Sales and Use Tax Developments in Colorado and Washington: Digital Goods and Services Expansion

Sales and Use Tax Developments Across the Western U.S.

State tax policy in the western United States saw significant activity throughout 2025 and into early 2026. Court decisions addressing digital goods, legislative expansions of the sales tax base and continued modernization of administrative systems all reshaped compliance obligations for multistate businesses.

Colorado and Washington produced particularly consequential developments. Colorado’s courts addressed the tax treatment of digital streaming services while legislators implemented structural changes to the state’s sales tax system. At the same time, Washington enacted one of the most sweeping expansions of services taxation in recent years.

Colorado

Digital goods, local tax complexity and legislative reform

Colorado continues to present one of the most complex sales tax environments in the United States due to its home-rule structure, which allows dozens of municipalities to administer their own sales taxes independently.

Several developments during the past year highlight both the complexity and the evolution of the state’s system.

Streaming services and the definition of tangible property

In Netflix, Inc. v. Department of Revenue, the Colorado Court of Appeals ruled that digital streaming subscriptions constitute taxable tangible personal property. The court concluded that images and sounds transmitted through streaming services can be “perceived by the bodily senses,” placing them within the statutory definition of taxable property.

The decision highlights a growing trend: courts and regulators are applying existing tax laws to the digital economy without waiting for legislative clarification.

TABOR and limits on expanding the tax base

In MetroPCS v. City of Lakewood, the Colorado Supreme Court ruled that the City of Lakewood expanded an existing tax to previously untaxed providers and services, constituting a “new tax” under the state’s Taxpayer Bill of Rights (TABOR), which requires voter approval for new taxes. Because Lakewood did not receive voter approval, the decision may limit future efforts to broaden the local tax base similarly without a referendum.

The ruling is already influencing debates over proposals to tax certain types of software and digital services.

Vendor fee elimination

In August 2025, the Colorado legislature eliminated the state sales tax vendor fee effective January 1, 2026. Previously, qualifying retailers could retain a small portion of collected tax to offset administrative costs. This change is intended to simplify administration, standardize treatment across taxpayers and increase state revenues.

Modernizing the sales and use tax system

Colorado also continued updating its Sales and Use Tax System (SUTS), including enhancements that improve address-level rate identification and support administration across home-rule jurisdictions. These efforts aim to reduce the compliance challenges associated with Colorado’s fragmented local tax system.

Washington

Expanding the taxation of services

Washington produced perhaps the most significant regional development when lawmakers dramatically expanded the state’s sales tax base in 2025.

Major expansion of taxable services

Senate Bill 5814 extended retail sales and use tax to a wide range of services previously outside the tax base. Newly taxable services include certain advertising services, IT services, software training, website development, temporary staffing, data processing and several security-related services.

The legislation also broadened the definition of “digital automated services,” potentially capturing transactions involving significant human effort when delivered electronically.

For many businesses, the most challenging aspect of the reform is the sourcing rule: services are taxed based on where the customer first uses them. Determining that location on a transaction-by-transaction basis may require significant system updates.

Transition guidance and litigation

The Washington Department of Revenue issued transition guidance for contracts signed before the October 1, 2025, effective date. Existing contracts may receive temporary treatment under prior rules until March 31, 2026, as long as they remain unmodified.

At the same time, a legal challenge has been filed contesting the application of the tax to advertising services, with arguments that the law unfairly targets digital commerce.

Changes to the B&O tax

Washington also enacted increases to several business and occupation tax rates and adopted a statutory safe harbor related to investment income deductions.

Key Takeaways for Businesses

Colorado and Washington illustrate two different forces shaping state sales tax policy today. Colorado’s developments highlight the role of courts and local governance structures, while Washington’s reforms show how legislatures may expand the sales tax base to address fiscal pressures.

Businesses operating in these jurisdictions should closely monitor ongoing litigation, regulatory guidance and future legislative proposals. For more information about state and local tax law changes in Colorado and Washington, contact us.

Authored by Marshall Ferris

©2026

Sales and Use Tax Developments Across the Western U.S.

Sales and use tax policy across the western United States saw significant activity in 2025 and early 2026. This four-part series reviews major legislative, administrative and judicial developments affecting businesses operating in Colorado, Washington, Arizona, Utah, New Mexico, Wyoming and Idaho.

• Sales and Use Tax Developments in Wyoming and Idaho: Small Seller Exemptions and Policy Updates