Governor Gavin Newsom has signed Senate Bill (SB) 122 into law as part of California’s 2026–27 state budget package. The legislation makes several significant changes to California tax law affecting software purchases, business tax credits, certain pass-through entities, and specific settlement payments. While many of the provisions take effect beginning January 1, 2027, businesses should begin evaluating the potential impact now. Key provisions of SB 122 include the following:
The new law includes the following changes:
- Sales and use tax on digitally delivered software: Beginning January 1, 2027, California sales and use tax would apply to digitally delivered prewritten software, including software accessed remotely through software-as-a-service (SaaS) platforms. This includes collaboration tools, video conferencing platforms, tax software, and other subscription-based business applications
- Business tax credit limitation becomes permanent: The existing $5 million limitation on the use of business tax credits will remain in place through the 2029 tax year. Starting in 2030, the limitation becomes permanent and will equal the greater of $5 million or 70% of the taxpayer’s total tax liability;
- Temporary relief for newly formed entities: Newly formed limited Liability companies (LLCs), limited partnerships, and limited liability partnerships will receive temporary first-year relief from the annual tax. For tax years 2027 through 2029, the first-year annual tax is reduced from $800 to $400,
- Taxation of certain federal settlement payments: Taxpayers receiving payments from an anti-weaponization settlement fund established by the federal Department of Justice during tax years 2026 through 2029 will be subject to a 100% California tax on those payments.
Net Operating Loss (NOL) Update
The enacted budget legislation does not extend the current suspension of California net operating loss (NOL) deductions. As a result, the suspension remains scheduled to expire at the end of the 2026 tax year unless future legislation provides otherwise.
What This Means for Businesses
Businesses that purchase, sell, or rely heavily on software and SaaS solutions should begin assessing how the new law may affect their operations. Key areas to evaluate include:
- Software procurement and budgeting
- Vendor contracts and pricing
- Sales and use tax collection and compliance
- Billing and accounting systems
- Business tax credit planning and utilization
Although many of these provisions become effective on January 1, 2027, businesses have a limited window to prepare. Early planning can help minimize compliance challenges, manage costs, and identify tax planning opportunities before the new rules take effect.
How Windes Can Help
Windes can help businesses evaluate the potential impact of SB 122, review software and SaaS purchasing practices, assess sales and use tax obligations, and develop proactive tax planning strategies ahead of the new rules. Contact your Windes advisor to discuss how these changes may affect your organization and what steps you can take now to prepare.
