Colorado Will Tax All Software Sales Starting 2027 Under HB 26-1223

On June 4, 2026, Governor Polis signed House Bill 26-1223 into law. Effective for transactions on and after January 1, 2027, Colorado software sales tax will apply to computer software available for repeated sale or license, no matter how it is delivered. Under prior law, Colorado generally taxed standardized software only when it was delivered on a tangible medium, which left downloaded software and remotely accessed software outside the state tax base. The new law repeals that exemption and treats in-scope software as tangible personal property whether it is transferred on physical media, downloaded, or accessed remotely through the internet. This brings Colorado in line with the majority of states that tax software without regard to delivery method.

What HB 26-1223 Taxes: Software Regardless of Delivery Method

Beginning in 2027, perpetual software licenses, subscription arrangements, software as a service, mobile applications, electronically delivered software, and charges for updates, renewals, and upgrades will generally be subject to Colorado sales and use tax when the software is available for repeated sale or license. For software companies and their customers, the practical effect is that the delivery method distinctions that have driven Colorado taxability determinations for years will simply no longer matter at the state level.

What’s Still Exempt: Custom Software and Negotiable Licenses

Two software exemptions survive. Software developed for use by a particular user, meaning true custom software, remains exempt, as does software transferred pursuant to a negotiable license agreement. The statute does not define what makes a license agreement negotiable, but the term is generally understood to refer to individually negotiated arrangements rather than the standardized click-through, browse-wrap, or shrink-wrap agreements that accompany most mass-market software. That distinction leaves real uncertainty for hybrid arrangements that pair standard terms with negotiated commercial provisions, and guidance from the Colorado Department of Revenue will be important in defining where the line falls. In the meantime, companies with enterprise agreements should take a close look at how their contracts are structured, because the difference between a negotiated license and a standardized one may now determine taxability.

Home Rule Cities: Colorado’s Dual-Layer Sales Tax System

It is also worth remembering that Colorado is a dual-layer system. The state’s home rule municipalities administer their own sales and use taxes, and many of them, including Denver, have taxed software and SaaS for years regardless of delivery method. HB 26-1223 brings the state-level treatment closer to what many home rule cities were already doing, but it does not eliminate local variation. Home rule jurisdictions retain independent authority over their own definitions, sourcing rules, and interpretations, so businesses selling into Colorado will still need to evaluate state and local obligations separately even after the new law takes effect.

How Sellers Should Prepare

For sellers, the months before the effective date are the time to act. Companies should determine which of their offerings constitute software available for repeated sale or license, assess whether the custom software or negotiable license exemptions could apply, and confirm that billing systems and tax engines are configured to charge Colorado tax on newly taxable transactions beginning January 1, 2027. Out-of-state sellers that previously had little or no taxable Colorado revenue should also revisit their economic nexus position, since software sales that were exempt before may now push them past the state’s collection thresholds or convert an existing registration from a formality into a live compliance obligation.

How Buyers Should Prepare

Buyers should review their software spend, budget for the added cost, and consider whether upcoming renewals or negotiated agreements can be structured with the new rules in mind.

California, Colorado, and the Multistate Trend Toward Taxing Software

Taken together with California’s SB 122, which taxes prewritten computer software that is transferred electronically or accessed remotely on the same January 1, 2027 date, Colorado’s change signals a clear trend of states modernizing their sales tax bases to capture the digital economy. Software companies with multistate footprints should expect more states to follow and should treat 2026 as the year to get their product taxability, contracts, and compliance systems in order.

KBF Advisory, LLC constantly monitors changes to Colorado software sales tax and other state sales and use tax laws so our clients are never caught off guard. If your business sells or purchases software in Colorado and you are facing questions about how this upcoming change affects your obligations, our state and local tax team is here to assist. Please reach out to your KBF contact to discuss how HB 26-1223 may impact your business and how to prepare before the January 1, 2027 effective date.