State and Local Tax Changes on the Horizon: What Businesses Need to Know

Senate Bill 122, signed by Governor Newsom, expands California’s sales and use tax base to include digital products, effective January 1, 2027.

• Tangible personal property (TPP) now includes digital products and any associated copyright or patent interests.¹
• A digital product is defined as prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely, the last of which encompasses SaaS.²

This expanded definition of TPP applies to transactions occurring on or after January 1, 2027.

Notably, SB 122 does not extend the tax base to other digital goods such as digital books, video games, cryptographically secured digital assets, certain digital infrastructure offerings, or audio, visual, and audiovisual works. Custom software development also remains exempt as a professional service.

Vendors and purchasers should also be aware that local taxes under the Bradley-Burns Uniform Local Sales and Use Tax Law, and district taxes under the Transactions and Use Tax Law, automatically conform to this change, meaning local and district taxes will also apply to retail sales of digital products as defined.

In California, Technology Transfer Agreements (TTAs) have historically been used to separate the intellectual component of software from the physical component, with the intellectual aspect excluded from tax as an intangible. With this change, unless an applicable exemption applies, sales and use tax will apply to continuing TTA leases for all lease payments due on or after January 1, 2027.

SB 122 also excludes from use tax the temporary storage of software on servers in California for deployment and functional use outside the state. “Golden Master” transactions, sales of digital products to purchasers who will effectively resell those products to third parties, will continue to be exempt from California tax.

Effective August 1, 2026, Kentucky HB 757 also modifies the state’s sales and use tax economic nexus provisions. The law eliminates the 200 or more separate transactions threshold. The $100,000 sales threshold remains in place, but the scope of sales counted toward the threshold has been expanded to include services, in addition to sales of tangible personal property and digital property.

Effective January 1, 2027, Kentucky will impose a 14.25% excise tax on prediction market operators. For purposes of the new tax, a prediction market is defined as:

• Any physical or electronic platform through which a consumer may buy, sell, or exchange event contracts, whether the market is located in or out of the state; or
• Any platform or system that provides consumers with the ability to open speculative positions on the outcomes of future events.

SB 6346 was signed into law, with various sales and use tax and B&O tax changes scheduled to take effect in 2029. The law will repeal the sales tax on several services that only became taxable in 2025, including:

• Custom software and customization of prewritten computer software
• Information technology (IT) consulting
• Training and support
• Custom website development
• Data processing and data entry
• Security and investigation services
• Temporary staffing services
• Live presentations, both in-person and via electronic means

For B&O tax purposes, the law will:

• Increase the small business B&O tax credit to $125 per month for non-service businesses and $375 per month for service businesses (up from $55 and $160 per month, respectively).
• Increase the annual taxable income threshold for the B&O tax return to $250,000 (up from $125,000).

Important note: All sales and use tax and B&O tax changes under SB 6346 will be null and void if a court of final jurisdiction invalidates Washington’s new income tax.