How SB 122 Will Change California Purchasing, and What It Means for Procurement Teams

California’s SB 122 is not, strictly speaking, a procurement law. It’s a tax law, a change to the state’s Revenue and Taxation Code that expands the definition of taxable property to include digital products and Software as a Service (SaaS software). But for the people who manage public procurement in California’s cities, counties, school districts, utilities, and special districts, the practical effects land squarely in procurement’s domain.

Starting January 1, 2027, any software platform your California agency purchases, including financial management systems, permit platforms, eProcurement tools, and the rest of the software stack public agencies rely on, will carry California sales tax at a rate of 7.25% to 11.75%, depending on applicable county taxes. There are no government exemptions.

What does this mean, in plain terms? For as long as it has existed, cloud-based software was not taxable in California. Now it is, for everyone.

Let’s discuss what this change means in practical terms for California procurement teams. First, we’ll get into the details.

What Changed, When, and Why

Governor Gavin Newsom signed SB 122 on June 29, 2026, as part of the state’s 2026-27 budget package. The law expands California’s sales and use tax to cover prewritten software regardless of how it’s delivered, whether that’s physical media, electronic download, or remote access through a browser. Standard SaaS platforms are now taxable.

This change is part of Newsom’s attempts to pad the budget surplus and reserves ahead of anticipated federal funding cuts. Currently, the budget is balanced, no deficit is projected for the next couple of years, and the state is carrying nearly $30 billion in reserves.

But the state is aggressively building reserves and attempting to strengthen and modernize the Rainy Day Fud with the Save for California’s Future Act, ahead of fears of a potentially overvalued stock market, rising costs of maintaining state programs, and the federal H.R. 1 funding cuts that are forcing counties and cities to absorb significant health and social services costs.

Learn more about the California state budget look ahead in our article, Examining the 2026-2027 Fiscal Year for California Procurement.

The state estimates the new software tax will generate approximately $900 million for the general fund and $1.1 billion in local sales tax revenue annually. California will join more than 20 other states that already tax SaaS in some form, after being one of the holdouts for the past three decades.

How This Changes California Purchasing

SB 122 introduces a new variable into every software purchase your agency makes. And because software is not a one-time budget decision or a one-time purchase, there will be recurring effects on your budget.

Every Software Contract Will Now Carry a Tax Calculation

Starting January 1, 2027, the price of every software contract includes an additional 7.25% to 11.75% in tax, collected by the vendor and remitted to CDTFA. This tax will be collected at every new purchase and at every contract renewal, meaning multi-year agreements will have a bigger impact on your bottom line than ever before.

The compounding nature of the tax means that a contract that renews annually at the same price carries the same tax, every year. A three-year contract absorbs the tax three times, so when budgeting or justifying the cost of a software investment, the tax-inclusive total over the entire contract term should be the number you use.

How Vendors Invoice Will Affect What You Pay

SB 122 creates a clear financial incentive to understand how your vendors plan to structure their invoices going forward. This approach will directly affect how much of your contract is taxable.

If a vendor invoices software and services as a single bundled line item, the full amount may be treated as taxable. But separately stating the software subscription cost from implementation and training fees, ongoing support, and managed services could reduce the taxable base to the subscription portion only. On a multi-year enterprise contract, that can be a significant difference in total cost.

This is a legitimate question to ask any software vendor you’re currently doing business with, as well as those you’re in the process of evaluating.

“How do you plan to invoice California agencies starting in 2027, and what portion of our contract will be treated as taxable?”

The answer should be in writing before the contract is executed.

What’s Still Unresolved: Multi-Year Contracts and Renewals

One of the most consequential open questions is how SB 122 will apply tax to contracts that straddle January 1, 2027. We still do not know how it will affect agreements executed before the effective date with terms extending beyond it or renewals of existing software subscriptions.

CDTFA stated at its July 2026 workshop that a taxable transaction on or after January 1, 2027, requires both a right to use and consideration given after that date. But they did not confirm whether the contract execution date or the actual payment and access date determines the tax application for straddling agreements. Emergency regulations are expected by December 2026.

Contracts executed and fully paid before January 1 may avoid the tax on that contract term, pending final regulatory guidance, which means agencies currently evaluating eProcurement software may be wise to sign before the end of the year. Those agencies with contracts up for renewal in Q1 or Q2 of 2027 should consult their agency counsel and vendor on how those renewals are likely to be treated under the final regulations.

Platform Cost Becomes a Tax Variable

Because SB 122 applies a percentage rate to the contract price, the platform you choose will directly affect how much your agency pays in tax for the life of that contract. Obviously, that means the higher the contract price of your platform, the higher the tax amount for the life of that contract. Now, more than ever, price needs to be a determining factor in the software platform you choose for your agency.

This dimension of total cost of ownership didn’t exist in the California software market before. When evaluating platforms, you will now need to compare the tax-inclusive total across a multi-year term, not just the base license fee. If your procurement team is building a business case for finance, you’ll now be expected to present the tax-inclusive cost over the contract term.

What This Means for Procurement Teams Specifically

Beyond the purchasing and budget implications, SB 122 will put more operational and compliance work directly onto procurement’s shoulders.

A New Vendor Compliance Check

Procurement teams will need to add a new check to their vendor qualification process, in addition to insurance certifications, business licenses, and contractor registrations: Is this vendor registered with CDTFA and prepared to collect and remit California sales tax? Vendors who fail to collect the tax are still responsible for remitting it to the state, but your agency could find itself in the middle of a dispute if a vendor’s tax compliance isn’t in order.

For larger contracts, vendors will likely begin to include tax compliance representations and gross-up provisions in their agreements. Procurement teams should flag these for legal review before signing.

Solicitation Documents Need Updating

RFPs and ITBs for software need to account for SB 122 before they go out. Solicitations that do not mention tax treatment will leave bidders to make their own assumptions, which creates inconsistency in bid responses and complicates the comparison process.

At a minimum, solicitations for software issued after January 1 should:

• Require bidders to separately state taxable and non-taxable components in their pricing;
• Specify whether bids should be submitted tax-inclusive or exclusive; and
• Address what happens if the regulatory guidance changes between bid submission and contract execution.

Standard contract templates and approved contract language should be updated through your agency counsel and risk management office before the end of the year. Contracts executed in December that do not mention tax treatment may create complications when the first invoice arrives.

Budget Planning Conversations are Happening Now

Finance officers at California agencies are already working through what SB 122 means for their 2027 software budgets. Procurement teams have visibility into the agency’s full software contract portfolio, renewal dates, and estimated contract values that finance may not have in one place, putting them in a unique position to help lead the conversation.

To build your credibility with finance leadership, procurement teams can proactively surface a software contract audit that includes what platforms are in scope, when each renews, and what the tax will add annually. It is also a prerequisite for any internal conversation about whether to accelerate a procurement before January 1.

What Procurement Teams Should Be Doing Before January 1

A Note on Who We Are

PlanetBids was designed and built by procurement professionals specifically to address the challenges faced by public agencies. Based in Studio City, PlanetBids has been helping agencies navigate compliance in the most highly regulated state in the country for more than 25 years. When we say we understand the issues you are facing, we mean it from direct experience.

SB 122 is a new compliance challenge. But for a team that has helped California agencies through Public Contract Code changes, prevailing wage updates, DVBE requirement shifts, remote work evolutions, and the move from paper to digital procurement, it’s a familiar kind of challenge, and we’re ready to help.