California and Colorado Will Tax SaaS Starting January 1, 2027: What It Means If You Buy or Sell Software

What Changes on January 1, 2027?

California Senate Bill 122 expands the definition of tangible personal property to include many digital products. The California Department of Tax and Fee Administration (CDTFA) says the change applies to prewritten software that is transferred electronically or accessed remotely. That brings many SaaS subscriptions into the state’s sales and use tax base.

Colorado House Bill 26-1223 expands taxable computer software to include software delivered by download or remote internet access. Beginning January 1, 2027, many SaaS sales will become subject to state sales and use tax, unless subject to the law’s exemptions.

In both cases, a type of business expense that often arrived without sales tax may carry tax beginning in 2027. For a SaaS seller, a taxable transaction may create an obligation to register, collect the applicable tax from the customer, and remit it to the state. For a buyer, the tax becomes an additional cash cost. If the seller does not collect the tax, the buyer may still owe the corresponding use tax.

California and Colorado SaaS Tax Rules at a Glance

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What the Change Means If Your Startup Sells SaaS

The January 1 effective date does not mean every SaaS company must add California and Colorado tax to every invoice. Your obligation depends on what you sell, whether you have nexus in the state, where the customer receives or uses the software, and whether an exemption applies.

1. Determine Whether Your Product Is Taxable

Start with the product itself. California generally taxes prewritten software developed for general or repeated sale, while Colorado broadly taxes computer software delivered by download, remote access, or other means. Both states exempt qualifying software developed for a particular customer or user. Configuring or modifying an existing product does not necessarily make the full offering exempt.

California excludes qualifying “digital infrastructure” from its definition of a digital product. This generally covers a remotely provided cloud service that allows customers to create, deploy, scale, or run their own software on the provider’s platform without managing, operating, or maintaining the infrastructure required to do so. CDTFA identifies qualifying Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) offerings as examples. Ordinary SaaS applications typically do not fit this definition. Companies offering developer platforms, hosting, AI infrastructure, or products that combine SaaS and infrastructure should have their classification reviewed.

Those lines can be difficult to draw. A cloud product may combine software access, data, support, implementation, professional services, and infrastructure in one contract. Calling the offering a “platform” or a “service” does not determine its tax treatment. When taxable and nontaxable components are bundled into a single charge, the entire charge may be taxable.

Colorado exempts software developed for a particular user and software governed by an individually negotiated license agreement. To qualify, the agreement must also be signed in writing by authorized representatives of both parties before or when the customer receives access to the software. Standard form agreements, click-through terms, and substantially nonnegotiable contracts usually do not qualify.

2. Determine Where You Must Collect Tax

If your company is based in California or has employees, an office, or other operations there, you likely already have physical nexus. In that case, California’s $500,000 economic-nexus threshold is not the deciding factor. The January 1 change means you need to determine which of your California software sales become taxable and make sure your registration, billing, collection, and filing processes are ready.

The $500,000 threshold matters primarily to SaaS companies outside California that have no physical presence in the state. These sellers must collect California use tax once their qualifying California sales exceed the threshold in the current or preceding calendar year.

California-based SaaS companies should separately evaluate their sales into Colorado. Colorado uses a $100,000 economic-nexus threshold, although employees or other physical presence will create nexus below that amount. Colorado’s local tax treatment requires jurisdiction-by-jurisdiction review. The state law does not automatically make SaaS taxable in every local jurisdiction.

3. Collect Better Customer-Location Data

You cannot calculate the right tax without reliable location data. California’s current guidance says a remote sale is sourced using the purchaser’s known California address in the seller’s business records, provided those records are maintained in good faith in the ordinary course of business. When the buyer provides multiple addresses, the billing address receives first priority, followed by the shipping or delivery address and other address records. The seller also bears the burden of proving that a sale is not taxable.

That does not make billing address the only relevant fact. A business subscription may serve users in several states, and the place where a person accesses a digital product can affect use-tax treatment. Enterprise sellers should be prepared to collect and retain user-location or allocation information when a customer’s workforce is spread across multiple jurisdictions.

Colorado specifically allows certain multistate software purchases to be allocated based on the licenses actually used in the state. The purchaser must provide the seller with a written statement allocating the license fees between Colorado and other points outside the state. California’s current guidance does not provide an equivalent multiple-points-of-use (MPU) exemption, so companies should not assume the same allocation method applies there.

At minimum, review whether your customer records capture:

• A complete billing and service address
• The locations where licensed users access or use the software
• Seat counts or another reasonable allocation method for multistate subscriptions
• Valid exemption or resale documentation

4. Update Billing, Contracts, and Tax Workflows

By January 1, your systems need to do more than display a tax line. They must determine which products and customers are taxable, calculate the correct state and local rate, preserve supporting data, and carry the transaction into the appropriate return.

Review your billing platform, tax engine, customer relationship management system, and general ledger together. A clean process should cover new purchases, upgrades, renewals, credits, refunds, bundled charges, and changes in customer location.

