Key Takeaways
- Effective January 1, 2027, Colorado will expand its sales and use tax base to include most downloaded software and remotely accessed software.
- HB 26-1223 extends the definition of computer software and treats electronically delivered software as tangible personal property, with limited exemptions for custom software and software governed by a qualifying negotiable license agreement.
- Colorado's 65+ self-administered home rule cities may apply different software tax rules and may not follow the state's changes, so local requirements must be evaluated separately.
Historically, Colorado state sales tax applied to software mainly based on the delivery method. Canned or prewritten software transferred on tangible media was taxable, while most types of electronically delivered software products, such as software as a service (SaaS) and downloaded software, were not taxable.
Colorado's software tax landscape is changing significantly. Under HB 26-1223, the state will expand the scope of taxable software transactions beginning January 1, 2027, affecting both software vendors and businesses purchasing software. Here's what you need to know.
What HB 26-1223 Changes
HB 26-1223 taxes software as tangible personal property regardless of delivery method unless a specific exemption applies. This includes software accessed remotely through internet-based platforms and applications installed on computers and other mobile electronic devices (e.g., tablets and cell phones). While the new law doesn’t explicitly mention SaaS as taxable software, the enacted language suggests that SaaS and any software delivered electronically or accessed remotely would be subject to Colorado sales tax.
Exemption for Negotiable Software License Agreements
Custom software remains exempt, and the new law creates a limited exemption for software transferred under a qualifying negotiable license agreement. To qualify, the agreement must be individually negotiated and executed by authorized representatives of both parties before or at the time the customer accesses the software. Standard click-through, browse-wrap, and other non-negotiable agreements generally do not qualify, potentially limiting the exemption for many software providers.
Unanswered Sourcing Questions
Software sourcing rules remain uncertain under the new law. The repeal of Colorado’s multiple points of use exemption removes a key framework for allocating software sales based on users' locations, requiring taxpayers to revisit sourcing methodologies pending anticipated guidance from the Colorado Department of Revenue. Questions also remain regarding how to source other digital products, including in-app purchases commonly found in consumer mobile applications, video games, and digital content platforms.
Colorado Home Rule Cities
Colorado’s self-administered home rule cities set their own taxability rules and don’t have to adopt the state’s new software definitions or exemptions. Businesses should check the taxability of software separately in each home rule city where they sell or use software.
Practical Considerations for Businesses
Businesses should begin evaluating how the new law may affect software transactions, compliance obligations, and internal processes well before the January 1, 2027, effective date.
What software vendors should do:
- Analyze sales sourcing and customer user locations to assess Colorado state and local nexus
- Review product offerings to determine which subscriptions and licenses become taxable
- Update tax engine software for taxability matrices, billing processes, and reporting
- Evaluate customer contract structures and licensing arrangements
- Assess whether negotiable-license exemptions may apply to customer agreements
- Monitor Colorado Department of Revenue tax guidance
What software purchasers should do:
- Determine whether vendors will begin collecting Colorado state sales tax
- Consider user-based allocation methodologies for taxable software
- Review software contracts to identify opportunities for exemption
- Review procurement procedures for cloud-based applications and subscriptions
- Evaluate use tax accrual processes for software purchases
Preparing for Colorado’s Software Tax Changes
Businesses purchasing and selling software in Colorado should begin evaluating potential sales and use tax implications well before the January 1, 2027, effective date. Systems and processes take time to change, and Colorado’s home rule system adds a layer of complexity that businesses should not underestimate.
Our State and Local Tax team can help you assess the impact and prepare for the transition.
Get the right plan and advice to keep state and local taxes from becoming a compliance risk.
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