From 1 January 2027, California and Colorado will change how they tax many software and SaaS sales.
If you sell standard software into either state, a treatment that has been non-taxable up to now may need to be reassessed before your first 2027 invoice.
For years, electronically delivered software and remotely accessed SaaS often sat outside the sales-tax base in both states. That is changing. California Senate Bill 122 expands California sales tax to cover certain digital products, including many forms of prewritten software. Colorado House Bill 26-1223 repeals the state's exemption for software delivered electronically or accessed remotely.
This is not simply a rate change. Software businesses need to review how products are classified, where customers use them, what data sits in their billing systems and how contracts are structured.
We have worked with our partners at BRDG, US tax specialists for fast-growing and international companies, to explain what is changing and where to start. BRDG advises on US corporate and income tax, entity structure and income-tax nexus. Yonda focuses on the indirect-tax compliance work that follows: product taxability, registrations, collection, returns and ongoing reporting.
Here is what founders, CFOs and finance teams need to know before 2027.
What is changing in California and Colorado?
Both states are moving away from a distinction that previously helped many software businesses: whether software was supplied on physical media, downloaded or accessed online.
From 1 January 2027:
- California will bring certain prewritten software into the sales-tax base whether it is supplied on physical media, transferred electronically or accessed remotely.
- Colorado will repeal its exemption for software delivered electronically or accessed remotely. Software available for repeated sale or licence may be taxable even where it is delivered electronically or accessed through a SaaS model.
Neither change means every software product is automatically taxable. Custom software, human-led services and certain other arrangements may still receive different treatment.
The practical problem is that many businesses have built their billing, tax and contract processes around the old position. Those processes may not be sufficient from January.
For background on how US sales tax works more broadly, including the link between product taxability and nexus, see Yonda's guide to when to collect sales tax on US sales. Collection obligations only apply once you have nexus. Colorado's economic-nexus threshold is $100,000 of annual sales into the state; California's is $500,000.
California: many SaaS products become taxable from 2027
California has historically taxed prewritten software supplied on physical media, such as a disc or USB drive. Software downloaded electronically or accessed online was often treated differently.
That changes from 1 January 2027.
Under California Senate Bill 122, California expands its sales-tax base to include certain digital products. This includes prewritten computer software that is:
- Delivered on physical media
- Transferred electronically
- Accessed remotely through a browser, app or API
For many businesses, this will mean reassessing SaaS subscriptions that have historically been treated as non-taxable in California.
Not every digital product will be taxable
The new rules do not apply in the same way to every product described as software or digital services.
Potential exclusions and exemptions may include:
- Software developed to the special order of one customer
- Certain services that primarily involve human effort after the customer makes the request
- Qualifying digital infrastructure
- Software purchased solely for use outside California, or in interstate or foreign commerce
- Certain rights to reproduce or distribute software
The key point is to look at what the customer is actually buying.
A product called a "digital service" can still be taxable if the customer is paying to access prewritten software. Equally, a subscription that includes genuine custom development or a substantial human-led service may need a different analysis.
The product name, invoice description and sales-page wording are not enough on their own. The contract, service description and the reality of delivery all matter. This is particularly important where a subscription includes implementation, consulting or managed services. Yonda's guide to sales tax on services explains why the service label alone does not decide the treatment.
Customer location is the starting point
For electronically transferred or remotely accessed software, California will generally use the customer-address information in the seller's records to determine the place of sale. However, the place of use is where the person accessing the software is located. This distinction matters when an enterprise customer has users across several states.
That is manageable for a small subscription sold to one customer in one state. It is harder for enterprise software.
For example, a company might buy a 500-seat licence through its San Francisco headquarters, while 200 users work in Texas. Applying tax to the full contract based only on the head-office billing address may not reflect the complete picture.
This is why reliable customer and user-location data will matter more in 2027. If your enterprise customers use the product across several states, decide now what information you need, where it will be held and how it will be refreshed.
Large enterprise contracts need particular care
California also contains technical rules that may affect high-value purchases of electronically transferred or remotely accessed digital products.
Where a retailer's aggregate gross receipts from electronically transferred or remotely accessed digital products sold to the same purchaser exceed $5 million in the current or preceding calendar year, liability for the tax may shift from the retailer to the purchaser, who may then need a use tax direct payment permit. This changes who reports the tax. It is not an exemption. This is a technical rule with conditions and administration requirements, so it should be assessed against the facts and current guidance rather than applied as a general rule.
For most SaaS sellers, the immediate priorities remain product classification, location data and billing readiness. However, if you have a small number of very large California customers, raise this before renewal or implementation dates are agreed.
For further detail, see Grant Thornton's analysis of California's software-tax rules and BRDG's original analysis.
