Tax Guide for Retailers and Purchasers of Digital Products
Purchasers

Purchasers may be responsible for reporting and paying use tax directly to us on their storage, use, or other consumption in California of digital products purchased from any retailer on and after January 1, 2027, when any of the following apply:

The retailer is relieved of sales tax liability or obligation to collect use tax due to exceeding an aggregate threshold amount explained below.
The digital product is purchased for use in California from an out-of-state seller who is not registered with us to collect use tax or who is registered with us but did not collect use tax.
A purchaser issues an exemption certificate at time of purchase claiming the transaction as exempt from tax but makes a taxable use of the digital product.

Threshold rules that may shift tax liability from retailer to purchaser

A retailer may be relieved from the liability to pay sales tax (unless the purchaser is an insurer) or the obligation to collect use tax on sales or purchases of digital products transferred electronically or accessed remotely when:

The aggregate gross receipts from sales of digital products by the retailer to the same purchaser that are transferred electronically or accessed remotely exceed $5,000,000 in the 2027 calendar year, or
Beginning January 1, 2028, the aggregate gross receipts from sales of digital products by the retailer to the same purchaser that are transferred electronically or accessed remotely exceed $5,000,000 in the current or preceding calendar year. The $5,000,000 aggregate threshold amount is subject to adjustments based on the California Consumer Price Index (CCPI).

When a retailer is relieved from the liability, the purchaser becomes responsible for reporting and paying use tax directly to us on the transaction that caused the retailer to exceed the aggregate threshold amount. A purchaser subject to direct reporting requirements generally must:

Obtain a Use Tax Direct Payment Permit
Issue the retailer of digital products transferred electronically or accessed remotely a Use Tax Direct Payment Exemption Certificate, and
Report and pay use tax on the purchase of digital products directly to us, including applicable local and district use taxes. More information will be provided on how to report the amount of local and district use taxes as it becomes available.

Even when the aggregate threshold amount is met, we may waive the purchaser's direct reporting requirements if we determine it is necessary for the efficient administration of the Sales and Use Tax Law. If a purchaser wants to request a waiver from reporting use tax directly to us, the purchaser must:

Submit a waiver request to us, and
Provide the retailer with all places of business where first use of a digital product is expected to occur.

Please note that emergency regulations are being drafted to interpret and clarify SB 122. This guide will be updated with direct payment and waiver process indicated above when such information is available.

Regulation 1567, Banks and Insurance Companies, subdivision (b), provides that use tax does not apply to the storage, use, or other consumption in this state by insurance companies of tangible personal property. Therefore, insurance companies are excluded from the aggregate threshold rule.

Purchase for use solely outside California

The sale of, and the storage, use, or other consumption of, a digital product purchased solely for use outside of California or in interstate or foreign commerce is exempt from sales and use taxes. A purchaser may issue an exemption certificate to the seller when purchasing a digital product for use solely outside California or in interstate or foreign commerce. If the purchaser later makes taxable use of the product in California, the purchaser is liable for payment of the sales tax as if the purchaser were a retailer making a retail sale of the property at the time of that use. More information about the form of exemption certificate will be provided as it becomes available.

Purchase outside California for use in California

A digital product that was purchased outside of California and used in California within 90 days from the date of sale or purchase is presumed to be purchased for storage, use, or other consumption in California. The purchaser is liable for use tax when such a use occurs.

Mixed-Use (used out-of-state and instate) transactions

When a purchaser buys multiple digital products in one transaction and only some products qualify for interstate and foreign commerce exemption, they may:

Issue an exemption certificate for the purchase of digital products solely for use outside of California or in interstate or foreign commerce
Report use tax on the digital products used in California

We may authorize or require an alternative method of allocation if supported by the purchaser's records and fairly reflects the amount of use tax due.

Storage and use exclusion

Use tax does not apply to the purchase of digital products for keeping or exercising of any right or power over a digital product for the purpose of installing or deploying the digital product for use thereafter solely outside California. This exclusion does not apply to sales tax transactions.

Credit for taxes paid to another jurisdiction

Purchasers generally are allowed a credit against California use tax when they paid sales or use tax, or tax reimbursement, to another state, political subdivision, or District of Columbia, on the same digital product prior to its storage, use, or other consumption in California.

Key rules:

The credit cannot exceed the amount of California use tax due
The credit cannot produce a refund of excess out-of-state tax
A credit is not allowed against taxes measured by periodic lease payments if the out-of-state tax was also measured by periodic lease payments before the storage, use, or other consumption in California
The credit is not allowed if an alternative method of allocation is used to calculate the use tax due for digital products used in multiple locations as explained in the Mixed-Use (used out-of-state and instate) transactions section above.

Purchasers claiming the credit must keep documentation showing proof of tax paid to another jurisdiction.

Tax Guide for Retailers and Purchasers of Digital Products Purchasers