Colorado Expands Sales Tax to More Software Transactions Beginning in 2027

Key Takeaways

• Beginning January 1, 2027, Colorado will expand its sales and use tax base to include more software transactions, including many SaaS subscriptions and remotely accessed software.
• The change applies at the state level and will also flow through to state-collected local jurisdictions that use the state tax base.
• Existing exemptions for custom software and software sold under qualifying negotiable license agreements will remain available, but businesses should review whether their agreements meet the requirements.
• Colorado home-rule cities may continue to apply their own tax rules, definitions, exemptions, and sourcing methods, creating jurisdiction-by-jurisdiction complexity.
• Software providers and purchasers should review contracts, billing systems, taxability determinations, and local compliance obligations before the law takes effect.

On June 4, 2026, Colorado enacted HB-26-1223, introducing sweeping changes to how software is taxed. These transformations are following a much broader trend of states looking to generate revenue via expansion of the taxable base to include digital products, services, software, and software-as-a-service (SaaS). Colorado joins states such as California, Illinois, and Maryland that have considered expanding their sales tax bases to reach more digital products and services.

Beginning January 1, 2027, the new law will subject more computer software to state sales tax. This will include many downloaded software purchases, SaaS subscriptions, and other remotely accessed software that have historically not been taxable. As modern businesses access much of their software through cloud-based subscriptions instead of installing it on their own computers, the change will likely impact most businesses in Colorado.

The change impacts two main groups:

• Providers selling software to Colorado businesses
• Colorado organizations that purchase the software.

Both groups should understand not only the new rule, but also how it layers on top of the software taxes that many Colorado home-rule cities have imposed for years. The interaction between the new state tax and the existing local taxes is where the most complex work sits.

What Changed Under Colorado HB-26-1223?

Before January 1, 2027, Colorado’s definition of taxable computer software generally only applied to prewritten “canned” software. Software that was delivered or accessed remotely (SaaS) did not usually meet that definition. Accordingly, the Colorado Department of Revenue guidance treated most SaaS as a nontaxable service, because the customer accessed software hosted by the provider rather than taking possession of it. As software has moved from downloaded products to cloud-based subscriptions, similar software has often received different tax treatment based solely on how customers accessed it.

Starting on January 1, 2027, Colorado’s definition of tangible personal property was broadened to include computer software, defined as coded instructions that are both designed to direct a computer or other electronic device to perform a task and are delivered “by any means,” including compact disc, download, or remote access/internet. Additionally, software available for repeat sale or license is treated as tangible personal property and subject to sales and use tax. Accordingly, the law no longer turns on how customers receive the software. Instead, it focuses on the software itself, and as a result, many SaaS subscriptions and other electronically delivered software become taxable.

Is Any Software Exempt?

Two existing exemptions, custom software and software sold under a qualifying negotiable license agreement, will continue to apply after January 1, 2027.

Custom Software Exemption

For custom software, the key is how the software was developed. The exemption applies to software designed and developed for a specific customer rather than prewritten software developed to be sold to multiple customers.

Not all software modified for a customer is custom software. For example, a business might purchase an existing software platform and pay the provider to add features, configure workflows, or integrate it with its existing systems. The provider has modified the software for that business, but the underlying product was still developed for use by multiple customers.

Businesses purchasing prewritten software along with customization work should review how the agreement identifies and charges for each item. Customization does not necessarily make the underlying prewritten software exempt from sales tax.

Negotiable License Agreements Exemption

The law also preserves an exemption for software sold under a qualifying negotiable license agreement. A qualifying agreement allows the customer and software provider to negotiate the terms together rather than requiring the customer to accept terms set by the provider. For example, an enterprise customer may discuss and negotiate pricing, licensing rights, authorized users, support, warranties, data security, intellectual property rights, or indemnification before entering into the agreement. Software sold under this agreement is exempt.

However, a standard online subscription works differently. The customer buys the software online and accepts the same agreement that every other customer receives. The customer cannot negotiate those terms, and the software sold under these agreements is usually taxable. Businesses that sell enterprise software should review their agreements to see whether they qualify for the exemption.

Business Considerations Regarding Local Jurisdiction Taxes

Colorado’s sales tax system runs on two tracks, state sales and use tax as well as local sales and use tax. While the new law directly changes only the state sales and use tax, it will have ripple effects on statutory local jurisdictions.

The Colorado Department of Revenue administers the state’s 2.9% sales and use tax and, on the same tax base, collects local sales and use taxes on behalf of the state’s statutory cities and towns, counties, and special districts. Because these state-collected local jurisdictions start with the state base, the expansion of that base to software flows through to them automatically. Accordingly, beginning January 1, 2027, software that is taxable at the state level will also be taxable in every state-collected local jurisdiction.

Home-Rule Differences

Under Article XX of the Colorado Constitution, home-rule municipalities may administer their own sales and use taxes and create/adopt their own tax codes and rules. Approximately 70 home-rule municipalities/nonconforming cities set their own tax base, define what is taxable, establish nexus and sourcing rules, etc. Home-rule cities do not usually provide the same exemptions that the state would provide. Ultimately, the home-rule cities do not automatically conform to the state base, as such new rules or changes to law do not impact them.

For sellers and purchasers in 2027, the state law changes should be understood as a new “layer” of tax rather than a replacement of tax.

In many home-rule cities, local tax is already applied to software and SaaS. The new law merely adds a state and state-collected local layer on top. Thus, a provider that has been collecting tax in Denver (a home-rule city) on SaaS or software will now need to collect the state sales tax as well.

Because home-rule cities do not adopt the state's exemptions or state definitions, a single sale may produce different tax results across different tax jurisdictions. Software taxability in Colorado is no longer a single yes or no question. The provider must do a jurisdiction-by-jurisdiction analysis.

The State and each home-rule city may define software, SaaS, bundled services, etc., differently, and may source a sale differently, for example, use of a customer's billing address versus the location where the software is used.

Next Steps for Businesses

Businesses that purchase or sell software in Colorado should prepare before the new law takes effect on January 1, 2027. Businesses should:

• Review software purchases and sales to identify SaaS and other software that may become taxable.
• Review customer agreements for the custom software and negotiable license agreement exemptions.
• Update invoices, billing, and tax determination systems for software that will become taxable.
• Review the rules in Colorado’s home-rule cities and address any differences in local tax treatment.

If you need assistance understanding how Colorado’s new software sales tax rules affect your business, contact a member of EisnerAmper’s State and Local Tax team.