Why this matters

As more businesses rely on cloud-based software, SaaS subscriptions, and digital products, states are updating their tax laws to capture revenue from these transactions. If your company develops, licenses, sells, or purchases software, these changes could affect how you invoice customers, collect sales tax, structure licensing agreements, and comply with state tax requirements. 

Importantly, businesses should not focus only on new transactions beginning January 1, 2027. Existing maintenance and support agreements should also be reviewed to determine whether software updates, patches, upgrades, or other software provided under those agreements after January 1, 2027, could be subject to tax.

Taking time now to evaluate your software offerings and contracts can help reduce compliance risks, avoid unexpected tax liabilities, and ensure you're ready when the new rules become effective on January 1, 2027.

What is changing for software sales tax in California?

Effective January 1, 2027, California's newly enacted SB 122 expands the definition of tangible personal property to include digital products. Under the legislation, digital products include prewritten computer software transferred on tangible storage media, delivered electronically, or accessed remotely. 

Custom computer software developed to the special order of a single customer generally remains excluded from California sales and use tax. In addition, a digital product that represents a service provided electronically may remain exempt if the service primarily involves human effort performed after the customer requests the service.

How is Colorado expanding sales tax on software?

Beginning January 1, 2027, Colorado's HB 26-1223 expands the taxability of software to include software delivered electronically, apps, and Software-as-a-Service (SaaS). Many Colorado home rule jurisdictions such as Denver already taxed electronically delivered software and SaaS.

Colorado also enacted an exemption for software governed by a qualifying negotiated license agreement. The agreement must be individually negotiated and executed in writing by authorized representatives of both parties before, or at the time, access to the software is granted. Standard click-through agreements, boilerplate terms, and other automated acceptance mechanisms do not qualify for the exemption. Custom computer software is also exempt.

What does this mean for businesses?

Businesses should begin reviewing their software offerings, licensing agreements, subscription services, sourcing methodologies, invoicing practices, and sales tax compliance procedures now to prepare for these significant changes. Companies that provide software in multiple states should also evaluate how these legislative changes may affect their registration, tax collection, and reporting obligations.

FAQs

Will SaaS be taxable in California beginning January 1, 2027?

Yes. California will treat prewritten software accessed remotely as a taxable digital product.

Does California continue to exclude custom software?

Yes. Software prepared to the special order of a single customer generally remains excluded.

Will Colorado tax remotely accessed software?

Yes. Colorado’s revised definition of computer software includes software delivered through remote internet access, unless a statutory exemption applies.

What type of Colorado agreement may qualify for exemption?

The agreement must be individually negotiated and signed by authorized representatives of both parties. Standard click-through and boilerplate agreements do not qualify.