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VideoColorado Expands Sales Tax to Software, SaaS and Digital Products
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As states continue to modernize how they tax digital goods and services, Colorado is taking a step toward aligning its sales tax rules with today’s digital economy.
With that, the cost of software and certain software-as-a-service (SaaS) offerings could increase in 2027 in Colorado via a new statewide sales tax on software. The new tax will bring the combined sales tax rate to nearly 10% in some cities, including Denver. As a result, businesses will need to understand what is changing, how software will be taxed and how it may affect costs and compliance.
How Colorado Is Redefining Software for Sales Tax
When the Colorado Court of Appeals ruled in Netflix, Inc. v. Department of Revenue that streaming subscriptions are “corporeal” tangible personal property because they can be perceived by sight and sound, it signaled that Colorado’s sales tax statute would not protect digital products on delivery-method grounds alone. The court said that “absurd results would follow if physical touch were a prerequisite of tangibility.” While the Netflix story isn’t quite finished, as the Colorado Supreme Court agreed to hear Netflix’s appeal earlier this spring, the legislature was not waiting around for the Supreme Court.
On June 4, 2026, Governor Polis signed HB 26-1223, which legislatively extends a similar approach to software what the Court of Appeals did judicially for streaming.
For taxpayers, this represents a potentially significant tax increase. It also brings the state law in line with what most home rule cities were already doing, thereby increasing consistency between state-administered sales tax and many home rule city rules.
What Changes Starting January 1, 2027
Currently, Colorado taxes software that is generally limited to prewritten software delivered on tangible media under a nonnegotiable license. This three-part test effectively exempts both downloaded software and SaaS.
HB 26-1223 eliminates those limitations and expands the state’s definition of taxable software. Effective January 1, 2027, computer software is defined as tangible personal property when delivered “by any means, including compact disc, download or remote access via the internet.” The definition additionally expressly captures mobile applications. Two narrow exemptions remain:
- Custom software developed for a particular user
- Software governed by a negotiated license agreement; click-through and browse-wrap terms are expressly excluded
While the statutory changes are relatively clear, uncertainty remains around the law’s broader implications, including potential Taxpayer Bill of Rights (TABOR) challenges and the treatment of SaaS.
How the Law Addresses TABOR Requirements
Article X, Section 20 of the Colorado Constitution contains the TABOR that requires voter approval before the state or local government enacts a new tax, tax rate increase or tax policy change directly causing a net tax revenue gain. Notably, HB 26-1223 was passed and signed without going to the ballot.
The legislature structured the legislation to remain revenue neutral. The tax increase was paired with a dollar-for-dollar expansion of the Family Affordability Tax Credit, a form of tax relief aimed at lower-income families in Colorado.
For now, the law appears to satisfy TABOR requirements, but a taxpayer challenge could still emerge in the future.
SaaS Treatment Under the New Law
The statute doesn’t explicitly state that SaaS is taxable. However, the legislative council staff fiscal note assumes SaaS sales are included in the tax base, and the statutory language has led some practitioners to interpret the phrase “remote access via the internet” the same way.
At the same time, the bill does not repeal Colorado’s application service provider framework, and it preserves nontaxable treatment for merely examining vendor-maintained data. Additional clarifications and interpretations are expected through the department’s rulemaking process.
Preparing for Change: What Taxpayers Should Do Now
Both the Netflix case and HB 26-1223 point to how Colorado is modernizing between its tax law and its digital tax base, with the courts adapting the 1935 language and the legislature rewriting it. For taxpayers, the practical effect is the same: The long-standing distinction between software delivered on a physical medium and software delivered electronically is losing support.
Businesses should begin evaluating how these changes may affect their software offerings, tax positions and compliance processes. This includes reviewing product classifications, contract terms and invoicing practices, as well as assessing exposure across state and home rule jurisdictions.
Weaver’s tax team can help you interpret the new rules, evaluate potential impacts and implement practical solutions to prepare for the January 1, 2027, effective date. Contact us. We can help evaluate how these changes may affect your business and what actions you can take now.
Authored by Marshall Ferris and Blake Fuqua
©2026
