By: DiAndria Green | 07/10/26
Before H.B. 26-1223, Colorado’s state sales tax statute taxed retail sales of tangible personal property, not software in every form. Subsection 39-26-104(1)(a) imposes tax on retail sales of tangible personal property. The key issue, then, was whether software fit within the statutory definition of tangible personal property.
Colorado answered that question narrowly. Subsection 39-26-102(15)(c)(I) treated computer software as tangible personal property only if all three conditions were met: the software was prepackaged for repeated sale or license, its use was governed by a tear-open nonnegotiable license agreement, and it was delivered to the customer in a tangible medium. The statute further stated that software is not delivered in a tangible medium if it is provided through an application service provider, delivered electronically, or transferred through load-and-leave delivery.
That framework meant many modern software transactions fell outside the tax base. Downloaded software, hosted software, and most cloud arrangements generally were not taxable because the customer did not receive a physical medium. Colorado also separately defined an application service provider as an entity that hosts software for third-party use, typically accessed over the internet. That definition reinforced the conclusion that traditional cloud delivery was outside the old rule.
As a result, if a business asked in 2026, “is software taxable in Colorado”, the state-level answer depended heavily on delivery method and contract structure. The 2026 multistate survey reflects that Colorado was nontaxable for SaaS before the new law takes effect.
H.B. 26-1223 changes that framework beginning January 1, 2027. The enacted bill summary states that the downloaded software exemption is repealed so that all software available for repeated sale and license qualifies as tangible property and is therefore subject to sales and use tax, while preserving exemptions for software governed by a negotiable license agreement or developed for a particular user.
For sellers, that means the 2027 rule reaches transactions that historically sat outside the state tax base, including:
Colorado hb 26-1223 therefore modernizes the state’s treatment of digital software transactions and moves Colorado closer to states that broadly tax software without regard to delivery format.
The statute does not simply say “SaaS is taxable.” Instead, it uses broader terms: computer software delivered by any means, including remote access through the internet. That language points directly at many software-as-a-service arrangements.
Before the change, hosted software often fit within Colorado’s application service provider framework. The provider retained or hosted the software, and users accessed it through the internet. Under the revised definition, remote access is specifically included in computer software.
The practical reading is that Colorado SaaS Sales Tax becomes a live issue in 2027, and most non-custom, non-negotiated SaaS subscriptions should be expected to be taxable unless future guidance narrows the rule.
For broader context, states remain inconsistent. Colorado was previously aligned more closely with jurisdictions that did not tax SaaS, unlike SaaS Taxation in Louisiana, where SaaS is taxable, and like SaaS Taxation in California, where SaaS in 2026 is nontaxable.
The enacted bill preserves two important categories outside the expanded tax base:
The first category is essentially custom software. If software is developed specifically for one customer rather than offered for repeated sale or license, the bill summary indicates it remains exempt.
The second category is narrower than many taxpayers may expect. The enacted law explains that the exemption is intended for genuinely negotiated agreements that are individually bargained and executed by authorized representatives of both parties. Standard click-wrap, browse-wrap, and similar mass-market agreements do not qualify under that interpretation.
That distinction matters because many software vendors rely on standardized online terms. If the agreement is effectively take-it-or-leave-it, the exemption likely will not apply. Sellers claiming exemption should be prepared to substantiate actual negotiation, including redlines, individualized terms, and signatures by authorized representatives. This is especially important in any future audit or Voluntary Disclosure Agreement context where documentation quality can determine exposure.
Even after taxability is established, sourcing remains difficult. Colorado’s sourcing statute provides that sales of tangible personal property, commodities, or services generally are sourced first to the seller’s business location if received there by the purchaser, then to the location where receipt occurs, then to purchaser address hierarchy rules if receipt location is not known.
Applying those rules to downloaded software, mobile apps, and remote access software is not always straightforward. A user may download an app on a mobile device in one location, use it in multiple locations, or access a SaaS platform through distributed employees. The new law notes that software downloaded to phones and other mobile devices raises sourcing questions, and remote access software may require businesses to identify, document, and potentially allocate use.
The state-level issue is only part of the problem. Colorado has a uniquely fragmented local tax system because many home rule cities administer their own sales taxes and may diverge from state definitions and exemptions. Colorado has multiple home rule cities and that a transaction may be taxable in one city and not another. Some cities already treat software and digital goods differently from the state.
So while the state’s 2026 general sales tax rate is 2.9%, sellers often must separately evaluate local rates and local tax bases. That is one reason SaaS Sales Tax compliance in Colorado can be more burdensome than in more centralized states.
Software sellers with Colorado customers should begin preparing now for January 1, 2027.
Key preparation items include:
Businesses should also revisit nexus. Colorado’s economic nexus threshold generally applies when retail sales of tangible personal property, commodities, or services in the state exceed $100,000 in the prior year or current year timing rules are met. Once software becomes taxable tangible personal property more broadly, sellers that previously had limited Colorado exposure may face collection obligations.
Bennett Thrasher can assist by analyzing transaction taxability, reviewing software agreements, evaluating nexus and sourcing, and helping businesses align state and local compliance processes before the effective date.
As of July 2026, Colorado generally does not tax SaaS at the state level. The current multistate survey lists Colorado SaaS as nontaxable. That said, some Colorado home rule cities may apply different local rules. Beginning January 1, 2027, state law changes are expected to bring many SaaS transactions into the tax base.
H.B. 26-1223 is an enacted Colorado law signed June 4, 2026. Among other changes, it repeals the downloaded software exemption and expands sales and use tax to software available for repeated sale or license. The software tax changes apply to sales, storage, use, and consumption on or after January 1, 2027.
Yes, beginning January 1, 2027, downloaded apps are expected to be subject to Colorado sales and use tax unless an exemption applies. The enacted law identifies downloaded software and mobile applications as newly taxable categories. Custom software and software governed by a qualifying negotiable license agreement remain excluded from the expanded tax base.
Generally, no. The enacted law indicates that the exemption for negotiated license agreements is intended for agreements that are individually bargained and executed by authorized representatives of both parties. Standard click-wrap, browse-wrap, and similar non-negotiable online terms generally do not qualify. Documentation of actual negotiation will likely be important in audit defense.
They can. Colorado’s home rule cities often administer their own sales taxes and may adopt tax bases, definitions, and exemptions that differ from state law. Software tax treatment can vary among home rule jurisdictions. As a result, sellers should not assume that state treatment automatically controls local treatment in Denver or other self-administered cities.
In conclusion, Colorado’s 2027 software tax expansion is a major shift from a delivery-method-based regime to a broader rule that reaches downloaded software, apps, and likely most SaaS. The most important remaining issues are the scope of the negotiated-license exemption, sourcing for remote access transactions, and the interaction between state law and home rule city rules. Sellers with Colorado customers should treat 2026 as the implementation period for contract review, systems changes, and multijurisdictional compliance planning.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact DiAndria Green, Partner and Co-Leader of Bennett Thrasher’s State and Local Tax (SALT) practice, or call us at 770.396.2200.
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