Sales Tax Will Apply to SaaS in California and Colorado in 2027

Two of the largest state economies in the country are moving in the same direction on software taxation. Effective January 1, 2027, both Colorado and California will begin applying sales and use tax to software-as-a-service (“SaaS”) and other electronically delivered prewritten software.

Together, the changes accelerate a broader nationwide trend affecting software vendors, cloud providers, and virtually any business that buys technology to run its operations.

Start assessing where SaaS sales tax changes could affect your organization so you understand the potential tax impacts before the effective date.

Colorado expands its sales tax base to SaaS

On June 4, 2026, the governor signed legislation that expands the state’s sales and use tax rules for software. Beginning January 1, 2027, the state’s definition of taxable computer software will broaden to include software delivered by any means, including remote internet access.

As a result, many SaaS arrangements that historically fell outside the Colorado sales and use tax base will become taxable.

The legislation is significant because Colorado’s prior rules generally tied taxability to older delivery concepts, such as software transferred on tangible media. By removing those delivery-based limitations, the statute more closely aligns with the modern software market, where customers increasingly access products through cloud-based platforms and subscription models.

As with most sales tax laws, exemptions apply:

• The law preserves the exemption for software developed for a particular user, traditionally referred to as “custom software.”
• The law exempts software governed by a “negotiated license agreement.” The statute does not further define this term, so future guidance from the Colorado Department of Revenue will be important.

Colorado is a “home-rule” state (i.e., localities have there own sales tax laws (including how software is taxed) and collect the tax; their law and collection methods do not necessarily follow Colorado’s). Cities such as Denver and Boulder have imposed sales tax on SaaS under their own local ordinances well before this state-level change.

If your company does business in Colorado, remain mindful of taxability at both the state and local levels.

California rule change impacts SaaS

Soon after Colorado enacted its legislation, on June 30, 2026, California’s governor similary signed legislation that expands the state’s sales and use tax rules for software. This marks a major change in California’s tax policy and is expected to significantly increase California’s revenue base.

Beginning January 1, 2027, sales of prewritten software delivered electronically, including many software subscriptions and downloaded programs, will now become taxable in California. Custom-developed software will remain exempt.

Historically, California has not taxed most intangible products, including electronically delivered software. As a result of this new law, many software products and services that were previously not subject to tax will now be taxable starting January 1, 2027.

State lawmakers estimate the change will generate roughly $450 million in additional revenue in fiscal year 2027 and approximately $900 million annually thereafter.

If your software or technology company sells to California customers, or if your California business purchases software, the impact could be significant. Reassess your tax obligations, update invoicing and billing systems, review contracts, and modify compliance processes that were built around California’s long-standing treatment of electronically delivered software as nontaxable.

Businesses that buy software may face higher costs, new use tax responsibilities, and added pressure to review where users are located before the rules take effect.

How to prepare for SaaS tax compliance

With the effective date (1/1/2027) approaching quickly in both California and Colorado, begin preparing now:

• Review product and service offerings to identify SaaS, mobile applications, and other electronically delivered software that may fall within the new tax base.
• Consider accelerating nontaxable software purchases into 2026.
• Evaluate contract language and invoicing practices, including how software components are described, bundled, or separately stated.
• Update taxability matrices, sourcing methodologies, and tax determination systems (including ERP and billing platforms) ahead of the January 1, 2027, effective date.
• Assess nexus profiles, registration, and collection obligations in Colorado (including home-rule jurisdictions) and California, if not already registered.
• For purchasers, review software purchase invoices to determine whether use tax should be self-assessed and model the potential cost impact on existing commercial arrangements. Also consider where users are located to determine if Colorado or California sales tax would apply.

How CLA can help with sales tax changes

CLA’s state and local tax (SALT) professionals help software vendors, cloud providers, and purchasers of technology navigate rapid changes in state tax law.

From nexus analyses and taxability studies to system readiness reviews and voluntary disclosure agreements, our team can help your organization prepare before the 2027 effective date. The goal is to understand where exposure may exist, what process updates may be needed, and how the changes could affect pricing and contracts.

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