Colorado repeals downloaded software sales tax exemption

Colorado Governor Polis signed HB26-1223 on June 4, 2026. Starting January 1, 2027, downloaded software, SaaS, and mobile apps are subject to Colorado sales and use tax.

Two categories remain exempt: software governed by a negotiable license agreement and software custom-built for a specific user. Standard click-through or browse-wrap agreements do not qualify for the negotiable license exemption.

What changed

For years, Colorado exempted downloaded software from sales and use tax. That exemption is repealed. Beginning January 1, 2027, the definition of taxable tangible personal property is expanded to include all computer software, regardless of how it is delivered. ^[1]

The practical effect:

The negotiable license exemption requires a genuinely negotiated agreement between the parties. Standard terms of service, click-through agreements, and browse-wrap agreements do not meet this standard.

This distinction matters: a SaaS company selling through standard online checkout will be taxable. A SaaS company with enterprise contracts negotiated individually with each customer may qualify for the exemption on those contracts.

A note on local jurisdictions

Colorado’s change operates at the state level, but local jurisdictions including counties, municipalities, the regional transportation district, and the scientific and cultural facilities district have some flexibility. Local governments may elect to adopt the new state definition of taxable software, or they may retain the prior definition.

Some Colorado localities already tax SaaS under existing rules. Sellers should verify the combined state and local tax treatment for Colorado addresses, as local taxability may differ from the state rule during a transition period.

Who this affects

• SaaS companies selling into Colorado: if your customers access software remotely over the internet and pay through a standard subscription or checkout flow, those sales are taxable in Colorado starting January 1, 2027
• Software vendors selling downloaded software or mobile applications into Colorado: all standard license sales are in scope regardless of delivery method
• Businesses purchasing software for use in Colorado: if your vendor does not collect Colorado sales tax, you may owe use tax on those purchases
• Companies with enterprise software contracts: review each contract to determine whether the license terms are genuinely negotiable. If so, those may qualify for the negotiable license exemption
• Custom software developers: software built specifically for a single identified user remains exempt
• Out-of-state software sellers meeting Colorado’s economic nexus threshold of $100,000 in Colorado sales or 200 or more separate: you are required to register and collect Colorado sales and use tax on newly taxable software sales
• CPAs and tax professionals advising Colorado software buyers or sellers: contracts, billing systems, and nexus registrations all need to be reviewed before January 1, 2027

Next steps for sellers

• Audit your Colorado software sales now. Identify which products are sold under standard licenses versus genuinely negotiable agreements, and which are custom-built for specific users
• Review your standard license agreements. If your agreements are click-through, browse-wrap, or otherwise non-negotiable, assume those sales will be taxable starting January 1, 2027
• If you sell enterprise software under individually negotiated contracts, work with legal counsel to confirm whether those agreements qualify for the negotiable license exemption before relying on it
• Verify Colorado nexus. If your software sales into Colorado meet the $100,000 economic nexus threshold and you are not currently registered, registration is required before you begin collecting tax on January 1, 2027
• Check local jurisdiction treatment separately. Colorado localities have flexibility around adoption of the new rules, and some already tax SaaS. Verify the combined rate and local taxability for your Colorado delivery addresses
• Update your billing and tax calculation systems before January 1, 2027 to collect Colorado sales tax on newly taxable software transactions
• If you purchase software for use in Colorado and your vendor does not collect Colorado sales tax, assess your use tax obligations

If you use TaxCloud: TaxCloud will update its tax calculation engine to reflect the expanded taxability of software in Colorado effective January 1, 2027, so sellers using TaxCloud to manage Colorado compliance will have the correct treatment applied to software transactions automatically.