California’s new law taxing SaaS (SB 122) is part of a much bigger trend: More and more states are steadily expanding sales tax rules to cover SaaS, cloud software, and other forms of digital prewritten software.

For startups, that means California is no longer an outlier to watch from a distance – it’s joining a long and growing list of states that already tax software delivered electronically or accessed remotely.

Why this matters

SB 122 applies California sales and use tax to digital prewritten software, including SaaS, beginning January 1, 2027. That change brings California closer to the approach already used in many other jurisdictions, where cloud software is taxable even if the customer never downloads or physically receives the product.

For founders, the practical takeaway is simple: If a startup buys SaaS in multiple states or sells SaaS across state lines, California is now part of a broader multi-state compliance tapestry rather than a one-off rule change.

Quick overview for founders

If you’re a startup founder or CFO just trying to understand the big picture, here’s the TL;DR on SaaS sales tax in the U.S. and where California’s SB 122 fits in. The details vary by state, but the pattern is clear enough to inform your planning:

  • Many states already tax SaaS or remotely accessed prewritten software in some form, and California joins that group in 2027 under SB 122.
  • Big startup-market states where SaaS is commonly taxed include New York, Texas, Massachusetts, Pennsylvania, Washington, and now California.
  • Some states use partial or nuanced rules, such as Colorado local jurisdictions and Connecticut’s reduced rate for certain business use cases.
  • Some states still do not tax SaaS at the state level, but that list has been shrinking as lawmakers modernize tax codes around digital products.
  • The broader direction is clear: States are moving toward taxing software based on what it does, not how it is delivered.

How do other states tax SaaS and cloud software?

While every state uses its own definitions, many jurisdictions already have rules that look broadly similar to SB 122 because they tax SaaS, electronically delivered prewritten software, or cloud-accessed software.

Generally taxable states

These states are widely cited in current SaaS taxability guides as taxing SaaS or remotely accessed prewritten software in some form:

  • Alabama.
  • Arizona.
  • Connecticut.
  • District of Columbia.
  • Hawaii, through its general excise tax structure.
  • Kentucky.
  • Louisiana.
  • Maryland, in at least some digital or SaaS contexts.
  • Massachusetts.
  • Nebraska, often with product-specific treatment.
  • New Mexico.
  • New York.
  • Ohio, particularly in business-use contexts.
  • Pennsylvania.
  • Rhode Island.
  • South Carolina.
  • South Dakota.
  • Tennessee.
  • Texas, often under data-processing rules with partial exclusions.
  • Utah.
  • Vermont.
  • Washington.
  • West Virginia.

Partial or nuanced states

Some states do not fit neatly into a yes-or-no box because SaaS can be taxable only in certain situations, at reduced rates, or at the local level.

  • Alaska, which has no statewide sales tax, but many local jurisdictions tax SaaS and other digital services.
  • Colorado, where some home-rule cities can tax SaaS or digital products even when the statewide treatment is more favorable.
  • Connecticut, where SaaS for business use may be taxed at a reduced rate rather than the full rate.
  • Iowa, where personal-use SaaS is commonly taxed and business-use treatment can differ.
  • Illinois, where statewide treatment may be more favorable but local taxes can still apply in some jurisdictions.
  • Nebraska, where treatment can depend on the type of software product being sold.

States that do not fully tax SaaS

Several states are still commonly described as more SaaS-friendly because they do not broadly tax SaaS at the state level, although local rules, digital product rules, or future law changes can complicate that picture.

  • Arkansas.
  • Delaware.
  • Florida.
  • Georgia.
  • Idaho.
  • Indiana.
  • Kansas, though treatment should be checked carefully because guidance evolves.
  • Maine.
  • Michigan.
  • Minnesota.
  • Mississippi.
  • Missouri.
  • Montana.
  • Nevada.
  • New Hampshire.
  • New Jersey.
  • North Carolina.
  • North Dakota.
  • Oklahoma.
  • Oregon.
  • Virginia.
  • Wisconsin.
  • Wyoming.

States considering similar legislation

Identifying states that are considering bills like SB 122 can be difficult, because most states revisit SaaS taxation through a mix of legislation, budget bills, digital product definitions, and tax department guidance.

Even so, there is a clear trend. Many states are periodically evaluating whether to explicitly include cloud software, remotely accessed software, or digital products in their sales tax base:

  • States with older software tax rules are increasingly revisiting whether those rules should also cover cloud-delivered products.
  • Some states are updating “digital product” definitions rather than passing a SaaS-specific law.
  • Others are expanding taxability through administrative guidance instead of headline legislation.
  • California’s enactment of SB 122 is likely to add momentum for similar proposals elsewhere, especially in states already taxing some digital goods but not clearly taxing SaaS.

What founders should do next

If you’re looking at this list of SaaS‑taxing states and thinking, “We do business in half of these,” you’re not alone – and you shouldn’t try to untangle it on your own.

Kruze Consulting works with hundreds of venture‑backed startups that sell and buy SaaS across multiple states, so we’re already helping founders map where their software is taxable, how SB 122 fits into that picture, and what it means for runway and compliance. Whether you’re a heavy SaaS buyer, a SaaS vendor, or both, we can:

  • Analyze your multi‑state SaaS tax exposure.
  • Help you set up billing and revenue ops that handle California and other SaaS‑tax states correctly.
  • Model the impact of new sales tax rules on your burn and cash runway so there aren’t any surprises at board meetings.

If you want to make sure your SaaS business is ready for California and the other states on this list, contact Kruze – we handle tax and compliance work so you don’t have to.