In contrast to how HB26-1223 brought relief for Colorado prepared food retailers, the bill broadens the state’s tax base in the digital economy by repealing the functional exemption for downloaded software, effective January 1, 2027.
It replaces the prior narrow definition of taxable software, which generally reached only software delivered in a tangible medium, with a comprehensive standard that includes coded instructions delivered by any means and explicitly covers downloads and remote access. Electronically delivered software will qualify as tangible personal property and therefore will be subject to sales and use tax. At the same time, it creates a limited exemption for software governed by a negotiated license agreement or developed for a specific user (custom software), while excluding standard click-through, browse-wrap, and similar nonnegotiable agreements from qualifying treatment.
Under prior law, cloud-based and hosted software was effectively exempt, because it was not delivered in a tangible medium and the provider retained custody of 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 Legislative Council Staff fiscal note reinforces this reading, assuming that SaaS sales would become subject to tax when projecting the bill’s revenue impact. Even so, the statute neither names SaaS nor repeals the existing application service provider framework, so the question will likely turn on Department of Revenue rulemaking, which the bill expressly authorizes.
Taken together, HB 26-1223 reflects a broader policy shift: granting targeted, time-limited operational relief to certain businesses while modernizing and expanding the taxation of digital products, increasing both compliance complexity and planning considerations for affected taxpayers. Consumers of software in Colorado should review their purchases to determine whether they qualify as “custom” or standard and evaluate software licensing agreements for sales and use tax implications. Sellers of software should review their systems to see if they need to make any updates that affect taxability and compliance. (Colorado H.B. 26-1223, 75th General Assembly, enacted 2026, effective January 1, 2027)