Colorado’s New Software Tax Law: SaaS and Downloaded Software Taxable Starting in 2027

Colorado enacted HB 26-1223, effective January 1, 2027. The legislation repeals the downloaded software sales and use tax exemption so that software available for repeated sale or license is treated as tangible personal property and is therefore subject to sales and use tax. Under prior law, Colorado generally taxed only certain prepackaged software delivered on tangible media, while downloaded software and Software as a Service (SaaS) were generally not taxable.

Beginning January 1, 2027, Colorado will generally tax software that is available for repeated sale or license regardless of how it is delivered, including by download, remote internet access, or physical media. As a result, many SaaS subscriptions, hosted software products, and mobile applications will become subject to Colorado sales and use tax.

The two exemptions that remain are software developed for a particular user (custom software) and software governed by a negotiable license agreement.

This change does not automatically apply to all Colorado local jurisdictions. In state-administered localities, the state’s software rules will apply. However, home rule cities may continue to impose their own tax treatment on software, even if the state provides an exemption.

Beginning in 2027, Colorado will move from a narrow software tax framework to a broader system that generally taxes downloaded software and remotely accessed software, including many SaaS offerings. Businesses should evaluate how these changes may affect their software sales and purchases before the law takes effect.