U.S. states are rapidly expanding sales and use taxes (SUTs) to reach software as a service (SaaS), digital content and data-driven services. Businesses that provide these offerings to U.S. customers should assess whether the changes create new registration, collection, self-assessment, sourcing or documentation obligations.
In 2026 alone, lawmakers introduced approximately 80 bills across 22 states addressing the taxation of digital products and services, according to MultiState, a government relations company. Several newly enacted laws significantly expand the taxation of SaaS, streaming services, cloud-based software and data-related transactions. Notable changes in California, Colorado, Utah and Kentucky take effect in 2026 and 2027 and may create new compliance obligations for businesses selling into the U.S. market.
This article summarises key developments in California, Colorado, Utah and Kentucky and identifies practical steps businesses should consider before year-end as states continue to broaden the taxation of the digital economy.
Effective 1 January 2027, California will impose sales and use tax (SUT) on retail sales of “digital products,” including prewritten software regardless of whether such software is delivered through physical media, electronic download or remote access (software as a service or SaaS). Historically, California’s characterisation of software as taxable tangible personal property depended largely on the transfer of a physical medium, resulting in the general exclusion of electronically delivered software and SaaS from tax.
The term “digital product” expressly excludes digital assets such as cryptocurrency; digital audio, visual and audiovisual works; digital books; video games played for entertainment; and digital infrastructure, including infrastructure-as-a-service platforms. Custom computer software — software prepared to the special order of a single customer — also remains exempt. Modifications to prewritten software may qualify as custom software only to the extent of the modification and only when the related charges for modifications are separately stated.
Services provided electronically that primarily involve human effort and are performed in response to a customer request remain exempt from tax. However, this exemption will not apply to charges for the right to use or access software hosted on the provider’s cloud infrastructure, including software accessed through a web browser, thin client interface or program interface.
In addition to expanding California's SUT base to encompass remotely accessed and electronically delivered digital products, the legislation establishes detailed rules governing sourcing, presumptions regarding the place of use of digital products and the shifting of use tax compliance obligations to certain large business purchasers.
A retailer will be relieved of the obligation to collect tax on sales of remotely accessed or electronically delivered digital products once its gross receipts from such sales exceed USD 5 million during the calendar year. Beginning in 2028, the threshold will be measured based on gross receipts in either the current or preceding calendar year. Once the threshold is exceeded, liability will shift from the retailer to the purchaser, which will be responsible for self-assessing and remitting the applicable use tax directly to the California Department of Tax and Fee Administration (CDTFA). The purchaser’s obligation will apply to the transaction that causes the retailer to exceed the threshold, subsequent transactions and related adjustments. The CDTFA may waive the purchaser's self-assessment requirement when necessary for efficient tax administration. If the purchaser applies for a waiver and identifies anticipated places of first use, liability for the tax will remain with the retailer. Although this provision may reduce collection and compliance obligations for retailers, it will require both buyers and sellers to enhance transaction tracking and documentation to address potential audit exposure.
Software purchased solely for use outside California, or in interstate or foreign commerce, will be exempt. A digital product is deemed used at the location where any right or power over the product is exercised, and the right to remotely access a digital product is exercised at the location of the user accessing the product. There is a rebuttable presumption that a digital product purchased outside California and first used in California within 90 days of the sale was purchased for use in California.
Sales of digital prewritten software are sourced using the purchaser’s California address in the seller’s records. The seller must apply the following priority order: billing address, shipping or delivery address, address associated with the payment instrument; and mailing address. If the purchaser does not provide an address at the time of sale, the seller applies the same hierarchy to the most recent addresses previously supplied by the purchaser. If the seller has no California address, the sale is sourced outside the state.
Beginning 1 January 2027, Colorado’s definition of tangible personal property subject to sales tax will include most forms of downloaded and remotely accessed computer software, including applications installed on cellular phones, tablets or other mobile devices.
The law provides for two exemptions:
Colorado is a home-rule state, which allows self-administering local jurisdictions to adopt and administer their own SUTs independent of the state tax system. Although new Colorado law permits local governments and special districts to adopt the legislation's taxability and definitional changes, several home-rule jurisdictions already impose SUT on SaaS and other remotely accessed software.
Effective 1 July 2026, Utah expanded and clarified the scope of its SUT base to include charges for streaming of, or subscription for access to, digital audio-visual works, digital audio works, digital books and gaming services regardless of whether the access is single-use or subscription based. Previously, Utah generally imposed sales tax on digital goods transferred electronically through a download. The new law expands the tax base to encompass on-demand access models, including streaming and subscription services, that do not involve the transfer or download of the underlying digital product.
Utah also codified the imposition of SUT on the storage, use or other consumption of prewritten computer software delivered electronically or by load and leave, as well as seller-hosted prewritten computer software. Utah defines seller-hosted prewritten computer software as prewritten software accessed through the internet or a seller-hosted server, regardless of whether the customer receives a download or permanent access rights.
Accordingly, both electronically delivered software and software accessed through SaaS or other hosted environments generally fall within Utah's SUT base.
Effective 1 August 2026, Kentucky imposes sales tax on data brokering services. These services include the collection, aggregation and analysis of personal data for sale to a third party when the service provider or the third party retains possession of the underlying data. The tax applies whether charges are assessed per use, per user, per license or subscription.
The tax does not apply to data brokering services purchased for use outside Kentucky and transferred electronically outside the state. As a transition rule, the tax also does not apply to lump-sum, fixed-fee or fixed-price contracts executed on or before 25 February 2026. Data brokering services sold by the Kentucky government or its agencies are exempt.
