State Tax Day - Current, S.3, California—Sales and Use Tax: Revenue Trailer Bill Includes Expansion of Tax to Digital Products, (Jul 2, 2026)

Under a revenue trailer bill for the 2026-27 budget, California expands the sales and use tax base to certain digital products.

Definitions Amended and Enacted

The following definitions are amended or enacted:

• the definitions of "sale," and "purchase" are amended to include: (1) any transfer of title or possession, exchange, or barter, conditional or otherwise, in any manner or by any means, of a digital product transferred on tangible storage media for a consideration; and (2) any permanent or temporary transfer of the right, in any manner or by any means whatsoever, to open, view, access, download, copy, update, possess, store, manipulate, or otherwise use a digital product transferred electronically or accessed remotely for a consideration; and

• the definition of "use" is amended to include the exercise of any right or power over tangible personal property incident to the ownership of that property includes opening, viewing, accessing, downloading, copying, updating, possessing, storing, or manipulating a digital product transferred electronically or accessed remotely.

The definition of "tangible personal property" is amended to mean either:

• personal property that can be seen, weighed, measured, felt, or touched, or is in any other manner perceptible to the senses; or

• a digital product and any copyright or patent interests associated with that.

A "digital product" is defined as prewritten computer software transferred on tangible storage media, transferred electronically or accessed remotely. The term does not include:

• a digital asset;

• a digital audio work;

• a digital audiovisual work;

• a digital book;

• digital infrastructure;

• digital video game product; or

• a digital visual work.

Sourcing of Digital Products

The place of the sale or purchase of digital products is:

• for a digital product transferred on tangible storage media, the place of the sale or purchase of that digital product is the place where the tangible storage media is physically located at the time the act constituting the sale or purchase takes place;

• if the sale or purchase of a digital product that is not transferred on tangible storage media is an in-person sale or purchase at a location of the seller for which the seller is required to hold a seller’s permit, the place of the sale or purchase of such a digital product transferred electronically or accessed remotely is the seller’s place of business in California where the in-person sale or purchase occurred; and

• if the sale or purchase of a digital product that is not transferred on tangible storage media is not an in-person sale or purchase, the place of the sale or purchase of such a digital product transferred electronically or accessed remotely is deemed to be the purchaser’s known address in California shown in the seller’s records maintained in good faith in the ordinary course of business.

The place of use of a digital product is the place 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. A presumption is enacted that a digital product that was purchased outside California and used in California within 90 days from the date of sale or purchase was purchased for storage, use, or other consumption in California.

Retailer's Relief from Liability

Retailer's liability to pay sales tax. A retailer is relieved from liability to pay sales tax on the sale or purchase of a digital product that is transferred electronically or accessed remotely if the gross receipts from the sale of digital products by a retailer to a purchaser (unless the purchaser is an insurer) that are transferred electronically or accessed remotely exceed $5 million in the aggregate in the current calendar year, or, beginning January 1, 2028, in the current or the preceding calendar year.

The purchaser will become liable for the use tax on the transaction that caused the retailer to exceed the $5 million threshold and any adjustments. If a retailer is relieved from liability to pay sales tax, the purchaser is liable for the use tax and must self-assess and pay directly to the California Department of Tax and Fee Administration (CDTFA) the taxes due, and, if otherwise applicable, on the transaction that caused the retailer to exceed the $5 million threshold and any adjustments made.

If a retailer is relieved from liability to pay sales tax, the purchaser is liable for the use tax and must self-assess and pay directly to the CDTFA taxes due and, if otherwise applicable, on the transaction that caused the retailer to exceed the $5 million threshold and any adjustments made.

A retailer is relieved from liability to pay sales tax or collect use tax on the sale or purchase of a digital product transferred electronically or accessed remotely if the place of the sale or purchase of the digital product was deemed to be outside California and the retailer demonstrates to the satisfaction of the CDTFA that the retailer made a reasonable effort to obtain accurate and complete address information from the purchaser.

Retailer's liability to collect use tax. A retailer is relieved of the obligation to collect use tax on the sale or purchase of a digital product that is transferred electronically or accessed remotely if the sales price of digital products purchased by a purchaser from a retailer that are transferred electronically or accessed remotely exceeds $5 million in the aggregate in the current calendar year, or beginning January 1, 2028, in the current or the preceding calendar year.

The purchaser will be responsible for reporting and paying the use tax to the CDTFA on the transaction that caused the purchaser to exceed the $5 million threshold and any adjustments made.

If a retailer is relieved from the obligation to collect use tax, the purchaser must self-assess and pay directly to the CDTFA taxes due and, if otherwise applicable, on the transaction that caused the purchaser to exceed the $5 million threshold and any adjustments made.

Exemptions

Exemptions are enacted for the gross receipts from:

• the sale or lease of, and the storage, use, or other consumption in California of, the right to reproduce or copy a digital product in order for copies of the digital product to be distributed for consideration to third parties, even if a copy of the digital product is transferred concurrently with the granting of that right (any tangible storage media on which the digital product is transferred is merely incidental);

• the sale of, and the storage, use, or other consumption of, a digital product purchased solely for use outside California or in interstate or foreign commerce; and

• the sale of, and the storage, use, or other consumption of, a digital product that represents a service provided in electronic form in which: (1) the service primarily involves the application of human effort by the service provider; and (2) the human effort originated after the customer requested the service (this exemption does not apply to the sale or purchase of the right to use the provider’s computer software running on a cloud infrastructure or the right to access that software from various client devices through either a thin client interface, including a web browser, or a program interface).

Income Tax Changes

Income tax changes made by this legislation are separately reported.

Ch. 23 (S.B. 122), Laws 2026, effective June 29, 2026, and applicable January 1, 2027