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Governor Jared Polis signed House Bill 26-1223 into law on 4 June 2026. From 1 January 2027, Colorado state sales and use tax will apply to computer software however it is delivered, including SaaS subscriptions, downloaded software and mobile apps.
The state change is simple. The local picture is not. Around 70 Colorado home-rule cities set their own rules for software, so from 2027 the tax on the same SaaS subscription will depend on which city your customer is in.
The bill adds computer software to Colorado’s definition of tangible personal property, covering software delivered by physical media, download or remote access over the internet. Until now, Colorado has only taxed software delivered on physical media, which kept most SaaS outside the state tax.
Two exemptions remain: custom software developed for a particular user, and software under a negotiable licence agreement. The licence must be individually bargained and signed by authorised representatives of both parties before access begins. Standard or boilerplate terms offered to multiple customers do not qualify, however they are accepted.
The state and the locals it collects for
The Department of Revenue collects the 2.9 percent state tax plus the taxes of statutory cities, counties and special districts, including the Regional Transportation District (1.0 percent) and Scientific and Cultural Facilities District (0.1 percent). These local taxes do not automatically pick up the change. Each jurisdiction would need to adopt it, and under TABOR that may require local voter approval, so local tax on software may lag the state from 1 January 2027.
Home-rule cities
Around 70 home-rule cities run their own sales tax codes, with their own definitions, exemptions, licensing and audits. HB 26-1223 changes state law only. Cities that already tax SaaS, such as Denver, Boulder and Aurora, will see state and special district tax added on top. Cities that exempt SaaS stay exempt unless they change their own code.
Take a $10,000 annual SaaS subscription on standard online terms, using 2026 rates:
Same product, same price, very different tax, and at least two separate filings. These figures are illustrative. They assume RTD and SCFD extend their tax to software, which is not yet confirmed.
The tax you charge
If you sell software to Colorado customers and have nexus (the threshold is $100,000 in sales), you will need to charge state tax plus the correct local taxes from 1 January 2027. Anything you miss becomes your liability.
The tax you pay
Software invoices for use in Colorado will start carrying sales tax. Where a vendor does not charge it, the obligation shifts to you as use tax.
Map your customers to jurisdictions: You need the city, county and special district for each customer, not just the state. That drives which home-rule cities you register with and which rates apply.
Review your contracts: Identify agreements that could qualify as negotiated licences or custom software, keep the evidence, and separately state customisation and services on invoices.
Get your systems and registrations ready: Your tax engine needs to switch software to taxable on 1 January, with city-by-city treatment for home-rule cities. Starting in December is starting late.
Do home-rule cities have to follow the new state law?
No. Each home-rule city sets its own tax base and decides whether to change its rules.
Is California changing at the same time?
Yes. California’s SB 122 also starts taxing SaaS from 1 January 2027, so many businesses will need to prepare for both at once. Read our California SaaS Tax guide to understand what that change means for your business.
When will the Department of Revenue issue rules?
No timeline has been published. The Department held a stakeholder workgroup in August 2026 and rules may arrive close to, or after, go-live.
VAT IT supports businesses in assessing and managing their US Sales Tax compliance position, from nexus reviews and threshold monitoring through to registration, filing, and system configuration across all states, including Colorado’s home-rule cities.
Get in touch with our team to find out where your business stands ahead of the January 2027 deadline.
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