The Colorado General Assembly has enacted a law that significantly expands the state's sales and use tax to cover computer software, regardless of how it is delivered. Starting January 1, 2027, most software sales will become subject to Colorado sales and use tax. With this decision, Colorado joined numerous US states, such as California, that are changing their sales and use tax rules to include software sales in the tax base.

Impact on Digital Service Providers

The new law broadens the definition of taxable software and removes prior distinctions based on delivery method. Computer software is now defined as coded instructions that make a computer or electronic device perform a task, regardless of whether it is delivered through physical media, downloaded electronically, or accessed remotely through the internet.

This change in definition confirms that software applications installed on mobile devices, such as smartphones and tablets, are also included within the taxable software category. Additionally, the law removes prior exclusions for software delivered through application service providers, electronic delivery methods, or “load and leave” arrangements, bringing cloud-based and remotely accessed software within the scope of taxation.

Consequently, starting January 1, 2027, both traditional downloaded software, such as applications installed on a device, and remotely accessed software provided through the internet, such as cloud-based or SaaS solutions, will generally become taxable. Notably, custom-developed software remains exempt, and software transactions covered by a negotiable license agreement will also continue to qualify for exemption.

Compliance Steps

Businesses operating in Colorado should review their current software arrangements, contract terms, and transaction structures to determine whether their software purchases or access arrangements will become taxable.

The expansion of taxable software also creates potential sourcing challenges, particularly for apps downloaded onto mobile devices like smartphones and tablets. Businesses may need to implement processes to track where software is accessed or used in order to correctly determine their tax obligations.