California and Colorado SaaS Sales Tax Changes: What Software Companies Need to Know

Beginning January 1, 2027, both California and Colorado will expand the application of sales and use tax to many forms of prewritten software delivered electronically or accessed remotely, including many SaaS offerings. For software companies and other businesses that generate revenue through subscription-based products, the changes may introduce new tax collection, reporting, and compliance considerations.

While the effective date is still months away, waiting until the end of 2026 may leave little time to address operational and compliance challenges. Companies that understand how these changes may affect their business now will be better positioned to evaluate risks, update processes, and avoid surprises once the new rules take effect.

What Are the New SaaS Sales Tax Requirements in California and Colorado?

Beginning January 1, 2027, both California and Colorado will expand the application of sales and use tax to many forms of prewritten software delivered electronically or accessed remotely, including many SaaS offerings. For software companies and other businesses that generate revenue through subscription-based products, the changes may introduce new tax collection, reporting, and compliance considerations.

Although the overall direction of the legislation is clear, the practical impact will vary depending on a company’s products, customer base, billing practices, and where customers use the software. Businesses that previously focused sales tax compliance efforts on tangible products or a limited number of states may find that existing processes need to be revisited.

In addition, state and local tax treatment of software continues to evolve across the country. California and Colorado are among the latest states to broaden the scope of taxable software transactions, making this a good opportunity for businesses to evaluate whether their sales tax posture reflects today’s cloud-based delivery models rather than legacy software distribution methods.

For many organizations, the most important question is not whether SaaS may become taxable, but whether the business is prepared to identify taxable transactions, apply the correct tax treatment, and support compliance once the new rules take effect.

How Software Companies Can Prepare for 2027 SaaS Sales Tax Changes

Although the new rules do not take effect until January 1, 2027, businesses may need significant lead time to evaluate the tax implications and make any necessary operational changes. For software companies in particular, preparation may involve more than simply updating tax rates. Product offerings, billing practices, contracts, and internal compliance processes can all influence how software transactions are taxed.

A good starting point is to review software products and related revenue streams. Companies that bundle software subscriptions with implementation, training, support, managed services, or other offerings should understand how those components are described and invoiced today. The way products and services are packaged may affect the sales tax analysis and could warrant further review before the new rules take effect.

Businesses should also assess whether existing systems are equipped to support evolving compliance requirements. Billing platforms, ERP systems, and tax determination tools may need updates to identify taxable transactions, apply the appropriate tax treatment, and maintain supporting documentation. Companies with customers in multiple states should also revisit their sourcing methodologies and consider whether changes in software taxability could affect collection responsibilities.

Customer agreements are another area worth reviewing. Contracts drafted under the assumption that SaaS transactions were not taxable in California may not adequately address future sales tax collection, reimbursement, or reporting considerations. Taking time now to evaluate contract language can help reduce the need for last-minute revisions and customer communications.

Finally, businesses should continue monitoring developments in both states. Additional guidance may be issued before the effective date, and the application of the rules may vary depending on the facts and circumstances of a particular transaction. Companies that regularly revisit their sales tax posture and seek guidance when questions arise will be better positioned to navigate the changing landscape.

As states continue modernizing their tax rules for digital products and cloud-based services, proactive planning can help organizations minimize disruption, maintain compliance, and focus on growth rather than reacting to unexpected tax obligations.

Questions about how the California and Colorado changes may affect your business? AAFCPAs’ State and Local Tax team can help evaluate your sales tax obligations and prepare for evolving software tax requirements.

Putting This Into Practice: State & Local Tax

AAFCPAs’ SALT practice helps software companies and other multistate businesses evaluate sales tax obligations, understand nexus and sourcing considerations, and prepare for changing state tax requirements. Our team advises clients on sales and use tax compliance, registration and filing requirements, tax automation solutions, and the state tax implications of new products, services, and growth initiatives. We work alongside clients to address evolving regulations, reduce compliance risk, and develop practical strategies that support long-term growth.

These insights were contributed by Kelly Zack, MST, Partner, State & Local Tax (SALT) and Brian O’Hearn, CPA, MSA, Tax Manager.

Questions? Reach out to our authors directly or your AAFCPAs partner.

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