In June 2026, Colorado Governor Jared Polis signed HB26-1223 into law, which includes critical sales tax changes for the technology and restaurant industries. For the technology industry, Colorado is expanding the definition of taxable software, and the restaurant industry will receive an expanded sales tax exemption.
Software as a service taxable starting in 2027
Currently, software must meet certain criteria to be treated as taxable tangible personal property (TPP). The most notable requirement is that software must be delivered “in a tangible medium” for software to be taxable TPP. HB26-1223 repeals this requirement and includes TPP as computer software. Additionally, the definition of computer software is changed to include software “delivered by any means [including] remote access through the internet.” These changes make all software, whether delivered in a tangible medium, downloaded, or accessed through the cloud, taxable by default. These changes are effective Jan. 1, 2027.
HB26-1223 provides two key sales tax exemptions for software. First, custom software that’s “developed for a particular user” is exempt. Second is a limited business-to-business exemption for software “governed by a negotiable license agreement[.]” To qualify as a negotiable license agreement, there must be a written contract signed by representatives of both the licensor and licensee. The definition specifically excludes software sold using an open offer boilerplate agreement. For example, if a business can sign up for a bookkeeping software tool online that simply requires account creation, subscription, and agreement to the terms of service, that would be an open offer software that — even if used for business purposes — isn’t a negotiable agreement exempt from tax. Alternatively, if a business has a written contract with specific terms that requires both its representative and the software vendor’s representative to sign the agreement before the software license is granted, that qualifies as a negotiable agreement.
These changes are only for Colorado and localities that conform with Colorado sales tax. Home rule cities within the state can still subject software as a service (SaaS) to local sales tax, even if it is a business-to-business transaction. Cities that currently subject SaaS to sales tax include Denver, Aurora, Colorado Springs, Boulder, and Fort Collins.
Colorado exemption on gas and electricity
Colorado businesses should also take note of two utility-related sales tax exemptions: the state’s existing exemption for industrial use of gas and electricity, and an expansion of a similar exemption that will provide relief to businesses selling prepared food.
Expanded exemption on gas and electricity for retailer food establishments as of July 1, 2026
HB26-1223 includes a new exemption, effective July 1, 2026, for all gas and electricity purchased by restaurants, cafes, lunch counters, hotels, social clubs, nightclubs, cabarets, resorts, snack bars, caterers, carryout shops, and other like places of business, such as food trucks or pushcarts that sell prepared food. Such retailers whose sales of prepared food exceed 25% of their total sales revenue may claim a 100% exemption from state-collected taxes. This exemption may be claimed with the utility supplier or claimed as a credit against sales tax collected by the retailer. If the retailer’s sales of prepared food make up 25% or less of the retailer’s total sales receipts, the retailer can claim a credit of 0.5% of the retailer’s prepared food sales against the sales tax they collect.
For example, a Denver restaurant has $100,000 in total sales receipts during the month, $95,000 of which are from sales of prepared food. The business spends $10,000 on gas and electricity during the same period. Since the prepared food receipts are over the 25% threshold, the restaurant can either claim a sales tax exemption from the gas and electric utility supplier or claim a credit of $400 (4% state and special district tax rate x $10,000 gas and electricity bill) against the Colorado state-collected tax that the restaurant collected from its customers.
Alternatively, a Denver hotel had the same receipts and gas and electricity costs, but only $25,000 of the total sales receipts are from sales of prepared food, which doesn’t meet the full exemption threshold. The hotel can instead claim a credit of $125 (0.5% x $25,000 prepared food receipts) against the Colorado state-collected tax that the hotel collected from its customers.
Colorado’s existing exemption for industrial use for gas and electricity
In addition to the expanded exemption noted above, there is a long-standing exemption for electricity and gas used in industrial use. Colorado defines “industrial use” as “the use of gas or electricity in a continuing business activity of manufacturing or producing tangible personal property or services.” This means any gas or electricity used directly in the business’s manufacturing process. It doesn’t include power used in offices, lunchrooms, laboratories, maintenance rooms, computer rooms, lounges, and usage solely for the comfort of employees.
The percentage of exempted use must be determined based on each meter. This can be calculated based on the actual exempt energy consumption or the percentage of square footage used for exempt (industrial) and nonexempt (offices, maintenance rooms, etc.) usage.
If usage is more than 75% exempt, businesses can complete Form DR 01666 and provide it to their utility supplier to receive an exemption. If usage is less than 75%, businesses will continue to pay sales tax on utility bills, but they can submit a refund claim for tax paid on the exempt portion each January. each January.
Additionally, businesses can request a refund for tax previously paid on gas or electricity used for exempt industrial use. A business must request a refund from their utility supplier before requesting a sales tax refund from the state.
Key takeaways for companies doing business in Colorado
- Review and understand the effect of HB26-1223 on software requirements. There are two key exemptions from sales tax for software that technology companies should take care to review.
- Colorado has a long-standing industrial use exemption for gas or electricity that specifically excludes power used in certain scenarios. Businesses that qualify can receive an exemption or submit a refund claim depending on the situation.
- For businesses selling prepared food, Colorado has an expanded exemption on gas and electricity as of July 1, 2026.
If you have any questions on how these changes may impact you, your business, or any other state and local tax matters, our Colorado state and local tax specialists can help.