Colorado: delivery method will no longer decide the outcome
Colorado is making a related change through House Bill 26-1223.
From 1 January 2027, Colorado repeals its exemption for electronically delivered software and removes the carve-out for software provided through an application service provider, the provision that kept most SaaS outside the state base. Software available for repeated sale or licence can be treated as taxable tangible personal property, even where it is delivered electronically or accessed through a SaaS model.
Put simply, the fact that a customer accesses your product online, rather than receiving a physical product, will no longer be enough to support non-taxable treatment.
Colorado exemptions may depend on the product and the contract
Potential exceptions remain for:
- Software developed for the use of a particular customer
- Software governed by a qualifying negotiated licence agreement
The negotiated-licence exception could matter for some enterprise providers. The software itself does not need to be modified. The exception turns on how the licence was agreed. Colorado expressly excludes standard-form agreements offered on a non-negotiable basis, and click-through, browse-wrap, shrink-wrap, account-creation and other automated acceptance. Electronic signatures through DocuSign or a similar authenticated method can qualify.
If you sell enterprise software, review:
- Whether material licence terms were genuinely negotiated
- Whether the negotiation is documented
- Whether the agreement was signed by authorised representatives of both parties
- Whether it was signed before, or at the same time as, the customer received access
- Whether the terms differ materially from your standard, click-through or boilerplate terms
The title of an agreement is less important than the underlying facts. Calling standard online terms an "enterprise licence" will not, by itself, create an exemption.
Colorado home-rule cities need a separate check, and some apply now
Colorado has home-rule cities, including Denver and Boulder, that administer their own sales taxes.
Their rules do not always align with the state position. A product that appears taxable or exempt at state level may need a separate local analysis. Local jurisdictions whose tax is collected by the state follow the state change automatically. Home-rule cities can choose whether to adopt the new state definition of taxable software or keep their own.
Do not assume that a state-level conclusion automatically applies across every Colorado jurisdiction where your customers are based or use the software. This is particularly important where you have larger customer concentrations in Denver, Boulder or other home-rule cities.
Subscriptions that span 1 January 2027
Many software businesses will invoice annual or multi-year renewals in the last months of 2026 for service delivered mostly in 2027. Whether those invoices attract tax can depend on the invoice date, the payment date or the service period, and the answer may differ between the two states.
Guidance on the transition is still limited. Before invoicing a renewal that runs into 2027:
- List prepaid or upcoming renewals for California and Colorado customers that cover any part of 2027
- Check how your tax engine treats an invoice dated 2026 with a 2027 service period
- Decide whether to split billing at 1 January, and document the reason
- Take advice on any high-value renewals before they are issued
Three areas where SaaS businesses get caught out
The 2027 changes expose weaknesses in product classification, billing data and contract records.
1. Incomplete customer addresses
A five-digit ZIP code is not always enough to calculate local tax accurately. Two customer addresses within the same ZIP code can fall into different local tax areas.
Your billing and tax setup should hold complete, validated customer addresses. That includes:
- Street address
- City
- State
- ZIP+4 where available
- Country
- The address type being used for tax determination
Review Stripe, Chargebee, your ERP, CRM and tax engine. It is common for different systems to hold different customer records. If the billing tool and the contract system disagree, you need a clear rule for which record controls the tax decision.
Yonda's SaaS sales-tax compliance page covers the practical connection between SaaS taxability, billing systems and multi-state compliance.
2. Bundled software and services
SaaS subscriptions are often sold alongside implementation, training, consulting, managed services or custom development.
These bundled arrangements can complicate tax treatment. Separately describing and pricing each element can help support a clearer analysis. But a separate invoice line does not automatically make a service non-taxable.
The outcome depends on what the customer is really buying, how the services are performed and the rules in the relevant jurisdiction.
This is where vague descriptions cause problems. A line called "professional services" may not be enough if the work is incidental to access to prewritten software. Conversely, a genuine human-led implementation or consulting engagement should be described clearly and consistently across the proposal, statement of work, invoice and delivery records.
3. Missing user-location data
Enterprise contracts often cover users in several states. Without reliable information about where the software is used, it becomes harder to calculate tax correctly and harder to support the position later.
Decide now:
- Which customer and user-location data you need
- Whether you need country, state, city or full address data
- Where that data will sit
- How often it will be reviewed
- Who owns the process when a customer's workforce moves or expands
This does not mean every business needs to build a complex usage-tracking system. But if you sell high-value multi-state licences, relying only on a head-office address may not be enough.
The wider US tax position: a view from BRDG
Sales tax is only one part of the picture. When finance teams revisit product classification, contracts, billing arrangements and where customers use their software, the same facts can also affect state income and franchise taxes. Three questions come up most often.
