Colorado to tax downloaded software in 2027

Colorado repealed the state sales tax exemption for downloaded software with the enactment of HB 26-1223. Starting January 1, 2027, Colorado state sales and use tax will apply to many currently exempt software transactions, including sales of cloud-hosted software, downloaded apps, and mobile apps. Depending on the location of the transaction, local sales and use taxes may or may not apply.

Key takeaways

• Colorado HB 26-1223 broadens the state sales tax base to most downloaded software starting January 1, 2027.
• Custom software and software governed by a negotiated license agreement remain exempt from state sales tax in Colorado.
• Home-rule jurisdictions operate independently, so local sales tax rules for downloaded software may differ significantly from the new state law.

How does Colorado tax computer software today?

Prepackaged software delivered via a tangible physical medium is currently subject to Colorado state sales and use tax, but most other computer software is exempt.

Specifically, Colorado state sales and use tax currently only applies to computer software that is:

• Delivered in a tangible medium like a disc or tape,
• Governed by a tear-open, nonnegotiable license agreement, and
• Prepackaged for repeated sale or license (e.g., shrink-wrapped).

Computer software is currently not subject to state sales tax in Colorado if it is:

• Delivered to the customer by electronic computer software delivery.
• Provided to the customer through an application service provider (ASP).
• Transferred to the customer by load and leave computer software delivery.

The Colorado Department of Revenue offers more details.

Note that electronically delivered computer software was previously subject to Colorado sales tax. Colorado HB 11-1293 repealed the state sales and use tax on computer software effective July 1, 2012, statutorily exempting custom software, standardized prepackaged (canned) software, and software delivered or accessed by ASP, electronic delivery, and load and leave.

How is Colorado sales tax on computer software changing in 2027?

Most computer software transactions will be subject to Colorado sales and use tax on and after January 1, 2027.

HB 26-1223 treats computer software as tangible personal property and expands the definition of computer software to mean “a set of coded instructions that are both designed to cause a computer or other electronic device to perform a task and are delivered by any means, including compact disc, download, or remote access through the internet.” Computer software includes applications installed on cellular phones, tablets, or other mobile devices.

However, Colorado HB 26-1223 preserves the state sales and use tax exemption for:

• Custom software developed for use by a particular user.
• Software governed by a negotiable license agreement.

To qualify as an exempt negotiable license agreement, the agreement must be “individually bargained between the licensor and the licensee,” and signed in writing by authorized representatives of both parties before, or at the time of, access.

The legislation specifically excludes from the exemption any standard, form, or boilerplate agreement offered on a nonnegotiable or substantially nonnegotiable basis to multiple licensees. It also excludes agreements accepted by the licensee on a click-through, browse-wrap, shrink-wrap, embedded signature, or any other automated basis, except for authenticated electronic signature methods such as Docusign. See the text of the bill for more details.

The Colorado Department of Revenue is permitted to adopt rules necessary to implement the state sales tax on computer software. Since HB 26-1223 doesn’t mention software as a service (SaaS), the department will likely need to provide some guidance sooner rather than later. The state may also need to clarify sourcing rules for apps downloaded on mobile devices and remotely accessed software.

Home-rule sales tax on computer software

HB 26-1223 eliminates only the state sales and use tax exemption for computer software. Self-administering home-rule jurisdictions are not required to follow the state’s lead for their local sales and use taxes.

Some self-administered home-rule jurisdictions may currently exempt downloaded software from local sales and use tax. Such districts would need to propose and approve a sales tax policy change to tax those transactions.

Computer software is already subject to local taxes in many home-rule jurisdictions, including Castle Rock, Denver, and Glenwood Springs. The City of Boulder taxes computer software unless the cost of modification of the software is greater than 25% of the price of the unmodified software; custom software is exempt.

Bottom line

Businesses that buy or sell computer software in Colorado should determine which transactions will become taxable under HB 26-1223, and whether any existing agreements could qualify for the narrow sales tax exemption for custom software or software governed by a negotiated license agreement.

Affected sellers will need to update billing systems, product tax codes, and customer-facing invoices. Buyers will want to ensure vendors are collecting and remitting Colorado state sales tax as required come January 1, 2027, and reassess their own use tax obligations.

Businesses operating in multiple Colorado locations face a particularly complex compliance landscape because home-rule jurisdictions could tax software transactions differently than the state.

Avalara Agentic Tax and Compliance™ solutions are built to handle this kind of complexity. Avalara helps businesses accurately calculate, collect, and remit sales and use tax across state and local jurisdictions, allowing you to focus on your business, not sales tax. Learn how Avalara can help you prepare for Colorado’s 2027 software tax changes.

“Avalara has made it possible for us to know that we are charging the correct amount of sales tax on every order,” says Dan Miller, CFO of Peak Audio Visual, which is based in Colorado. “And now not only are we charging the correct amount of tax, but Avalara is also filing all our sales tax returns and doing it correctly! We love Avalara!”

FAQ

Will Colorado charge sales tax on downloaded software in 2027?

Most electronically delivered software will be subject to Colorado state sales and use tax starting January 1, 2027. However, Colorado is preserving a sales tax exemption for custom software and software purchased under a qualifying negotiated license agreement.

Does a click-through agreement qualify for Colorado’s negotiated software tax exemption?

No. Standard boilerplate terms of service, including click-through, browse-wrap, or shrink-wrap agreements, do not qualify for the negotiated license exemption under Colorado law. The agreement must be individually bargained and signed by authorized representatives.

Are Colorado home-rule cities required to tax downloaded software?

No. Self-administering home-rule jurisdictions in Colorado are not required to follow the state’s new software tax policy. While some home-rule cities already tax downloaded software, others may currently exempt it and would need to pass their own local policy changes to tax these transactions.

Are other states changing sales tax policies related to software?

Yes. California sales and use tax will apply to prewritten computer software and SaaS starting January 1, 2027. Other digital goods, such as ebooks, music, and streamed content, will remain exempt from California sales tax.