California SB 122 expands sales and use tax to covered digital products beginning Jan 1, 2027. The key distinction for accounting firms is between access to prewritten software and digital infrastructure. “Cloud” is not a tax classification.
A firm budgeting for tax software and hosting should identify what it is buying, how the contract describes it, and where it is used. Do not assume that moving an application to a hosted server makes the software license tax-exempt.
Key takeaways
Classify the actual product or service rather than relying on the word cloud.
Assess software rights separately from a digital-infrastructure charge.
A hosted deployment does not automatically make the software license tax-exempt.
Use itemized contracts and invoices to confirm tax treatment and total cost.
Table of Contents
What does CDTFA say the new rules cover?
The CDTFA digital-products guide explains that the change covers prewritten software transferred electronically or accessed remotely, as well as software on tangible media.
CDTFA’s special notice L-1036 identifies prewritten SaaS providers and businesses licensing or providing remote access to prewritten software among the affected groups.
This changes the budgeting question from “Was anything shipped?” to “What digital product or service is being sold?” Read the actual agreement rather than deciding from the vendor’s marketing category.
Why is digital infrastructure a separate question?
The special notice lists digital infrastructure outside its definition of digital products, using cloud platforms that allow customers to create, deploy, or run their own applications as an example.
That supports a distinction between an infrastructure purchase and a purchase of prewritten software access. It does not establish that every service called hosting qualifies for the same treatment.
A package may include a software license, infrastructure, support, setup, or other components. Ask the vendor and tax adviser to assess the actual offering, including any bundle, rather than extending an infrastructure example to the entire bill.
Does hosting remove tax from the tax software license?
No blanket conclusion follows from using a hosted environment. The firm may still buy a separate prewritten tax-software license, and the treatment of that purchase must be evaluated on its own facts.
For example, a firm could bring its existing desktop licenses to an infrastructure provider. That is different from a provider selling access to software as part of a subscription. The contract and invoice should make the distinction understandable.
Avoid treating a remote desktop connection as proof of either classification. The technology explains how a user works; the agreement explains what the user buys.
Which common purchasing arrangements need separate review?
Separate desktop license plus hosting: identify the software seller, the rights purchased and the separately described infrastructure service. Have the adviser assess each transaction on its own facts.
Software included in a subscription: establish whether the provider is selling access to prewritten software and what else is included. A browser or remote desktop connection does not decide the tax treatment.
Bundled software, infrastructure and support: obtain a clear description of the components and ask how the actual bundle is treated. These are review scenarios, not automatic taxable or exempt classifications.
What should the firm collect before asking for a tax determination?
Put the following records together:
The current software license or subscription agreement.
The hosting or infrastructure agreement and service description.
A sample invoice showing each charge.
Any included software, user rights, support, migration, and setup components.
The users and locations relevant to the purchase and use.
The renewal terms and any proposed change to the package.
Send specific questions with those records. “Is cloud hosting exempt?” is too broad. “How is this separately described infrastructure charge treated, and how are the licensed applications treated?” gives the adviser a clearer problem.
CDTFA’s guide also addresses purchaser and retailer responsibilities. An invoice with no tax shown does not by itself establish that the purchaser has no use-tax responsibility.
How can a firm build a more reliable budget?
List each recurring software and infrastructure cost separately. Record the renewal amount, user basis, location assumptions, and the tax treatment confirmed for that item.
Use an illustrative calculation only after classification and the applicable rate are established. For example, a taxable annual charge of $10,000 at a hypothetical 8% rate creates an $800 tax line. That is arithmetic, not a prediction of the rate or treatment for a particular firm.
Compare the total cost of the proposed arrangement, including migration, support, licensing, backups, and tax. A hosting decision made solely to obtain an assumed tax saving can overlook operational costs and responsibilities.
Keep the analysis with the vendor records so the next renewal can be checked against the same assumptions.
What should you ask a hosting provider?
Request an itemized proposal that distinguishes the infrastructure from any software rights or additional services. Ask who supplies each license and which charges can vary with users, applications, or storage.
For the operational comparison, confirm the application’s supported configuration, migration checks, local-device requirements, and backup arrangements. The tax software server readiness checklist provides a separate framework for those questions.
Do not ask the provider to promise a legal classification unsupported by the actual agreement. Ask for a clear description that the firm’s adviser can evaluate.
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Bring the application list and current license agreements to the discussion. Request a proposal that clearly describes the hosting scope, any additional services, and the firm’s licensing responsibilities.
The firm can then compare the technical fit and total cost using the tax treatment confirmed for its actual arrangement. A hosting proposal should support that decision without promising universal SB 122 exemption or guaranteed tax savings.
Camren Majors is co-founder and Chief Revenue Officer of Verito Technologies, a cloud hosting and managed IT company built exclusively for tax and accounting firms. He is the co-author of Beyond Best Practices: Modernizing the Successful Accounting Firm (2026). His work has been featured in NATP TAXPRO Magazine and he has presented for NATP, NAEA, and NSA.