Does sales-tax nexus mean income-tax nexus? Not necessarily. Both can arise from physical presence or economic activity, but the standards are different. Sales-tax nexus may result from sales thresholds, employees, contractors, inventory or other in-state activity. Income-tax nexus may arise under separate sales, property, payroll, personnel and activity-based standards. Resolving one question does not resolve the other.
Does the sales-tax change carry over to income tax? Not automatically. Treating software as tangible personal property for sales-tax purposes does not, by itself, determine how the related revenue is sourced for state income-tax apportionment. It also does not automatically provide protection under P.L. 86-272.
P.L. 86-272 is limited to sellers of tangible personal property whose in-state activities do not exceed the solicitation of orders, with those orders approved and fulfilled from outside the state. Its application to internet-based activity continues to develop and varies between states. California’s previous administrative guidance on internet activities was invalidated on procedural grounds, without the court deciding whether the underlying interpretation was substantively correct. Businesses should therefore review their actual online and in-state activities rather than assume that the new sales-tax classification creates income-tax protection.
Should we change how we contract? Check both regimes first. The contracting entity, the location of employees and contractors, where services are performed and how customer rights are structured can affect sales-tax registrations, state income-tax exposure and the wider corporate-tax position. For international businesses, these decisions may also affect transfer pricing and whether the foreign company has a taxable US presence.
A contractual change designed to address one tax issue should therefore be reviewed across the wider US tax position before it is implemented.
Yonda focuses on indirect-tax compliance. We can help review product taxability, identify sales-tax exposure, prepare registrations and manage the filings and reporting that follow. See Yonda's US sales-tax service for an overview of the process.
BRDG advises on US corporate and income tax, income-tax nexus and entity structure. Bring us in when a sales-tax decision changes who contracts with customers, where your people work or how revenue is reported.
Your 2027 action plan
Complete these three reviews before the end of 2026.
1. Review your products
Separate standard SaaS from:
- Custom software
- Digital infrastructure
- Implementation services
- Consulting and training
- Human-led managed services
For each offering, document what the customer receives, how it is delivered and whether any customisation is genuinely created for that customer.
Do not rely on product names alone.
2. Check your billing and tax configuration
Confirm that your billing and tax systems hold complete customer addresses and can apply the correct state and local treatment.
This includes Stripe, Chargebee, your ERP and any tax-calculation tool used at checkout or invoicing.
You should also test what happens where:
- A contract is signed by a California entity but users sit in several states
- A customer changes address mid-contract
- An annual or multi-year subscription invoiced in 2026 runs into 2027
- A subscription includes taxable software and human-led services
- The invoice contains separately stated implementation or consulting charges
- A customer claims an exemption or out-of-state use
The time to find a system limitation is before 1 January, not when the first affected invoice is issued.
If you are reviewing your US exposure more widely, Yonda's sales-tax nexus guide for UK sellers explains how sales volume, transaction count and physical presence can create separate state obligations.
3. Review your contracts and bundles
Review licence terms, statements of work, service descriptions and bundled offerings.
For each product, identify:
- Potential custom-software elements
- Potential human-led service elements
- Whether charges are separately stated
- Whether a negotiated-licence exception could be relevant in Colorado
- Whether you need customer-use or user-location data to support your position
If the sales, legal, finance and implementation teams describe the same product differently, fix that before 2027. Consistency across customer-facing and internal documents makes the position easier to support.
Get ready before your first 2027 invoice
Many software companies that currently treat California and Colorado sales as non-taxable will need to reconsider their approach for 2027.
This is not a January clean-up exercise. Product mapping, contract review, tax configuration and customer-data changes take time. Starting now gives you room to identify gaps, make defensible decisions and update processes before the new rules take effect.
Need help with sales-tax compliance?
Yonda can help you review product taxability, map your state exposure, prepare registrations and manage ongoing sales-tax filings.
Book a free sales-tax review with Yonda
Need help with wider US tax or corporate structure?
If these changes raise questions about US corporate or income tax, entity structure, income-tax nexus or your wider US footprint, BRDG can advise on the broader position.
Book a complimentary call with the BRDG team
This article provides general information only and does not constitute tax or legal advice. The correct treatment depends on the facts of each transaction. Further guidance may be issued before 1 January 2027.
Sources
- BRDG: The SaaS sales tax shift for tech companies
- Colorado General Assembly: HB 26-1223
- PwC: California to impose sales and use tax on digital products and SaaS
- BDO: California sales tax expands to SaaS in 2027
- Grant Thornton: California enacts software tax rules
- California Department of Tax and Fee Administration: Sales and Use Tax Applies to Digital Products Beginning January 1, 2027 (Notice L-1036)