Under BDO’s analysis of California’s SB 122, sales and use tax reaches digital prewritten software, including SaaS, starting January 1, 2027. The same digital-product definition, as drafted, expressly excludes digital infrastructure such as infrastructure as a service-type platforms, which is where hosting-type services sit under BDO’s reading.
Key takeaways
California’s SB 122, signed as part of the 2026-27 budget, taxes digital prewritten software, including SaaS, from January 1, 2027, per BDO’s analysis.
BDO puts the estimated impact at roughly $900 million state and $1.1 billion local.
Under BDO’s reading, the digital-product definition expressly excludes infrastructure as a service-type platforms.
Every treatment conclusion here is BDO’s analysis of the bill as drafted, pending counsel sign-off.
Table of Contents
What does California’s SB 122 change for software buyers?
SB 122 was signed as part of California’s 2026-27 budget. Per BDO’s analysis, it extends sales and use tax to digital prewritten software, including SaaS, effective January 1, 2027, with an estimated impact of roughly $900 million at the state level and $1.1 billion at the local level.
BDO’s analysis is the source for every treatment statement in this post, and each one is BDO’s reading of the bill as drafted, not settled treatment. Most tax and accounting firms now buy software by subscription. For those firms, the practical question has a date on it: which renewals cross January 1, 2027, and what added tax does to the 2027 budget.
Which software costs does the new tax reach?
The category BDO identifies is digital prewritten software, including software delivered as SaaS. As drafted, that reaches the subscription model most tax and accounting tools now use, effective January 1, 2027. Which of your firm’s specific line items fall inside the definition is a product-by-product question for your counsel or state tax advisor.
Think through a typical 25-to-150-person firm’s stack: tax prep, practice management, document management, research, e-signature, client portals. Most of it is sold as a subscription, which is exactly the delivery model BDO says the bill reaches.
Four questions worth answering before renewal season:
Which subscriptions are billed to a California office or used by California-based staff?
Which contracts renew before January 1, 2027, and which renew after?
Which vendors have said how they plan to handle California invoices?
What does added tax on the in-scope line items do to the 2027 software budget?
A multi-state firm doesn’t need a California headquarters for this to land on its desk. If part of the team sits in California, or subscriptions are billed there, how SB 122 applies across the footprint is a sourcing question for counsel.
Is hosting-type infrastructure excluded from the SB 122 tax?
Under BDO’s reading, yes, as drafted. BDO notes the digital-product definition expressly excludes digital infrastructure, including infrastructure as a service-type platforms. Hosting-type services are infrastructure in that sense: the server layer your applications sit on rather than the software itself. Whether a specific service qualifies for the exclusion is a counsel question.
BDO quotes the bill’s digital-product definition as expressly excluding “digital infrastructure, including infrastructure as a service-type platforms.” That phrase is why this isn’t an across-the-board increase: as drafted, the law separates the software a firm subscribes to from the infrastructure it runs on.
This is how the categories in a firm’s software spend line up against BDO’s reading:
Spending category
Where it lands under BDO’s reading, as drafted
Open question for counsel
Digital prewritten software, including SaaS subscriptions
Inside the digital-product definition; taxed from January 1, 2027
Whether each specific product meets the definition
Digital infrastructure, including infrastructure as a service-type platforms
Expressly excluded from the digital-product definition
Whether a given hosting service fits the exclusion as written
Bundled invoices mixing software, infrastructure, and services
Not addressed in this draft
How mixed charges are stated, sourced, and treated on invoices
Definitions can be refined before the January 1, 2027 effective date, and how vendors state charges on invoices will shape what firms actually see. That is why counsel review comes before any budget assumption.
What should your firm do before January 1, 2027?
Treat this as a 2027 budgeting exercise with a hard date. Between now and January 1, 2027, inventory every software subscription, separate software line items from infrastructure line items, ask vendors how they plan to handle California invoices, and put the treatment questions in front of your counsel or state tax advisor.
Inventory the stack. Pull every software subscription the firm pays for, with the billing address, the renewal date, and the 2026 annual cost.
Separate software from infrastructure. Mark each line item as software delivered digitally, infrastructure the firm’s applications sit on, or a bundle of both, using BDO’s SB 122 categories as the working frame.
Ask your vendors. A vendor that expects to collect California tax from January 1, 2027 should be able to say so before your renewal. Put each answer in the counsel file.
Put the list in front of counsel or your state tax advisor. The treatment of each line item, the sourcing for a multi-state footprint, and what belongs in the 2027 budget are their calls, not a vendor’s and not a blog’s.
Set the review date early. Renewal conversations for tax season tooling happen in the fall, so a counsel review in September or October 2026 beats one in December.
Where does hosting fit in your 2027 software budget?
Hosting is the line item you can already price. VeritSpace is $69, $99, or $149 per user per month on a dedicated private server, with UltraTax-class workloads starting on the $99 Pro tier. VeritComplete, which bundles hosting with managed IT, is $129 to $249 per user per month.
Under BDO’s reading, hosting-type services sit inside the excluded digital-infrastructure category. And we’re not promising that a Verito invoice, or any hosting invoice, will or won’t carry the new tax; that determination belongs to counsel, for our invoices and everyone else’s.
Cost predictability is most of what firms want from the infrastructure line item:
“This combination of reliability, pricing, and exceptional support quality has been consistent throughout the four years of using Verito, influencing my likelihood of purchasing it again.”
Bill O., Owner, Hartman Hartman & O’Brien PA · G2, Oct 2025
A hard deadline does not have to mean a scramble. A stack inventory, vendor answers on file, and a counsel review on the calendar before January 1, 2027 add up to ordinary planning.
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.
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