not include digital assets, digital audio or audiovisual work, a digital book, digital infrastructure, a digital video game product, or digital visual work.

SB 122 includes sourcing rules that vary depending on whether the product is transferred via tangible storage media and whether it is an in-person sale. It also includes a section that shifts the burden of collection and remittance from the retailer to the purchaser when gross receipts from electronically delivered or remotely accessed digital products exceed $5 million. The bill also prohibits purchasers and retailers of electronically transferred or remotely accessed digital products from entering into agreements that directly or indirectly result in the payment, transfer, diversion, or rebate of local sales and use tax revenue imposed under the Bradley-Burns Uniform Local Sales and Use Tax Law. Emergency regulations are expected to be issued soon.

Key Changes to Income Tax

For income tax purposes, the law extends California’s temporary business tax credit limitation. Existing law limits the use of business credits to $5 million per taxpayer for tax years 2024 through 2026. SB 122 extends that limitation through tax year 2029. For tax years 2027 through 2029, the bill also extends the existing law that allows taxpayers to make an irrevocable annual election to receive a refundable credit for credits limited by the cap, generally claimed beginning in the third taxable year after the election and in annual amounts equal to 20% of the affected credits.

Beginning with the 2030 tax year, the law establishes a permanent business credit limitation. Under that framework, business credit usage is generally limited to the greater of $5 million per taxpayer or 70% of the taxpayer’s tax liability, with specified treatment for refundable credits generated under the 2024 through 2029 limitation periods.

The law also includes other targeted tax provisions, including a temporary 100% tax on certain settlement fund payments received during tax years 2026 through 2029 from specified federal funds. Specifically, this refers to the controversial proposed federal fund which contemplates providing benefits to those who surrounded or entered the federal Capitol building on Jan. 6, 2021. It also includes a temporary reduction of the annual minimum franchise tax for limited liability companies, limited partnerships, and limited liability partnerships from $800 to $400 for the first year of operation during tax years 2027 through 2029.

Taxpayer Considerations

Businesses selling, purchasing, or licensing prewritten software in California should evaluate whether electronically delivered or remotely accessed offerings may become taxable beginning Jan. 1, 2027. Sellers should assess collection, invoicing, sourcing, and exemption documentation processes. Purchasers, particularly California-based companies with significant SaaS spend, should evaluate whether they will need to self-accrue and remit use tax on taxable purchases, including situations where the seller does not collect tax or where the remittance obligation shifts to the purchaser, and consider inclusion of applicable California sales tax in their 2027 budgeting process.

Taxpayers with significant California credit positions should also model the impact of the extended $5 million credit limitation, the refundable credit election available for 2027 through 2029, and the permanent limitation beginning in 2030.

For further guidance or assistance evaluating the potential impact of SB 122 on your California sales and use tax, income tax, or franchise tax obligations, please contact a CBIZ SALT team member.