Colorado's tax code has changed more in the past 14 months than in most recent years, and the effects arrive in two waves: new rules on 2026 returns, and bigger structural changes on January 1, 2027.

The first wave came from the August 2025 special session. Governor Polis called it to close a budget gap created largely by the federal One Big Beautiful Bill Act (OBBBA). Because Colorado is a rolling conformity state, federal changes flow into the state base automatically unless the legislature decouples. The special session did exactly that for several provisions.

The second wave came from the 2026 regular session, which ended May 13. Two bills signed in June, HB26-1223 and HB26-1289, expand the sales tax base to software and overhaul corporate combined reporting. Both take effect in 2027, which means planning conversations should start this fall.

Here is what you need to know, and what to raise with clients before year-end.

New on 2026 returns: the special session changes

The 2025 special session bills mostly take effect for tax years beginning January 1, 2026, so the 2027 filing season is the first time most clients will feel them. Together they were expected to raise about $250 million.

Two of these are easy to miss. The vendor allowance repeal is a compliance change, not an income tax change: retailers should confirm their software and returns stopped claiming the allowance on January 1, 2026. And the expanded tax-haven list can pull affiliates in common holding jurisdictions like Ireland and the Netherlands into a Colorado combined report for the first time.

Software and SaaS become taxable on January 1, 2027

Starting January 1, 2027, nearly all computer software sold in Colorado is subject to state sales and use tax under HB26-1223, signed June 4. That includes downloaded software, software as a service (SaaS) and mobile apps.

One narrow exemption survives. Custom software, and software sold under a genuinely negotiated license agreement, stay exempt. A negotiated license means one individually bargained and signed by authorized representatives of both parties. Standard click-wrap and browse-wrap terms do not qualify.

The change hits clients on both sides of the transaction:

• Software sellers, including remote sellers, need to update product taxability, invoicing and exemption documentation before January 1.
• Businesses that buy software should expect higher costs on subscriptions and should plan to accrue use tax when a vendor doesn't collect.
• Clients with negotiated contracts should have those agreements reviewed now to see whether they fit the exemption.

One Colorado-specific wrinkle: home-rule cities administer their own sales taxes and set their own tax bases. A state-level change doesn't automatically change a home-rule city's treatment of software, so confirm each city's rules separately.

Revenue from HB26-1223 funds the state's expanded Family Affordability Tax Credit, which the same bill codifies.

Worldwide combined reporting and the water's-edge election

For tax years beginning on or after January 1, 2027, worldwide combined reporting becomes the default for unitary corporate groups under HB26-1289, signed June 3. Groups can instead elect water's-edge treatment, but the election is a 10-year commitment.

This is the third step in a fast evolution. Colorado moved from its old "3 of 6" test to traditional unitary combined reporting for 2026, and now to a worldwide default for 2027.

Key features of the election:

• Timing. It must be made on a timely filed original return.
• Duration. It binds for 10 consecutive years and renews automatically unless withdrawn. Early withdrawal requires showing extraordinary hardship from unforeseen changes in tax law or policy.
• A broader water's-edge group than clients may expect. The group includes all domestic members, foreign corporations with at least 20% of property and payroll in the U.S., income effectively connected with a U.S. trade or business, entities in designated tax havens, and certain income of affiliates in non-treaty countries that earn more than 20% of their income from intangibles or services deducted by group members.
• Anti-base-erosion rule. Members can't deduct payments to excluded affiliates for services or intangibles.
• Tax-haven list. The 2025 expansion added Hong Kong, Ireland, Liechtenstein, the Netherlands and Singapore. HB26-1289 removes Liechtenstein.

HB26-1289 also makes other 2027 changes worth flagging:

• Opportunity Zones. Federally excluded QOZ gains must be added back unless the investment is in a Colorado Qualified Opportunity Fund, one holding at least 90% of its assets in Colorado QOZ property.
• Enterprise zone credits. The health insurance credit is limited to employers with fewer than 50 employees. The R&E credit now requires $150,000 of minimum spending and applies only to spending above a two-year average baseline.
• Other repeals. The commercial vehicle investment credit for heavy vehicles and the state deduction for wages disallowed under IRC §280C are eliminated.

What didn't pass, and what to do now

Colorado did not broadly decouple from the OBBBA in 2026. HB26-1222, which would have decoupled the state from four federal business tax benefits, and HB26-1221, which would have limited executive compensation deductions and restricted NOLs, both passed the House but stalled in the Senate.

For now, rolling conformity continues to pull in the remaining OBBBA business provisions apart from the specific decouplings above. Confirm the treatment of each provision against Department of Revenue guidance before filing. Expect similar bills to return in the 2027 session.

November 3 could also change the picture. Voters will decide on two competing income tax measures, Amendment 87 and Proposition 136; see our companion post for a neutral explainer.

Visit this year-end client checklist in our COCPA Resource Center.

Join us for our Tax Year in Review courses, which will be offered around the state in person throughout the month of December.