Summary: Effective January 1, 2027, Colorado and California will tax prewritten software delivered electronically or accessed remotely, including SaaS. If your business licenses software in either state, as a licensor or a licensee, these changes could create new sales tax collection, registration, and compliance obligations. Reviewing your license agreements, nexus, and tax systems now can help you avoid the high cost of unknowns.
Colorado and California recently passed legislation that expands each state’s sales tax base to software that is provided to a customer other than on tangible media. If your business licenses software in these states, either as a licensor or a licensee, read more to learn how these new rules may impact your business.
Colorado
Governor Jared Polis signed HB 26-1223 on June 4, 2026 that amends Colorado’s taxation of computer software effective January 1, 2027. Under current law, computer software is taxable only if it meets the following criteria:
- It is prepackaged for repeated sale or use (i.e., not custom software);
- Its use is governed by a tear-open nonnegotiable license agreement; and,
- It is delivered to the customer via a tangible medium.
The legislation removes the third criteria, so computer software becomes taxable regardless of how it is delivered or accessed (e.g., downloaded, streamed, or accessed remotely through the internet), which will include Software as a Service (SaaS).
The law preserves exemptions for:
- Custom software that is built for a specific user, rather than sold or licensed broadly.
- Software under a negotiable license (i.e., an agreement that is individually bargained and signed by authorized representatives of each party). Click-through, shrink-wrap, and other standard nonnegotiable agreements do not qualify for the exemption, even if the underlying software itself might otherwise seem eligible.
This change aligns the state with many home-rule jurisdictions in Colorado which already subject computer software to local sales tax even when not provided on tangible medium.
California
On June 29, 2026, Governor Gavin Newsom signed SB 122; legislation that amends the state’s sales and use tax rules to start taxing prewritten software delivered electronically or accessed remotely (i.e., SaaS) beginning on January 1, 2027. Specifically, the legislation redefines “tangible personal property” to include a “digital product” and defines a “digital product” to mean “prewritten computer software transferred on tangible storage media, transferred electronically, or accessed remotely.”
Interestingly, the legislation uses the term “digital product” but specifies that such term does not include the types of digital products which are typically treated as digital products in other states (e.g., digital books, digital audiovisual works, and digital audio works). Therefore, these types of products continue to not be subject to sales tax.
Custom computer software remains excluded from the sales tax base and is defined as “computer software prepared to the special order of a single customer and includes those services represented by separately stated charges for modifications to existing prewritten computer software that are prepared to the special order of the customer.”
The legislation creates specific sourcing rules for remote sales of digital products that are transferred electronically or accessed remotely. Generally, the sale will be sourced to California if the purchaser’s “known address,” as maintained in the seller’s records in good faith and in the ordinary course of business, is in the state.
However, if the purchaser provides more than one address, then the “known address” will be determined using a set hierarchy that starts with the purchaser’s billing address. If there is no California address, then the transaction may be sourced outside of the state. It is unclear how California may apply sourcing when users are in multiple states.
Finally, for high-volume purchasers, the new law includes a threshold mechanism that would switch the compliance responsibility for the tax from a retailer to a purchaser once a retailer’s digital product sales that are transferred electronically or accessed remotely to a single purchaser exceed $5 million (subject to future inflation adjustments) in a calendar year (or in the prior or current calendar year beginning January 1, 2028).
What Your Business Can Do to Prepare
With several months before these rules take effect, businesses should consider the following:
- Taxability Analysis: Does your business license software to customers that will be taxable in these states? For Colorado, businesses should review their license agreements to determine whether they are individually negotiated or standard click-through.
- Nexus: Review whether your business may need to get registered in these states and start collecting and remitting the tax once these new rules go into effect.
- Tax Engine Mapping and Configuration: Ensure that your tax engines are set up properly to apply these new taxability and sourcing rules.
- Use Tax Process: Review your use tax process to address potential use tax remittance of these new taxes, in case your provider does not collect the tax.
- Agency Guidance: Be on the lookout for agency guidance to address any open, interpretive questions.
Final Thoughts: Preparing for SaaS Sales Tax in Colorado and California
Colorado and California are the latest states to bring remotely accessed software and SaaS into the sales tax base and more may follow. With the new rules taking effect January 1, 2027, businesses that license software, either as a licensor or a licensee, have a narrow window to get ready.
Now is the time to review your license agreements, confirm where you have nexus, and set up your tax systems to apply the new taxability and sourcing rules. Watching for agency guidance in the coming months can also help you address open interpretive questions before they create unexpected liabilities.
