Dive Brief:
- The California Department of Tax and Fee Administration is determining how to enforce a sales tax on software-as-a-service products set to go into effect Jan. 1, 2027. The agency closed its public comment period last week on Senate Bill 122, which outlines the sales tax, following its enactment by California Governor Gavin Newsom on June 29.
- The state’s amended law levies a state tax on prewritten computer software, transferred physically, electronically or through the cloud. Customized software for individual customers is exempt from the tax, along with digital assets and infrastructure, including infrastructure-as-a-service and cryptocurrency.
- Value-added resellers and distributors in the IT market are poised to pay at minimum a 7.25% sales tax for software sold from vendors to end customers, but the concrete implications of the tax are still unclear.
Dive Insight:
Software vendors and resellers want to know how the new tax will affect the indirect technology sales channel.
“The updated rules must explicitly preserve foundational sale-for-resale principles for software and digital products across all channel sales models,” Aodhan Downey, western state policy manager for the Computer and Communications Industry Association, wrote in a letter to the CDTFA. “Resale treatment must apply whenever a product or service is purchased for wholesale redistribution, white-labeling, or re-bundling into a downstream product, ensuring tax is collected solely at the final point of retail sale.”
Channel firms asked for details in the call for comment leading up to a Sept. 10 CDTFA public workshop. One channel executive, CDW Senior Tax Accountant Steve Matthews, asked if optional software maintenance agreements would be taxable. The Computer and Communications Industry Association inquired if cloud-based storage met the exempted digital infrastructure category. The trade group also asked how the law would view bundled offerings of software, infrastructure and services. In another letter, Salesforce recommended that buyers and sellers have an exemption certificate form for when a customer purchases software used across multiple states.
“Without addressing this key matter related to the administration of SB 122, Salesforce and other companies that sell digital products and remotely accessed software will run into significant burdens when providing their products and services in California,” said Brittany Jarnot, Salesforce manager of West US state and local government affairs, in the written comments.
California is not alone in establishing a tax on software. There are 26 other states that tax software and SaaS, according to tax intelligence firm Anrok. While Iowa exempts some commercial software sales and Connecticut offers a 1% B2B tax discount, California does not appear to distinguish between personal and business software in its new wording.
When the bill totals more than $5 million for a single vendor, the purchaser is on the hook for the tax, according to section 6052 of the Revenue and Taxation Code.
Moreover, California’s definition of custom software is too narrow, according to some legal experts.
“Software generally qualifies only if it is prepared to the special order of a single customer,” representatives from law firm Holland and Knight wrote in a blog post. “CDTFA's examples suggest that software licensed broadly to multiple customers remains taxable prewritten software even where outputs appear highly tailored or incorporate customer-specific functionality.”
Howard Mann, president of San Francisco-based Mann Consulting, shrugged off the impact of the change.
“It's literally a ‘tax’ for us and our customers, and it's mostly just a pain in the ass but I don't think it will get a customer to not buy something,” Mann told Channel Dive in an email. “More just an annoyance.”
