California, Colorado Tax Software and SaaS in 2027

California S.B. 122 and Colorado H.B. 26-1223 each expand state sales and use tax treatment of software by moving beyond older rules tied to tangible delivery. Beginning Jan. 1, 2027, California will treat certain digital products – chiefly prewritten computer software, including software as a service (SaaS) and other remotely accessed software – as taxable tangible personal property. Colorado’s legislation, applicable to sales on or after Jan. 1, 2027, similarly broadens taxable software to include software delivered electronically or through remote access. Together, these laws continue the state trend toward taxing software based on what is being sold rather than how it is transmitted, with California taking a narrower, digital-product approach and Colorado retaining a comparatively broader, negotiated-license exclusion.

Background

Historically, state sales tax treatment of software focused on classifications developed when software was more commonly transferred on disks or other physical media. In that framework, pre-written or “canned” software was frequently taxable when transferred in tangible form. Custom software, services, or remotely accessed technology solutions, on the other hand, could fall outside the sales tax base depending on state law and administrative guidance. As software commercialization shifted to downloads, subscriptions, cloud delivery, and mobile deployment, these legacy rules increasingly produced different tax results for economically similar transactions. States now are addressing these differences, as illustrated by the recent California and Colorado legislation.

Key California provisions

California S.B. 122 appears to be designed to reach most transfers and licenses of pre-written software, regardless of delivery format. The legislation expressly covers software delivered on physical media, downloaded electronically, and accessed remotely through SaaS or other cloud-hosted models. That alignment across delivery channels closes a long-standing distinction between installed software and hosted software and places California among the states that are willing to tax SaaS through statutory expansion rather than administrative interpretation alone.

The California bill also draws boundaries around what counts as a taxable “digital product.” Based on the bill summary, the term is limited primarily to pre-written computer software and excludes several other categories of digital content and assets. The narrower definition matters because it suggests the legislation is not a general digital goods tax. Instead, it is a software-focused base expansion. For taxpayers with mixed offerings, that distinction will require careful product mapping, especially when a single contract bundles software access with media, data, digital content, or infrastructure elements.

Crowe observation

This shift is substantial because California is not merely clarifying sourcing or delivery rules. It is enlarging the tax base by treating specified digital transactions as sales of tangible personal property.

Another notable feature of the California bill is its sourcing framework for electronically delivered and remotely accessed software. The bill generally sources transactions to the purchaser’s California address or place of first use. That rule should become central to compliance for multistate customers, enterprise agreements, and seat-based or usage-based pricing models. Businesses likely will need stronger documentation around user location, billing address, deployment location, and first-use determinations. The bill summary also identifies exemptions for software used solely outside California, certain electronically delivered services where human effort is the primary value, and certain reproduction or distribution rights. Those provisions indicate that the legislature recognizes the risk of overreaching into services and intellectual property transactions that are not, in substance, retail software sales.

A key practical question in California that remains is how S.B. 122 will interact with the state’s technology transfer agreement (TTA) exemption. That uncertainty is important because many software and technology transactions are structured as mixed transfers of rights, know-how, maintenance, implementation, and access. If future guidance narrows the relevance of the TTA framework for prewritten software, taxpayers might need to revisit long-standing positions on licensing structures and contract separation.

Key Colorado provisions

Similar to California’s approach, Colorado imposes broader taxation of pre-written software regardless of delivery method. However, Colorado’s legislation gets there by dismantling prior limitations rather than by focusing on a newly defined digital product category. Under the Colorado bill, software is taxable whether provided on physical media, by download, or through remote internet access, including hosted software. The law also expands the definition of software to encompass remote access and mobile applications, which should reduce disputes over whether newer delivery models fall outside existing statutory terminology.

Colorado’s most important differentiator is its negotiated-license exemption. In addition to preserving the exemption for custom software developed for a particular user, the bill exempts software licensed under a truly negotiated license agreement signed by both parties before use. The legislation expressly excludes standard click-through, browse-wrap, shrink-wrap, and similar nonnegotiated agreements from that exception. This distinction creates a sharper line between enterprise-negotiated transactions and mass-market software sales.

Crowe observation

Taxpayers that already negotiate substantive license terms might have an opportunity to preserve exempt treatment in Colorado, but only if the agreement genuinely is negotiated and properly executed before use begins.

Looking ahead

Taxpayers selling software, SaaS, or technology-enabled services in California and Colorado should begin contract and product reviews well before the 2027 effective dates. In California, the immediate priority will be determining which offerings are pre-written software, which are excluded digital products or services, and how sourcing data will be collected and supported. Businesses with bundled service offerings should evaluate whether the primary value is human effort or software access, because that distinction could affect taxability.

In Colorado, taxpayers should reassess whether any existing exemption positions depend on obsolete delivery-format rules. Businesses that rely on negotiated-license treatment should confirm that contracts are individually negotiated in substance, signed by both parties before use, and distinct from standard-form acceptance flows.

In both states, systems changes might be needed for invoicing, exemption certificate management, sourcing, and product tax coding. Both states are expected to issue additional guidance as the effective dates approach. Taxpayers should consult their tax advisers to evaluate how these new laws will affect current and future sales.