INSIGHT

Colorado Expands Sales and Use Tax to Software and SaaS Beginning January 1, 2027

Dilyana Antevil • August 6, 2026

Services: State and Local Taxes, Tax Industries: Technology

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Colorado has enacted HB26-1223, a significant sale and use tax change that will expand the state tax base to include most computer software, regardless of delivery method, effective January 1, 2027. The new law generally treats software downloads, mobile applications, electronically delivered software, and software accessed remotely through the internet as taxable tangible personal property. Limited exemptions remain available for certain custom software and software governed by a qualifying negotiable license agreement.

Key Change: Software Treated as Tangible Personal Property

HB26-1223 amends Colorado’s definition of tangible personal property to include computer software. The revised definition of computer software covers coded instructions delivered by any means, including compact disc, download, or remote access through the internet. The law also expressly includes applications installed on cellular phones, tablets, and other mobile devices.

Sourcing Software Transactions May Present Compliance Challenges

The legislation removes prior multiple-points-of-use language allowing taxpayers to allocate software licenses based on use inside and outside Colorado. As a result, taxpayers may face uncertainty in determining how software and SaaS transactions should be sourced, particularly for enterprise licenses, mobile applications, and remotely accessed platforms used across multiple jurisdictions.

Colorado generally applies destination-based sourcing rules to sales of tangible personal property and taxable services. Those rules may now apply to taxable software and SaaS transactions using the following hierarchy:

• If the purchaser receives the software at the seller’s business location, the sale is sourced to that location.
• If the software is not received at the seller’s business location, the sale is sourced to the location where receipt by the purchaser occurs, including the location indicated by delivery instructions if known by the seller.
• If those rules do not apply, the sale is sourced to the purchaser address available in the seller’s ordinary-course business records, provided use of the address is not in bad faith.
• If business records do not resolve the sourcing location, the sale is sourced to an address for the purchaser, including the address associated with the purchaser’s payment instrument, provided use of the address is not in bad faith.
• If none of the above rules can be applied, the sale is sourced to the location indicated by the address from which the tangible personal property was shipped.

Exemptions for Certain Software Transactions

Custom Software

Software developed for a particular user, rather than offered for repeated sale or license to multiple users, remains exempt from Colorado sales and use tax.

Negotiable License Agreements

The law also provides an exemption for software governed by a qualifying negotiable license agreement. To qualify, the agreement must be individually bargained between the licensor and licensee and signed in writing by authorized representatives of both parties. Standard form, boilerplate, click-through, browse-wrap, shrink-wrap, account-creation, embedded-signature, and other automated acceptances generally do not qualify. Electronic signatures, such as through DocuSign or a similar authorized method, may satisfy the written signature requirement.

Business-to-Business Transactions Require Further Review

Purchases of software and SaaS may qualify for exemption in limited business-to-business situations, such as purchases for resale by managed service providers or software incorporated into products sold by the purchaser. However, these exemptions may not apply neatly to many software and SaaS arrangements.

Colorado generally excludes from sales and use tax purchases of tangible personal property that are purchased for resale in the ordinary course of business.

Colorado also provides an exemption for ingredients and component parts purchased by manufacturers when the property becomes part of a manufactured product.

Because software and SaaS may not fit squarely within these existing business-to-business exemptions, additional guidance from the Colorado Department of Revenue will be important. Businesses should review resale, embedded software, and managed service provider arrangements before January 1, 2027.

Home Rule Cities May Apply Different Rules

Colorado’s local sales tax system is complex, and many home rule cities administer their own sales taxes. These jurisdictions may diverge from state definitions and exemptions, and some already treat software and SaaS as taxable. Sellers and purchasers should separately evaluate state and local taxability for Colorado transactions, including whether particular local jurisdictions conform to the new state rules.

Client Considerations

Businesses selling or purchasing software in Colorado should begin preparing for the January 1, 2027 effective date. Key action items include reviewing product taxability, evaluating customer and vendor license agreements, determining whether negotiable license or custom software exemptions may apply, updating billing and tax calculation systems, and developing documentation to support sourcing and exemption positions.

Companies with customers, users, or employees in multiple Colorado jurisdictions should also assess local tax exposure, as home rule city treatment may differ from the state-level rules.

Please contact your BPM tax advisor to discuss how these changes may affect your business and what steps may be appropriate before the January 1, 2027, effective date.