Colorado Software Sales Tax Changes January 1, 2027

The Colorado software sales tax rules change on January 1, 2027. On that date, the state’s 2.9% sales and use tax begins to apply to most downloaded and remotely accessed computer software, a category that has been exempt from state tax since 2011. This guide reflects the law as of July 2026. If your business buys or sells software or SaaS in Colorado, the purchases and sales you have treated as non-taxable may now carry state tax.

The change comes from House Bill 26-1223, “Modifying Certain Tax Expenditures,” signed by Governor Jared Polis on June 4, 2026. Here is what changed, what stays exempt, and the steps to take before the effective date.

What Is Colorado HB 26-1223 and When Does It Take Effect?

HB 26-1223 is a Colorado law that narrows the state’s downloadable-software sales and use tax exemption. Its software-tax provisions take effect January 1, 2027. The bill expands taxable tangible personal property to include most downloaded and remotely accessed software, so software once excluded from state tax becomes subject to it.

The bill was signed into law on June 4, 2026 (Session Law Chapter 379) after passing the House on May 4 and the Senate on May 13, 2026. Its prime sponsors were Representatives Steven Woodrow and Andrew Boesenecker and Senators Matt Ball and Dylan Roberts. The Colorado General Assembly’s official summary states the effect plainly:

“The bill narrows the downloadable software sales and use tax exemption so that only custom software developed for use by a particular user and software governed by a negotiable license agreement is exempt from taxation. Under the bill, all other types of downloadable software are subject to state sales and use tax beginning January 1, 2027.” — Colorado General Assembly, HB 26-1223 bill summary

The exemption being repealed is not new. Colorado enacted it in 2011 through House Bill 11-1293, reversing a brief 2010 change that had taxed such products. The Colorado Office of the State Auditor estimated the state forwent at least $83 million in 2020 because of the exemption. A later review found exempt software sales to businesses alone may have cut state sales tax revenue by as much as $88.5 million in 2022.

Is SaaS Taxable in Colorado Right Now?

No, SaaS and electronically delivered software are not currently subject to Colorado state sales tax, and that holds through December 31, 2026. Under current law (C.R.S. § 39-26-102(15)(c)), prewritten software is taxable only when it meets all three conditions: it is prepackaged for repeated sale or license, governed by a tear-open nonnegotiable license, and delivered in a tangible medium such as a disk or CD.

Software is explicitly treated as “not delivered in a tangible medium” when it is provided through an application service provider (SaaS), delivered electronically, or transferred by load-and-leave. Because those delivery methods fail the tangible-medium test, they are not taxed at the state level today. The Legislative Council Staff fiscal note describes the current rule directly:

“Under current law, only software that is prepackaged via a tangible physical medium is subject to the state sales and use tax. Examples of software that are exempt … include: software that is used over the internet without being downloaded to the user’s computer, such as with cloud computing.” — Colorado Legislative Council Staff, HB 26-1223 Fiscal Note

What this means for you: the state-level “not taxable” treatment you rely on for cloud and downloaded software is exactly what HB 26-1223 removes. After January 1, 2027, delivery method no longer determines taxability.

What Software Becomes Taxable on January 1, 2027?

Most downloaded and remotely accessed software becomes taxable, including SaaS, downloaded programs, and mobile applications on phones and tablets. HB 26-1223 redefines “computer software” as a set of coded instructions “delivered by any means, including compact disc, download, or remote access through the internet,” which folds electronic and cloud delivery into the taxable base.

The table below compares treatment before and on or after the effective date.

*Many home-rule, self-collecting municipalities already tax SaaS locally, so “not taxable” has never been fully true in those cities. See the home-rule section below.

Are Downloaded Apps Subject to Colorado Sales Tax Under the New Law?

Yes, downloaded apps become subject to Colorado state sales and use tax on January 1, 2027. The new definition of computer software covers coded instructions delivered by any means, and the law specifically includes applications on cellphones, tablets, and mobile devices. A downloaded app is no longer treated differently from software on a physical disc.

What Software Is Exempt From the Colorado Software Sales Tax?

After January 1, 2027, only two categories remain exempt: custom software built for a particular user, and software under a negotiable license agreement. Every other downloadable or remotely accessed program becomes taxable as tangible personal property.

The statute defines a negotiable license agreement narrowly: a written contract “individually bargained between the licensor and licensee” and “signed in writing by authorized representatives” of both parties, before or at the time of use. Standard, form, or boilerplate agreements offered on a nonnegotiable basis do not qualify, regardless of signature, packaging, or website terms.

Does Custom Software Qualify for the Colorado Exemption?

Yes, software built for use by a particular user (custom software) stays exempt after January 1, 2027. It is one of the two preserved exemptions. If a vendor builds software to a single client’s specification instead of packaging it for repeated sale, it stays outside the state sales tax base.

Does a Click-Through License Agreement Qualify for the Software Exemption?

No, a click-through license or standard EULA does not qualify for the negotiable-license exemption. The exemption requires an agreement individually bargained and signed by authorized representatives of both parties. Click-through terms, browse-wrap, and boilerplate agreements offered to many licensees on a nonnegotiable basis are excluded by name, even when the user clicks “I agree.”