Contract language also deserves attention. Check whether your agreements allow you to add taxes to the customer’s invoice, require the customer to provide accurate location and exemption information, and address taxes identified after the original bill. If your contract says the stated price includes all taxes, the company could be forced to absorb a tax that it expected to pass through.

Early customer communication can reduce friction. Customers may need time to update purchase orders, provide use locations, submit exemption documents, and adjust budgets. A brief notice in Q4 is better than an unexpected increase on the first 2027 invoice.

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What the Change Means If Your Startup Buys SaaS

Startups often carry dozens or hundreds of software subscriptions across engineering, finance, sales, HR, cybersecurity, data, and collaboration. A new tax on even part of that stack can create a noticeable budget variance.

1. Budget for Higher Software Costs

California’s statewide 7.25% sales and use tax rate includes state and county taxes. City and district taxes may raise the combined rate depending on location. Colorado’s state rate is 2.9%, with county, city, and special district taxes potentially adding to the total where SaaS is taxable.

For a simple illustration, a 9% combined rate could add $9,000 to a taxable $100,000 annual software purchase. The precise amount depends on the location, product, contract, exemption status, and allocation of use. Finance teams preparing 2027 budgets should review material software lines instead of applying a blanket percentage to the entire technology budget.

2. Inventory Your Software and Where It Is Used

Build a list of material software vendors, annual spend, renewal dates, contract structure, billing address, and user locations. Give special attention to subscriptions used by employees in California or Colorado, even when the company is incorporated or headquartered elsewhere.

Then separate likely taxable SaaS from products that may qualify as custom software, digital infrastructure, professional services, or another excluded category. Do not assume the vendor’s current tax treatment is correct for 2027. Ask major vendors how they plan to classify the product and what location data or exemption documents they will require.

3. Watch for Use Tax When the Vendor Does Not Collect

A missing tax line does not necessarily mean the purchase is tax-free. When taxable software is used in a state and the vendor does not collect the applicable sales tax, the purchaser may have to calculate and report use tax directly.

Accounts payable teams should flag untaxed SaaS invoices for review beginning in January. Preserve invoices, contracts, user-location records, exemption certificates, and evidence of tax paid to another jurisdiction. This is especially important for multistate purchases, where the same subscription could raise allocation or tax-credit questions.

California also has a special rule for very large digital-product purchases. When one retailer’s annual sales of remotely accessed or electronically transferred digital products to the same purchaser exceed $5 million, responsibility may shift to the purchaser through a direct-payment process. Most early-stage startups will not reach that threshold with one vendor, but larger companies should identify it early.

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Can You Reduce the Tax by Acting Before January 1?

Possibly, but simply moving an invoice or payment into December may not be enough.

California’s proposed guidance focuses on when the purchaser receives the right to access the software. Its examples indicate that paying or signing an agreement in December for access that begins January 1 can still produce a taxable 2027 sale. Conversely, a transaction in which the customer receives the right to access a one-time software license before January 1 may receive different treatment even when payment occurs later.

Subscriptions add another complication because recurring charges may be treated as continuing sales tied to each subscription period. Colorado’s law applies to the sale, storage, use, and consumption of covered software on or after January 1, and additional guidance is needed before relying on a 2026 invoice or prepayment for 2027 use.

There may be legitimate opportunities to complete certain software transactions before the effective date. Any strategy should be reviewed based on the contract, access date, subscription structure, payment terms, and state involved. Do not promise customers that early invoicing alone will eliminate the tax.

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What Founders Should Do Before 2027

If You Sell SaaS

1. Classify each product or bundled charge under the rules of both states.
2. Recalculate economic and physical nexus, including the effect of remote employees and other in-state activity.
3. Identify customers and users in California and Colorado, then close gaps in address and allocation data.
4. Review contracts for tax reimbursement, customer-location representations, exemption documentation, and post-billing adjustments.
5. Confirm that billing and accounting software can calculate location-specific rates and support returns.
6. Register where required and establish filing, reconciliation, and record-retention procedures.
7. Notify affected customers before their first taxable invoice.

If You Buy SaaS

1. Inventory material SaaS subscriptions, renewal dates, billing addresses, and user locations.
2. Estimate the 2027 budget impact using applicable rates rather than one company-wide assumption.
3. Ask major vendors how they will classify and source your subscription.
4. Provide accurate allocation and exemption documents where appropriate.
5. Add untaxed SaaS invoices to your use-tax review process.
6. Have a sales tax professional evaluate any proposed pre-2027 renewal, license, or access change.

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Prepare Before the First 2027 Invoice

January 1 will arrive quickly for companies that need to classify products, review nexus, collect customer-location data, update contracts, configure billing systems, and register in new jurisdictions. Buyers also need enough lead time to build the added cost into 2027 budgets and strengthen use-tax controls.

Burkland’s tax and compliance team can help you assess SaaS taxability, nexus, registration requirements, multistate use, and the sales and use tax processes your company needs before the new rules take effect. Contact us to request more information.

Agency rules and guidance may change before January 1, 2027. This article is general information and is not legal or tax advice.