Effective January 1, 2027, the California Legislature has attempted to broaden its Sales and Use Tax laws to reach certain software and other digital transactions that historically have escaped taxation when delivered electronically or accessed remotely.¹ The Legislature accomplished this, in part, through a seemingly simple device: it has declared that certain “digital products” constitute tangible personal property. This is significant because California’s Sales and Use taxes traditionally apply only to tangible personal property.

The term “digital product” means “prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.”²

Prewritten computer software is “accessed remotely” when it is “accessed for consideration by use of a digital code, password, or other means” while residing “on the vendor’s server or the server of a third party.”³

Prewritten computer software is “transferred electronically” when it is “obtained by the purchaser, by means other than tangible storage media, in a manner that allows the purchaser to open, view, access, download, copy, possess, store, manipulate, update, or otherwise use the digital product.”⁴

The expansion of California’s Sales and Use Tax to digital products therefore reaches familiar arrangements such as downloaded software and many forms of remotely accessed or cloud-hosted software.  It does not, however, tax everything delivered digitally.  Among the exclusions, the statutory definition excludes digital books, digital audio and audiovisual works, video games, digital visual works, digital infrastructure, and digital assets.⁵

Where is Software “Used”?

For businesses operating in multiple states, one of the most important provisions may be the new place of use rule.

The place of use of a digital product will determine whether the Sale or Use tax applies and is defined as “where any right or power is exercised over the digital product.  The right or power to remotely access a digital product is exercised at the place where the person accessing the digital product is located.”⁶  Thus, software that a California company licenses may nevertheless be used outside California, while software purchased from an out-of-state vendor may generate California use tax if it is accessed by personnel located here.

There are, of course, continuing provisions for digital products purchased for resale to customers, for custom-made software prepared for the special order of a single customer, and for software sold for exclusive use outside California.

These changes in the law will require some explanations as to how they will be implemented.   The California Department of Tax and Fee Administration (the “CDTFA”) is expected to provide guidance and temporary regulations prior to the end of 2026.

Can the Legislature Make the Intangible Tangible?

That brings us back to the chicken and the fish.

The Legislature apparently assumed that it could simply reach “digital products” by declaring them to be tangible personal property. The expanded legislation aims to replace California Sales and Use tax revenues that have been lost as software delivery methods to customers have shifted. Formerly, software was delivered on floppy disks, on 3 ½ inch disks, on thumb drives, or on CDs.  All of these had physical properties and could be taxed as tangible personal property under the current laws.  But now software is often downloaded from the sellers’ sites, including the many phone and computer applications.  Also, some programs are merely accessed remotely, such as software for the preparation of tax returns. However, the place of use rule cited above becomes important because a customer’s use of software outside the State is not taxed even if the seller resides inside the State.  

However, California courts historically have drawn a sharp distinction between tangible versus intangible property. The distinction between tangible personal property, which can be physically touched, seen or otherwise observed, from intangible property which cannot be sensed in any of those ways has been embedded in those decisions.  

In particular, the courts recognized that intangible property generally consists of a “right” rather than a physical object.⁷ The point became especially clear in Lucent Technologies v. Board of Equalization.⁸ There, the Court of Appeal rejected the State’s argument that software became tangible merely because it was placed on a CD or magnetic tape.  The physical medium was tangible whereas the software itself remained distinct.  The court even characterized as an “absurd result” a rule that could impose millions of dollars of tax on software delivered on a CD while leaving identical electronically delivered software untaxed.

Whether the Legislature has the power to redefine what constitutes tangible personal property will likely be tested in the California courts, leaving sellers and users uncertain as to whether or how to comply with the change.  As California turns its newly declared digital “fish” into taxable reality, we will be looking to the CDTFA for guidance on how sellers and users should navigate these uncertainties, including the prospect of litigation.

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¹ S.B. 122 Taxation, 2025-2026 Reg. Sess. (Cal. 2026).  On June 29, 2026, Governor Gavin Newsom approved Senate Bill 122.

² Revenue & Taxation Code Sec. 6016.1(a).

³ Revenue & Taxation Code Sec. 6016.2(a)

⁴ Revenue & Taxation Code Sec. 6016.2(c)

⁵ Revenue & Taxation Code Sec. 6016.1(b).

⁶ Revenue & Taxation Code Sec. 6010.5.1

⁷ See e.g., Navistar Int’l Transportation Corp. v. State Bd. of Equalization, 884 P.2d 108 (1994); Preston v. State Bd. of Equalization, 19 P.3d 1148 (2001); Nortel Networks Inc. v. State Bd. of Equalization, 119 Cal. Rptr.3d 905 (2011).

⁸ 193 Cal. Rptr.3d 323 (2015).