California & Colorado Are Taxing More Digital Products — Here’s What You Need to Know
By Danielle Tuscher
Effective January 1, 2027, California and Colorado are expanding the taxability of certain software and digital products and modifying taxpayer reporting responsibilities.
These changes may impact your tax calculations, exemption management and tax technology configuration but Tax CSA can assist, so you can start 2027 confident your compliance is in check!
CALIFORNIA – SB 122
Newly Taxable: Prewritten software, including electronically delivered software and Software as a Service (SaaS), will become taxable.
- Exclusions
- Certain products, including custom software, eBooks and streaming media, remain excluded or exempt.
- Sourcing
- New rules generally prioritize the customer's billing address when determining where remote software sales are taxable. (It is not limited to just the billing address but is included)
- $5 Million Rule
- When a customer purchases more than $5 million in taxable digital products from a single retailer during a calendar year, the responsibility for reporting and remitting use tax may shift from the seller to the purchaser. This may require a Direct Pay Permit and supporting exemption certificate.
- Economic Nexus
- Taxable digital products will count toward California's economic nexus threshold.
COLORADO – Software Tax Changes
Newly Taxable: Downloaded, electronically delivered and remotely accessed prewritten software and mobile applications will become taxable.
- Certain individually negotiated software license agreements may qualify for an exemption.
- Affected software sales will count toward Colorado's economic nexus threshold.
What Should You Do Now?
If your business sells digital products, software or SaaS, we recommend:
- Review Tax technology Tax Codes
- Confirm your products are mapped correctly so that the new taxability rules are applied.
- Test Tax technology Calculations
- Verify your tax calculations before January 1, 2027.
- Verify Customer Addresses
- Review billing and shipping information, particularly for California. Tax technology allows the invoice to pass both the billing and shipping address.
- Review Exemptions
- Identify transactions requiring exemption certificates or Direct Pay documentation.
- Evaluate Nexus
- Determine whether these changes impact your registration or collection obligations.
Need Assistance?
Tax CSA can help review your product taxability, tax technology nexus configuration, tax code mappings and exemption requirements to prepare for these changes.
Let's schedule some time if you'd like to discuss.
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