On Thursday June 4th, Gov. Polis of Colorado signed H.B. 1223, making various tax changes in Colorado. On the sales and use tax front, those changes were centered around software and prepared food retailers.
Software
Across the country, so many of the changes in the sales and use tax world are related to software. That’s because the sales and use tax laws are still somewhat antiquated and aren’t aligned with the realities of our economy and the ever-changing technology environment. With H.B. 1223, Colorado is attempting to close the gap between its laws and how software is sold and delivered in today’s world.
Currently, Colorado taxes software that is deemed to be tangible personal property, but it has to meet three criteria:
- Prepackaged for repeated sale or license;
- Its use is governed by a tear-open nonnegotiable license agreement; and
- It’s delivered to the customer in a tangible medium.
Effective January 1, 2027, H.B. 1223 repeals these requirements and related definitions. With these legislative changes, tangible personal property will be statutorily defined generically to include computer software. As a result, starting January 1, 2027, there will be no more Colorado state-level exemptions for SaaS, electronically delivered software, or software delivered via load-and-leave. However, there will be two software-related exemptions that remain (and will be codified) – (1) customized software and (2) a negotiated license agreement.
Supporters of the legislation stated that these changes better align the state’s sales tax treatment of downloadable software with its treatment of software purchased in a store. As always, the Colorado home rule cities might have different rules around software compared to the state, so taxpayers should consult their tax provider about these nuances.
Prepared Food Retailers
For some time, Colorado has provided some sales tax relief to retailers of prepared food. With the governor’s signing of H.B. 1223, that relief is codified and expanded. Effective July 1, 2026, retailers that sell food or drink are allowed to exempt 100% of their gas and electricity purchases if their sales of prepared food exceed 25% of the retailer’s total sales revenue (used to be a 55% exemption). The retailer can either claim the exemption directly from the utility provider or as a credit against its sales tax obligation. If the retailer’s sales of prepared food are equal to or less than 25% of its total sales, then the retailer is allowed a credit of 0.5% against its sales tax obligation.
Finally, H.B. 1223 provides what amounts to a partial sales tax holiday for certain restaurants, bars, food service contractors, mobile food vendors, and caterers. Specifically, in calendar years 2027 and 2028, these retailers may deduct the lesser of state net taxable sales or $14,000 per site in the months of July, August, November, and December.
As Colorado’s sales tax landscape continues to evolve, businesses should closely monitor these changes and evaluate how they may affect their overall sales and use tax compliance functions. Clarus Partners, A Richey May Company, will continue to help clients navigate these developments and assess the practical implications for their operations and compliance obligations.
Brian Hollingsworth
Partner with Clarus Partners, A Richey May Company
[1] Colo. Rev. Stat. §39-26-102(15)(c)(I)
[2] Colo. Rev. Stat. §39-26-102(21)(c)(I)(A)