US Colorado Expands Sales Tax to Digital Software Under House Bill 26-1223

Colorado enacted House Bill 26-1223 on June 4, 2026. While the HB26-1223 brought relief for food retailers, it introduces significant changes when it comes to taxing the digital economy participants.  The bill expands the tax base in the digital economy through the adjustment of the taxable software under the sales and use tax framework. 

The bill expands the applicability of sales and use tax to computer software, regardless of the method of delivery, including the downloadable version of it, remotely accessible software, while it maintains a limited exemption for custom software, and to software purchases that are regulated by the contractually negotiable license terms. 

Timeline

Effective January 1, 2027, Colorado HB 26-1223 repeals the previous sales and use tax exemption for downloaded software, remotely accessible software, and many other software categories. 

Software Providers and Remote Sellers 

Under the current tax base, the possibility of charging sales and use tax for the provision of software under the “tangible personal property” definition is very narrow. The current framework relies primarily on taxing the software that is delivareble at tangible medium, and the provider retains control over the software.

The bill’s new “remote access through the internet” language creates an argument that non-negotiated SaaS now falls within the taxable definition, particularly since standard subscription terms accepted by click-through or browse-wrap are expressly excluded from the negotiated-license exemption. 

The bill doesn’t per se indicate that SaaS will be included in the new tax base, but considering that the Bill included the State’s revenue projection if the tax base includes SaaS under the new taxation framework, it could be assumed that SaaS will be under the sales and use tax. 

Most probably, the DOR will issue a ruling in this regard to eliminate any potential doubt or confrontation. 

Custom software developed specifically for a particular user and software governed by a negotiated license agreement remain exempt. Standard, non-negotiable click-through or browse-wrap agreements do not qualify for this exemption.