The SaaS sales Tax Shift for tech companies: California and Colorado
For years, many software companies did not have to charge state sales tax on sales into California and Colorado if their products were delivered electronically or accessed online.
That changes on 1 January 2027.
New laws in both states will make many software and Software-as-a-Service (SaaS) products taxable.
Some exemptions will remain. However, businesses should not assume that their current tax treatment will continue in 2027.
Here is what founders, CFOs, and finance teams need to know before issuing their first invoice of the new year.
California: Many SaaS Products Will Become Taxable
California has historically taxed prewritten software when it was delivered on physical media, such as a disc or USB drive.
Software downloaded electronically or accessed online was often not taxable.
Under California Senate Bill 122, many digital software products will become taxable from January 1, 2027. This includes prewritten software that is:
delivered on physical media
downloaded electronically
accessed remotely through a browser, app or API
Not every digital product will be taxed
Important exemptions and exclusions remain. These may include:
software developed specifically for one customer
certain services that mainly involve human work
qualifying digital infrastructure
software purchased only for use outside California
certain rights to reproduce or distribute software
Businesses should review what they are actually selling. A product described as a “digital service” may still be taxable if the customer is primarily paying to access prewritten software.
Customer location matters
For remote sales, California will generally begin with the customer address held in the seller’s records. The billing address will usually be considered first.
The analysis may become more complicated when software is used in several states.
For example, a business may sell a 500-seat licence to a company headquartered in San Francisco, while 200 of those users work in Texas. Taxing the entire contract based only on the head office could produce the wrong result.
Software businesses should begin collecting reliable customer and user-location information before the new rules take effect.
Colorado: How Software Is Delivered Will No Longer Matter
Colorado is making a similar change under House Bill 26-1223.
From January 1, 2027, prewritten software may be taxable regardless of whether it is downloaded or accessed online through a SaaS arrangement.
The absence of a physical product will no longer be enough to support non-taxable treatment.
Some exemptions will remain
Colorado will continue to provide potential exemptions for:
software developed for a particular customer
software covered by a qualifying negotiated licence agreement
The contract exemption may be important for enterprise software providers.
However, standard click-through and other non-negotiated agreements are unlikely to qualify. Businesses should review how their customer contracts are negotiated, documented, and signed.
Local rules may be different
Colorado has several home-rule cities, including Denver and Boulder, that administer their own sales taxes.
Their local rules may not match the state rules. A product that is taxable or exempt at the state level may receive different treatment in a particular city.
Businesses selling across Colorado will need to consider both state and local requirements.
Billing Risks to Address
These changes affect more than the tax rate. They may also change how products are classified, how customer locations are recorded, and how contracts are structured.
1. Incomplete customer addresses
Five-digit ZIP codes do not always match local tax boundaries. Two addresses within the same ZIP code may be subject to different local tax rates.
Billing systems should use complete and validated customer addresses when calculating sales tax.
2. Bundled products and services
Software businesses often combine SaaS subscriptions with implementation, training, consulting or custom development.
Bundling these items can make the tax treatment more complicated. Clearly describing and separately pricing each part may help support the correct treatment.
However, placing a service on a separate invoice line does not automatically make it non-taxable. The nature of the service and the relevant state rules will still determine the outcome.
3. Missing customer-use information
Enterprise software contracts often cover users in several states.
Without reliable information about where the software will be used, it can be difficult to calculate the correct tax and defend that position during an audit.
Businesses should decide what customer-location information they need and how often it should be updated.
Your 2027 Action Plan
Before Q4, businesses should complete three important reviews:
[ ] Review your products: Separate standard SaaS products from custom software, digital infrastructure, and services mainly provided by people.
[ ] Check your billing system: Confirm that Stripe, Chargebee, or your other billing and tax systems use complete customer addresses and apply the correct state and local treatment.
[ ] Review your contracts: Check licence terms, service descriptions, and bundled offerings. Identify possible exemptions and determine whether you need more information about where customers will use the software.
Prepare Before Your First 2027 Invoice
Many software companies that currently treat their California and Colorado sales as non-taxable will need to reconsider that position.
The best time to review your products, contracts and billing systems is during 2026, not after an incorrect invoice has already been issued.
US Tax. Made Simple.
At BRDG, we help fast-growing and international companies understand their US sales tax obligations and put practical compliance processes in place.
Not sure how the new rules apply to your products or customers?
Contact the BRDG team to review your product taxability, nexus position and 2027 sales tax readiness.
This article provides general information only and does not constitute tax or legal advice. The correct treatment will depend on the facts of each transaction. Additional guidance may also be issued before January 1, 2027.
