California and Colorado Expand Sales Tax Treatment of Software from 2027

Summary

California will extend sales and use tax to qualifying prewritten software supplied electronically or accessed remotely from 1 January 2027. The change brings many Software-as-a-Service transactions within the tax base and will require suppliers to review product classifications, customer-location information, exemptions, pricing and tax-engine configurations. [pwc.com], [legiscan.com]
Colorado will also broaden the taxation of software from 1 January 2027 by repealing the exemption for most downloaded software. Software available for repeated sale or licence will generally become taxable, although exclusions remain for software developed for a particular user and software governed by a negotiable licence agreement. [leg.colorado.gov], [leg.colorado.gov]
The two measures reinforce the fragmented nature of US sales tax. Businesses must determine whether a product is taxable, establish where the transaction is sourced and apply relevant state and local rates. Particular attention will be needed for bundled products, multistate users, exemptions and home-rule jurisdictions. [taxcloud.com], [btcpa.net]

Article

California and Colorado are preparing significant changes to the sales tax treatment of software, with new rules taking effect in both states on 1 January 2027. The measures reflect a wider state-level trend towards bringing electronically delivered and remotely accessed software within traditional sales and use tax regimes.

California Senate Bill 122 expands the definition of taxable tangible personal property to include qualifying digital products. The legislation covers prewritten computer software transferred on tangible media, delivered electronically or accessed remotely. As a result, many Software-as-a-Service arrangements that are currently outside California’s sales tax base will become taxable. Custom software remains exempt, while certain other digital products, including specified audiovisual works and digital books, are not brought into scope by the software measure. [pwc.com], [legiscan.com]

The applicable California rate will depend on the transaction’s sourcing and the customer’s location. California’s statewide base sales and use tax rate is 7.25%, rather than the 7.5% stated in the original article, and applicable district taxes can increase the combined rate. The legislation also introduces sourcing rules that may place greater importance on accurate customer billing-address information for remote and electronic transactions. [taxcloud.com], [pwc.com]

Colorado House Bill 26-1223 takes a related, but not identical, approach. From 1 January 2027, the state will repeal the exemption for most downloaded software. Software available for repeated sale or licence will generally be treated as taxable tangible personal property. The legislation preserves exclusions for software developed for use by a particular customer and for downloaded software governed by a negotiable licence agreement. [leg.colorado.gov], [leg.colorado.gov]

Colorado’s state sales tax rate is 2.9%, but local taxes may materially increase the amount due. Implementation may be particularly complex because Colorado home-rule municipalities can operate their own sales tax systems and may not follow the state tax base automatically. Businesses should therefore avoid assuming that one product classification will produce the same outcome across every Colorado jurisdiction. [btcpa.net], [leg.colorado.gov]

Software suppliers and purchasers should begin reviewing product catalogues, contract language, delivery methods and exemption documentation. Systems should be capable of identifying the effective date, distinguishing custom from prewritten software, validating customer locations and applying the appropriate state and local treatment. Businesses purchasing software should also assess whether use-tax accrual processes will identify transactions on which a supplier does not collect the required tax.

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