Colorado recently enacted two significant tax bills, HB 26-1289 and HB 26-1223, that substantially affect corporate income tax, sales and use tax, and numerous tax credit programs, with most provisions effective Jan. 1, 2027. Collectively, the legislation represents one of the state’s most comprehensive tax reforms in recent years.
Worldwide Combined Reporting
HB 26-1289 fundamentally changes Colorado’s corporate income tax regime by making worldwide combined reporting the default filing methodology for unitary corporate groups beginning with tax years starting on or after Jan. 1, 2027. Taxpayers may instead elect water’s-edge reporting on a timely filed original return. The election is generally binding for ten years and automatically renews unless affirmatively withdrawn.
The legislation also seeks to reduce duplicative taxation by eliminating multiple inclusions of certain intercompany dividends, Subpart F income, and controlled foreign corporation tested income within the combined group. At the same time, in an attempt to curb income shifting through related party transactions, the legislation disallows deductions for certain payments made to affiliated entities excluded from the combined group for services or the use of intangible property.
Software and Software as a Service (SaaS) Become Subject to Colorado Sales Tax
HB 26-1223 significantly expands Colorado’s sales and use tax base by making virtually all retail sales of computer software taxable beginning Jan. 1, 2027, regardless of how it is delivered. The legislation repeals Colorado’s previous exemption for downloaded software and extends taxability to software delivered electronically, including software accessed remotely through the internet, mobile applications, and software as a service. Notably, the legislation preserves two important exceptions, custom software developed for a particular customer and software governed by a genuinely negotiated license agreement.
These changes will affect software developers, SaaS providers, software resellers, and businesses purchasing cloud-based software. In addition, out-of-state software vendors with Colorado sales should evaluate whether the expanded tax base creates new collection or compliance obligations.
Enterprise Zone and Tax Credit Changes
HB 26-1289 also narrows several Colorado tax incentives beginning in 2027. Among other changes, the enterprise zone health insurance credit is limited to employers with fewer than 50 employees, while the research and experimental activities credit now requires at least $150,000 of qualifying expenditures and is calculated using a revised methodology. The legislation further modifies numerous clean energy incentives, expands certain motor vehicle credits, revises wildfire mitigation credits, and creates a new sustainable aviation fuel purchase credit.
Looking Forward
Although most provisions become effective Jan. 1, 2027, taxpayers have a limited window to prepare. Corporate groups should evaluate the impact of mandatory worldwide combined reporting and carefully consider whether a water’s-edge election is warranted. Companies benefiting from enterprise zone and other Colorado tax credits should review their continued eligibility under the revised rules, while software vendors and purchasers should assess how HB 26-1223 may affect the taxability of their transactions and related compliance obligations. Early planning can help taxpayers identify restructuring, reporting, and compliance considerations before the new rules take effect.
If you have any questions about how these upcoming changes in Colorado’s tax laws will affect you and your business, please contact your CBIZ SALT team member.
Frequently Asked Questions
Beginning with tax years starting on or after Jan. 1, 2027, Colorado will require worldwide combined reporting for unitary corporate groups unless taxpayers elect water’s-edge reporting on a timely filed original return.
Starting Jan. 1, 2027, Colorado will generally tax retail sales of software regardless of delivery method, including downloaded software, cloud-based software, mobile applications, and SaaS offerings.
Yes. Custom software developed for a specific customer and software governed by a genuinely negotiated license agreement generally remain exempt.
The legislation narrows several incentives, including the enterprise zone health insurance credit and the research and experimental activities credit, while also modifying various clean energy, motor vehicle, and wildfire mitigation credits and creating a sustainable aviation fuel purchase credit.
Companies should evaluate the impact of worldwide combined reporting, review eligibility for revised tax credits, and assess potential sales tax and compliance obligations related to software and SaaS transactions.
© Copyright CBIZ, Inc. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.
“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.
