Publish Date
Sep 23, 2026
TAW
On August 18, 2026, the Colorado Department of Revenue hosted a public virtual work group meeting to gather stakeholder feedback on the definitions and implementation of upcoming sales tax changes to computer software, including Software as a Service (SaaS), under House Bill 26-1223 (HB 26-1223), signed into law on June 4, 2026. Members of the public offered comments during the approximately two-hour workgroup session, which the Colorado Department of Revenue will consider as it drafts the corresponding regulation. This article summarizes the comments raised by the public and suggests areas for consideration for software sellers and software purchasers.
HB 26-1223 removed the three conditions that limited the taxability of software: that it be prewritten, governed by a “tear-open” nonnegotiable license agreement, and delivered on a tangible medium. As amended, Colo. Rev. Stat. § 39-26-102(15)(c) expands the definition of tangible personal property to include “computer software” delivered by any means, including download or remote access through the internet. Effective January 1, 2027, this brings most SaaS, mobile applications, and electronically delivered software into Colorado’s sales and use tax base for the first time at the state level.
Work group participants asked the Department to clarify a number of terms in rule language, including what constitutes “delivery” and “remote access,” how embedded or firmware software and mainframe access should be treated, and how to distinguish taxable software from non-taxable information services and among Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS) offerings. The Department indicated it will identify ambiguous terms for clarification through a phased rulemaking and guidance approach.
The statute preserves two key exemptions from the expanded definition of tangible personal property: prewritten software which is governed by an individually negotiated license agreement, and custom software which is developed for a particular customer.
Much of the meeting focused on distinguishing negotiable licenses from licenses that are negotiated, and whether boilerplate license terms accepted by the customer without evidence of “bargaining” should qualify for the exemption. Comments raised by the participants included:
The statute requires a negotiated license to be signed “in writing” by an “authorized representative,” but the Department confirmed the statute permits authenticated electronic signature methods (e.g., DocuSign). While click-through or browse-wrap acceptance is expected to be considered evidence of a non-negotiated license. The Department said it plans to develop guidance distinguishing authenticated electronic signature methods from simple click-through acceptance, and will clarify the meaning of “authorized representative,” with an emphasis on substance (a genuine meeting of the minds) over the literal form of signature.
The Department proposed utilizing the Streamlined Sales Tax Agreement (SSTA) sourcing framework as a baseline for software and related services, while asking stakeholders to identify where Colorado-specific modifications may be needed. Under the SSTA framework, sales are generally sourced on a destination basis, that is, to the location where the purchaser receives the product or the right to use it.
Key issues discussed included how the forthcoming guidance will specify the place where software is delivered or first used, and how to apportion tax when users are located across multiple states or local Colorado jurisdictions.
Participants noted that multiple-points-of-use (MPU) approaches vary considerably across states including state-specific MPU certificates which transfer the burden of compliance to the purchaser, user-count apportionment which relies on purchaser-supplied data, and usage-based apportionment models, and that vendors generally cannot practically remit multiple local sales taxes on a single invoice. Practical concerns raised included the limits of tax-automation systems (which often default to taxing 100% or 0% rather than applying fractional apportionment), how frequently allocations should be updated (annually vs. quarterly), and the recordkeeping burden of affidavits, exemption certificates, and user lists. The Department indicated it will evaluate the SSTA sourcing framework alongside sourcing approaches used in other states to determine what sourcing documentation and/or administrative relief may be feasible.
Software maintenance agreements were discussed as potentially separable or inseparable from an underlying software purchase. Where the underlying software qualifies for the negotiated or custom-software exemption, related maintenance may also be exempt; where maintenance is separable and unrelated to exempt software, its taxability will depend on the facts. Stakeholders asked for transitional guidance on renewals, amendments, seat additions, upgrades, refunds, and multi-year billing with post-period true-ups, as well as factors to distinguish taxable configuration/customization labor from negotiated or custom development that qualifies for exemption.
Other transitional questions raised included the treatment of contracts executed before the January 1, 2027, effective date with payments due after that date (installment billing), multi-year contracts, reassignment of license use across jurisdictions, post-execution seat or term amendments, and bundled transactions involving software packaged with non-taxable items, such as services.
The Department indicated that rules and guidance will be issued in phases, with written comments accepted for the rulemaking record, and that additional work group sessions will follow to review the draft rule when it becomes available.
The Department identified its immediate priorities as: (1) clarifying the definition of computer software and the factors which demonstrate negotiation for non-taxable negotiated licenses, (2) providing transitional guidance for multi-year contracts and renewals and (3) outlining an administrable sourcing policy for multiple points of use. Secondary priorities include more detailed rules on bundled transactions and in-app purchases, and finer distinctions between configuration, customization, and bespoke development. The Department will collect comments by email for the rulemaking record, draft rules and guidance in phases, and hold follow-up work group sessions to review draft language, with the stated goal of issuing practical guidance before the January 1, 2027, effective date.
Because exemption eligibility for negotiated licenses will likely turn heavily on documentation, software vendors selling into Colorado, and their business customers, should begin reviewing standard licensing and SaaS agreements now to identify which arrangements are individually negotiated versus standard click-through or browse-wrap terms. Companies should consider building a contemporaneous evidence file (redlines, negotiation correspondence, signed amendments, and order schedules) for agreements intended to qualify for the exemption, since the work group’s discussion suggests these will be the Department’s primary audit indicators.
Given the sourcing models under consideration, businesses who sell to customers with users across multiple states or in multiple local Colorado jurisdictions should monitor the Department’s guidance closely and evaluate whether their billing systems can support the eventual apportionment approach the Department selects. Sellers should separately state taxable software and non-taxable fees in customer contracts, when possible, rather than bundling them together in a lump sum price. Because Colorado’s home-rule municipalities retain independent authority over their own sales tax bases and definitions, state-level guidance issued under HB 26-1223 will only apply to state-administered municipalities and may not be adopted by self-administered jurisdictions, which should also be considered by vendors who sell to customers who have users in both the state-administered and self-administered jurisdictions.
Not sure how HB 26-1223 will affect your Colorado software sales or purchases? A&M can help.
