Effective January 1, 2027, California and Colorado will expand the application of their sales and use tax laws to many forms of electronically delivered and remotely accessed software, including Software-as-a-Service (SaaS). Businesses that develop, license or purchase software should evaluate how these changes may affect taxability determinations, billing processes, and sales and use tax compliance. Although the states have taken different legislative approaches, both laws significantly broaden the taxation of software transactions.
California
California enacted Senate Bill 122 as part of its 2026–2027 budget legislation. Beginning January 1, 2027, the definition of tangible personal property will be expanded to include many digital products, including prewritten computer software delivered electronically or accessed remotely through SaaS arrangements.
The legislation generally does not apply to custom software developed for a specific customer. It also excludes several categories of digital products, including digital books, digital music, audiovisual works, video games and certain digital infrastructure.
SB 122 also establishes new sourcing rules for digital products. Sales generally will be sourced using the purchaser’s California address under a statutory hierarchy of customer location information, making accurate customer data an important part of determining where transactions are taxed.
Colorado
Colorado enacted House Bill 26-1223, effective January 1, 2027, which repeals the existing exemption for electronically delivered and remotely accessed software. As a result, electronically delivered software and SaaS offerings that were previously exempt from Colorado sales and use tax will become taxable beginning January 1, 2027.
Although Colorado is expanding sales tax to software delivered electronically and software accessed remotely, House Bill 26-1223 preserves an exemption for custom software and software governed by a negotiated license agreement. A negotiated license agreement is generally defined as a written agreement that is individually bargained between the licensor and licensee and signed by authorized representatives of both parties before or at the time the software is accessed or used. Standardized, nonnegotiable license agreements and click-through terms generally do not qualify for the exemption.
What Businesses Should Consider
Businesses that sell, license, or purchase software should evaluate how these legislative changes may affect their sales and use tax obligations. Companies that have historically conducted business in California or Colorado but have not maintained sales tax registrations because their software offerings were exempt may need to reassess their filing responsibilities. Businesses should also evaluate whether any available exemptions apply, including the exemption for custom software (California and Colorado) and software governed by qualifying negotiated license agreements (Colorado).
In addition to determining whether registration and tax collection obligations exist, businesses should review billing practices, applicability of exemptions, tax engine configurations, and customer invoicing processes to ensure they are prepared for the new rules.
Businesses with customers in Colorado should also consider the state's home rule structure. Many Colorado home rule municipalities administer and impose their own local sales taxes independently of the state and may adopt taxability rules that differ from Colorado state law. As a result, compliance obligations may extend beyond state-level requirements and may require separate analysis to determine whether software transactions are subject to tax at the municipal level.
For businesses operating across multiple jurisdictions, these changes underscore the importance of actively monitoring legislative developments, administrative guidance and taxability changes. Implementing automated tax determination solutions and periodically reviewing nexus and compliance obligations can help reduce the risk of under-collecting tax, over-collecting tax, or incurring penalties resulting from evolving state and local tax laws.
Actions To Consider Before January 1, 2027
Businesses should consider:
- Assess California and Colorado registration requirements
- Review software, licensing and SaaS taxability
- Update billing systems, ERP platforms and tax engines
- Analyze Colorado home rule requirements
- Evaluate use tax implications for software purchases
- Update compliance procedures and monitor guidance
Your Guide Forward
Cherry Bekaert’s Sales & Use Tax team is here to help businesses evaluate the impact of California’s and Colorado’s expanded taxation of software and digital products. We can assist with acquiring sales tax permits, reviewing agreements to determine if exemptions apply, updating tax engine configuration, and helping businesses navigate their sales tax compliance obligations.
