Colorado Expands Sales Tax to SaaS and Downloaded Software: What Businesses Need to Know Before 2027

For years, one of the biggest challenges for technology companies has been the lack of consistency in how states tax software. One state taxes SaaS but not downloaded software. Another taxes downloaded software but exempts SaaS. Some tax both, while others tax neither.

Now, Colorado is making a big change.

Beginning January 1, 2027, Colorado will expand its sales tax base to include many digital products and software transactions, including downloaded software and Software as a Service (SaaS). The change, enacted through House Bill 26-1223, is another reminder that states continue to modernize their tax laws to reflect today's digital economy.

This is a significant development for two reasons:

1. It adds to the list of states that will tax both SaaS and downloaded software; and

2. More importantly this brings the taxability of SaaS and downloaded software in alignment with many Colorado cities that already tax both.  

For businesses selling software, subscriptions, or other digital products, now is the time to understand how these changes could affect your sales tax obligations.

Colorado Joins the Growing List of States Taxing SaaS

Under the new law, Colorado will tax many electronically delivered products and services, including:

• Software as a Service (SaaS)
• Downloaded software
• Digital applications
• Certain digital products delivered electronically

While there are nuances and exceptions that businesses should review carefully, the legislation significantly expands Colorado's sales tax base to better align with how businesses purchase and consume technology today.

Another Example of the Evolving Digital Tax Landscape

Colorado isn't alone.

One of the biggest misconceptions we hear is that SaaS is either taxable everywhere or exempt everywhere. In reality, neither is true.
Sales tax treatment of SaaS remains one of the most inconsistent areas of state taxation.

Today:

• Some states tax SaaS as a taxable service.
• Some tax electronically delivered software but not cloud-based software.
• Others exempt SaaS entirely.
• Several states apply reduced rates or industry-specific rules.
• Local jurisdictions can have their own requirements that differ from state law.

Even within states, taxability often depends on factors such as:

• How the software is delivered
• Where the benefit of the software is received
• Whether or not the customer is a commercial enterprise
• The language contained in customer contracts

The result is a patchwork of rules that continues to evolve as technology advances faster than tax statutes.

California May Be Next

Colorado's legislation also comes as another large state considers expanding sales tax to SaaS.

California lawmakers are currently evaluating legislation that would make many SaaS transactions taxable beginning in 2027. If enacted, it would represent one of the most significant sales tax changes affecting technology companies in years.

While the California proposal has not yet become law, it highlights a broader trend: states are increasingly looking to digital products and cloud-based software as a growing source of tax revenue.

Read more on this here.

Don't Forget About Nexus

Taxability is only one piece of the puzzle.

Before a business is required to collect Colorado sales tax, it must first establish sales tax nexus.

Since the Supreme Court's Wayfair decision in 2018, every state with a statewide sales tax has adopted some form of economic nexus standard. In many cases, businesses exceeding $100,000 in taxable sales into a state should evaluate whether they have established collection responsibilities.

For software companies experiencing rapid growth, sales tax nexus will creep up on you – along with the burden of sales tax.

What Software Companies Should Be Doing Now

Although Colorado's changes don't take effect until January 1, 2027, businesses shouldn't wait until the end of 2026 to prepare.

Now is a good time to: 

• Evaluate whether you've established nexus in new jurisdictions.
• Review where your products are currently taxable.
• Review invoices and contracts to ensure products and services are properly described.
• Verify your tax engine or ERP system can accommodate Colorado's new rules before they become effective.

Companies selling across multiple states should also monitor additional legislative activity. Colorado and California are unlikely to be the last states to revisit SaaS taxation.

Sales Tax Rules Continue to Change

The taxability of software has never been static, and it continues to evolve.

Colorado's expansion is another reminder that businesses can't assume yesterday's rules will apply tomorrow. Staying compliant requires ongoing monitoring of both nexus and taxability as states continue to update their laws.

If your business sells SaaS, downloaded software, or other digital products, now is the time to review how these legislative changes may impact your compliance strategy.

TaxConnex helps businesses navigate changing sales tax rules across all jurisdictions. Whether you're evaluating nexus, determining product taxability, or preparing for upcoming legislative changes like Colorado's new law, our team can help you stay ahead of your compliance obligations. Contact us to learn what it means when you UPSOURCE your sales tax compliance.