“Because most enterprise software is licensed on standard, nonnegotiable terms, the negotiable-license exemption will be narrow in practice. The place to look is your genuinely bargained, signed contracts, not the click-through terms attached to off-the-shelf tools.” — Rick Whipple, CPA, Managing Partner, WhippleWood CPAs

Do Home-Rule Cities Like Denver Tax Software Differently From the State?

Yes, many Colorado home-rule, self-collecting municipalities already tax software and SaaS at the local level, so the state change does not create a single uniform rule. Cities such as Denver and Boulder have imposed their own local sales tax on software and SaaS for years under their own tax codes, independent of the state exemption.

HB 26-1223 broadly aligns the state with those home-rule cities, but conformity is not absolute. Home-rule jurisdictions set their own definitions and can differ from the state on what counts as taxable software. What this means for you: assess applicability jurisdiction by jurisdiction rather than assuming the state rule and every local rule now match.

What Is the Colorado Sales Tax Rate on Software?

The Colorado state sales tax rate is 2.9%, and that is the rate that will apply to newly taxable software beginning January 1, 2027. Local jurisdictions, including home-rule cities, add their own rates on top of the state rate, so the combined rate on a software purchase depends on where the sale is sourced.

Note that the bill’s sales-tax-base change does not automatically apply to certain special districts, such as the Regional Transportation District (RTD) and the Scientific and Cultural Facilities District (SCFD). Those districts follow their own base rules unless separately conformed.

Why Did Colorado Make This Change, and Is It a Tax Increase?

The state projects the software-tax expansion will raise $44.4 million in FY 2026-27 and $92.2 million in FY 2027-28, but the net state revenue impact is designed to be $0. HB 26-1223 pairs the expanded software base with a new refundable Expanded Family Affordability Credit, calibrated annually so the credit claimed equals the revenue raised by repealing the exemption.

The Legislative Council Staff fiscal note estimates the taxable software base at $16.44 billion in FY 2026-27 and $17.67 billion in FY 2027-28. Its revenue model assumes about 90% of software is downloadable and that roughly 20% of downloadable software sales come from nonnegotiable agreements that would become taxable. For businesses, the practical result is the same regardless of the offset: software purchases and sales that were exempt now carry state tax.

How Should Software Buyers and Sellers Prepare for January 1, 2027?

Colorado businesses should start now by inventorying affected software and reviewing license terms well before the effective date. Because the rules are still being written, early preparation leaves room to adjust. Here is a practical sequence:

1. Inventory taxable software purchases and sales. List the downloaded and remotely accessed software your business buys and, if you are a seller, the products you deliver into Colorado. Flag the ones that were exempt before January 1, 2027 and become taxable after.
2. Review license agreements against the exemption. For each product, determine whether it is custom software for a particular user or governed by a genuinely negotiated, signed license. Treat standard click-through and boilerplate terms as non-qualifying.
3. Update billing and tax systems. Sellers should configure tax engines and invoicing to charge the 2.9% state rate (plus applicable local rates) on newly taxable software as of January 1, 2027. Buyers should confirm use-tax accrual for untaxed purchases.
4. Assess each jurisdiction separately. Confirm how each home-rule city where you buy or sell already treats software, since state and local definitions may still differ.
5. Watch the DOR rulemaking. The Colorado Department of Revenue holds a workgroup meeting on August 6, 2026 at 10:00 a.m. MDT to develop implementing rules. The details finalized there may affect how the exemptions apply.

Related reading: business tax planning and compliance and outsourced accounting and bookkeeping for Colorado business owners.

Frequently Asked Questions

When Does the Colorado Software Tax Start?

The Colorado state sales and use tax on downloaded and remotely accessed software starts January 1, 2027, under HB 26-1223. The bill was signed June 4, 2026, but the software-tax provisions apply beginning January 1, 2027.

Is Downloaded Software Taxable in Colorado?

Downloaded software is exempt from Colorado state sales tax through December 31, 2026, and becomes taxable on January 1, 2027. After that date, downloaded prewritten software is treated as taxable tangible personal property unless it is custom or under a negotiated, signed license.

Are Digital Products Taxable in Colorado?

HB 26-1223 addresses computer software specifically, expanding the taxable definition to coded instructions delivered by any means, including download and remote access. Businesses should confirm treatment of any given digital product with current Department of Revenue guidance, since local rules can differ.

What Is the Colorado Sales Tax Rate on Software?

The state rate is 2.9%. Home-rule cities and other local jurisdictions add their own rates on top, so the total rate depends on where the sale is sourced.

Talk With Our State and Local Tax Team

The software-tax change touches purchasing, billing, and contract review at once, and the specifics are still being finalized through Department of Revenue rulemaking. Our state and local tax (SALT) and business tax professionals can help you inventory affected software, review whether your license agreements qualify for the negotiated-license exemption, and update your systems before January 1, 2027. Contact WhippleWood CPAs to review your Colorado software tax exposure.