Your 2027 Software Budget Has No Tax Line

An $11M company I work with got a software invoice in July with a sales tax line on it. First one in four years from that vendor. AP assumed a billing error, emailed support, got a form response citing a statutory change, then coded the whole invoice to software expense and moved on.

It wasn't an error. Utah started taxing SaaS on July 1 under SB 162. The vendor was right and the invoice was right. Nobody in finance saw it coming.

January 1 is the bigger date

California SB 122 makes electronically delivered prewritten software, SaaS included, subject to sales tax starting January 1, 2027. More than three decades of California treating a subscription as a nontaxable service, over. Sacramento expects roughly $1.4 billion a year from it.

Colorado does the same on the same date under HB 26-1223, signed in June. California becomes one of more than 20 states that tax SaaS in some form.

Now price it. A company running $22,000 a month of software, ordinary at $10M of revenue, spends $264,000 a year. California's rate is 7.25% before local add-ons and runs past 10% in parts of Los Angeles County. Call it 8.5% blended on the taxable portion. That's about $20,000 of new annual cost against contracts you already signed.

You probably spent two calls last quarter arguing a renewal down by 4%. This one shows up bigger, with no counterparty to argue with.

The rate turns on a field nobody in finance owns

For remotely delivered software, California sources the sale to the customer's billing address. Not where your people sit, and not where the entity is registered. Whatever address sits in the vendor's billing profile.

Most companies have 40 or 60 of those profiles, created over years by whoever swiped the card.

Then the exemptions, which is where the real money hides. California carves out custom software and, under conditions, cloud infrastructure. Your AWS bill may sit outside this while your seat-based tools sit inside it. Colorado exempts custom software and software governed by a negotiable license agreement, so your negotiated enterprise contract can land on a different side of the line than the click-through subscription marketing signed up for last year.

Your entire software stack reprices in one night, by 40 separate billing systems, and not one of them will call it a price increase.

A vendor that fails to collect hasn't given you a discount. When a state taxes the transaction, the buyer generally owes use tax on it. Uncollected becomes an accrual you never made and a filing you never did.

Before you lock the 2027 budget

Pull the vendor list and sort by annual spend. For the top 20, mark whether it's prewritten or genuinely custom, whether the agreement was negotiated or clicked through, and what billing address the vendor has on file. One afternoon of work, and it tells you which share of the line is exposed.

Budget the tax as its own line instead of grossing the software number up by one percentage that hides which contracts to look at.

Fix the billing addresses while you're in the portals. A stale address is now a rate decision.

If you sell software, read your own MSA tax clause this month. Language saying fees are inclusive of all taxes got written when the answer was zero. On January 1 that sentence takes 8.5% out of your California gross margin, and your customer has no reason to reopen it.

Twenty states have been doing this for years. Your budget just hasn't met one of them yet.