As Colorado continues to evolve its sales and use tax landscape, one of the most significant developments in 2026 is House Bill 26-1223. The bill expands the definition of taxable computer software to software delivered by any means, including compact disc, download, or remote access through the internet, and includes applications installed on mobile devices. As a result, certain cloud-based software and remotely accessed software may become subject to Colorado sales and use tax beginning January 1, 2027, unless an exemption applies.
Colorado’s Previous Stance to Digital Goods
Before HB 26-1223, Colorado’s statutory definition of taxable computer software generally depended on whether the software was prepackaged for repeated sale or license, governed by a tear-open nonnegotiable license agreement, and delivered to the customer in a tangible medium. Software provided through an application service provider, delivered electronically, or transferred by load-and-leave delivery was excluded from that tangible-medium rule.
The unclear standard for SaaS taxability led to inconsistent tax treatment across jurisdictions and audit exposure for SaaS vendors and their customers. For information on historical tax treatment to SaaS or questions, email us at info@milesconsultinggroup.com
HB 26-1223: Expanded Definition of Computer Software
HB 26-1223 expands Colorado’s definition of taxable computer software. “Computer software” is defined as a set of coded instructions that are both designed to cause a computer or other electronic device to perform a task and delivered by any means, including compact disc, download, or remote access through the internet. The definition also includes applications installed on cellular phones, tablets, or other mobile devices.
However, software developed for use by a particular user and software governed by a negotiated license agreement remain exempt.
Under section 39-26-713(3), the sale, storage, use, or consumption of computer software is exempt from Colorado sales and use tax if the software is governed by a negotiated license agreement or developed for use by a particular user. “Negotiated license agreement” means a written agreement or contract that is individually bargained between the licensor and licensee and signed in writing by authorized representatives of both parties before or at the same time as the licensee’s access to or use of the software.
What Should SaaS Companies Do Now?
Practical considerations to remain in compliance with Colorado might the review of your companies’ product classification in the state. By conducting a line-by-line analysis of all cloud services and modular offerings, a SaaS vendor can determine precisely how extensively they may fall within the “specified digital product” definition.
Ensure your billing systems can identify and tax each taxable SaaS component correctly, track exemption certificates, and report by jurisdiction. Customer agreements should reflect the state and local sales tax that will be imposed on taxable subscriptions. Consider carve-outs or pass-through clauses in your contracts, if your business model factors tax as a cost. Lastly, monitor your exposure to identify when the USD 100,000 threshold is met. Miles Consulting Group can help with these next steps, and we are happy to help! Please reach out to our team at info@milesconsultinggroup.com
HB 26-1223 marks a clear stance in Colorado’s approach to taxing cloud-based software and remote computing services. Getting ahead of potential exposure now could save a lot of money down the road.
