Colorado’s tax landscape continues to evolve as state legislators enact changes that affect both individuals and businesses. Legislative activity over the past several years has resulted in a series of tax law changes, with some provisions affecting the 2026 tax year and others scheduled to take effect in 2027.

One significant round of changes emerged from the August 2025 special legislative session. Governor Polis called the special session 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 revenue base automatically unless the legislature decouples. The special session enacted legislation to address several of these federal changes.

Additional developments followed during the 2026 regular legislative 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, respectively. Both take effect in 2027, making them important considerations for businesses evaluating their tax planning and compliance obligations.

Here is what you need to know to prepare clients before year-end.

Special Session’s impact on upcoming 2026 returns

The 2025 special session bills mostly took effect for tax years beginning January 1, 2026, so the 2027 filing season is the first time most taxpayers will see the impact of these changes on their tax returns.

Together these changes were projected to preserve about $250 million in state tax revenues.

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.

More about two 2026 legislative bills that take effect January 1, 2027

HB26-1223 makes software and SaaS taxable

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 applies to 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 pay for software, even on a subscription basis, should expect higher costs and 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 generated from HB26-1223 is legislated to fund the state's expanded Family Affordability Tax Credit, which the same bill codifies. 

Stay informed about the implementation of HB26-1223 by following the Colorado Department of Revenue’s workgroup updates. As proposed rules are developed, taxpayers and other interested parties can submit comments to dor_taxrules@state.co.us.

HB26-1289 makes worldwide combined reporting the default for unitary corporate groups

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 Expect Next

Colorado did not broadly decouple from the OBBBA in 2026, however, two proposals attempted to decouple from specific provisions.  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 bills passed the House but stalled in the Senate.  The COCPA actively opposed both bills during the 2026 legislative session alongside other business groups.  While opponents were successful in preventing these decoupling efforts in 2026, it is likely to expect similar bills to return in the 2027 legislative session.

November 3 could further change the tax picture for 2027. Voters will decide on two competing income tax measures: Amendment 87 and Proposition 136; read more about this in a companion post.

To dive deeper into both federal and Colorado tax changes, join the COCPA for Tax Year in Review courses, which will be offered around the state in person throughout the month of December.

Disclaimer: This article is intended for informational and educational purposes only, sharing insights from our member community to promote awareness and discussion. It does not constitute tax, legal, or regulatory advice or official guidance and may not address all relevant facts, tax issues, or applicable authorities. Readers should independently review applicable statutes, regulations, rules, and official guidance before taking action. This content should not be relied upon as a basis for tax or legal decisions.