California and Colorado have enacted major sales tax changes that will subject Software-as-a-Service (SaaS) and other remotely accessed prewritten software to sales and use tax beginning January 1, 2027. Historically, both states generally exempted from sales tax SaaS and electronically delivered or cloud-based software from state-level sales tax. These changes significantly expand each state’s sales tax base and will require many software vendors and purchasers to update tax collection, accrual, billing, contracting, and compliance processes

California

On June 29, 2026, Governor Newsom signed SB 122, which expands California sales and use tax to cover prewritten computer software transferred electronically or accessed remotely, including SaaS. These changes become effective on January 1, 2027.

Colorado

On June 4, 2026, Governor Polis signed HB 26-1223, which expands Colorado sales and use tax to apply to computer software regardless of delivery method, including cloud-based SaaS. The changes are effective January 1, 2027. Home-rule cities may continue to apply their own local tax rules, creating additional compliance complexity.

Key Takeaways

• Canned or prewritten SaaS becomes taxable beginning January 1, 2027.
• The tax applies to prewritten software, regardless of delivery method.
• Custom software developed for specific customers generally remains exempt.
• Generally, the sourcing rules provide that the transaction will be deemed to occur at the customer’s address. Additional sourcing provisions, including those relating to multiple points of use, are expected in the coming months.

Action Items for Businesses

1. Identify all SaaS and software offerings sold or purchased in California and Colorado.
2. Review contracts to determine whether exemptions may apply.
3. Update tax engines, billing systems, and ERP taxability settings.
4. Validate customer location and sourcing data.
5. Assess economic nexus and registration obligations.
6. Budget for increased software costs where tax will be borne by the customer or purchaser.

Recap

California and Colorado have joined the growing number of states taxing cloud-based software and SaaS. Effective January 1, 2027, many software transactions that historically were not subject to state sales tax will become taxable. Early planning is recommended to avoid collection, reporting, and audit exposure.

If you are impacted by these law changes and/or have any questions about implementing the change in your company’s sales tax processes, please contact Mike DiLeo (mdileo@millercooper.com) or Carrie Merickel (cmerickel@millercooper.com).