The statute's broad definition may reach businesses that would not traditionally view themselves as data brokers. Accordingly, businesses that collect, aggregate and analyse personal data for sale or commercial use by third parties should evaluate whether their activities fall within the scope of the new tax.
In 2026, other states, including Alaska, Illinois, Minnesota, Nebraska, New Jersey, New York and Washington, introduced various proposals aimed at imposing sales tax on data sales. Oklahoma is examining how imposing taxes on SaaS and other digital products may impact its state and local revenue.
As businesses prepare for 2027, technology companies, software providers, SaaS vendors and purchasers of cloud-based solutions should monitor recent legislative developments and anticipate further expansion of U.S. state sales tax bases. Amid continuing budget pressures, states are increasingly seeking to tax digital products and services, including SaaS, data-related transactions, streaming services and other components of the digital economy. This trend is likely to continue in 2027 and beyond.
At the same time, advances in data analytics and artificial intelligence are enhancing states' ability to identify noncompliance by cross-referencing marketplace information, prior audit findings and third-party data against taxpayer filings. As enforcement capabilities become more sophisticated, taxpayers may face greater scrutiny of their digital products and services tax positions.
Businesses should respond to these developments by evaluating where they have nexus, determining whether their offerings are taxable, reviewing sourcing and exemption rules, and updating systems and documentation before the new provisions take effect:
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In 2026 alone, lawmakers introduced approximately 80 bills across 22 states addressing the taxation of digital products and services, according to MultiState, a government relations company. Several newly enacted laws significantly expand the taxation of SaaS, streaming services, cloud-based software and data-related transactions. Notable changes in California, Colorado, Utah and Kentucky take effect in 2026 and 2027 and may create new compliance obligations for businesses selling into the U.S. market.
This article summarises key developments in California, Colorado, Utah and Kentucky and identifies practical steps businesses should consider before year-end as states continue to broaden the taxation of the digital economy.
SaaS in California
Effective 1 January 2027, California will impose sales and use tax (SUT) on retail sales of “digital products,” including prewritten software regardless of whether such software is delivered through physical media, electronic download or remote access (software as a service or SaaS). Historically, California’s characterisation of software as taxable tangible personal property depended largely on the transfer of a physical medium, resulting in the general exclusion of electronically delivered software and SaaS from tax.The term “digital product” expressly excludes digital assets such as cryptocurrency; digital audio, visual and audiovisual works; digital books; video games played for entertainment; and digital infrastructure, including infrastructure-as-a-service platforms. Custom computer software — software prepared to the special order of a single customer — also remains exempt. Modifications to prewritten software may qualify as custom software only to the extent of the modification and only when the related charges for modifications are separately stated.
Services provided electronically that primarily involve human effort and are performed in response to a customer request remain exempt from tax. However, this exemption will not apply to charges for the right to use or access software hosted on the provider’s cloud infrastructure, including software accessed through a web browser, thin client interface or program interface.
In addition to expanding California's SUT base to encompass remotely accessed and electronically delivered digital products, the legislation establishes detailed rules governing sourcing, presumptions regarding the place of use of digital products and the shifting of use tax compliance obligations to certain large business purchasers.
A retailer will be relieved of the obligation to collect tax on sales of remotely accessed or electronically delivered digital products once its gross receipts from such sales exceed USD 5 million during the calendar year. Beginning in 2028, the threshold will be measured based on gross receipts in either the current or preceding calendar year. Once the threshold is exceeded, liability will shift from the retailer to the purchaser, which will be responsible for self-assessing and remitting the applicable use tax directly to the California Department of Tax and Fee Administration (CDTFA). The purchaser’s obligation will apply to the transaction that causes the retailer to exceed the threshold, subsequent transactions and related adjustments. The CDTFA may waive the purchaser's self-assessment requirement when necessary for efficient tax administration. If the purchaser applies for a waiver and identifies anticipated places of first use, liability for the tax will remain with the retailer. Although this provision may reduce collection and compliance obligations for retailers, it will require both buyers and sellers to enhance transaction tracking and documentation to address potential audit exposure.
Software purchased solely for use outside California, or in interstate or foreign commerce, will be exempt. A digital product is deemed used at the location where any right or power over the product is exercised, and the right to remotely access a digital product is exercised at the location of the user accessing the product. There is a rebuttable presumption that a digital product purchased outside California and first used in California within 90 days of the sale was purchased for use in California.
Sales of digital prewritten software are sourced using the purchaser’s California address in the seller’s records. The seller must apply the following priority order: billing address, shipping or delivery address, address associated with the payment instrument; and mailing address. If the purchaser does not provide an address at the time of sale, the seller applies the same hierarchy to the most recent addresses previously supplied by the purchaser. If the seller has no California address, the sale is sourced outside the state.
SaaS in Colorado
Beginning 1 January 2027, Colorado’s definition of tangible personal property subject to sales tax will include most forms of downloaded and remotely accessed computer software, including applications installed on cellular phones, tablets or other mobile devices.The law provides for two exemptions:
- Sales tax will not apply to custom-developed software for use by a particular user; and
- The sale or use of software governed by a negotiable license agreement will not be subject to sales tax.
Colorado is a home-rule state, which allows self-administering local jurisdictions to adopt and administer their own SUTs independent of the state tax system. Although new Colorado law permits local governments and special districts to adopt the legislation's taxability and definitional changes, several home-rule jurisdictions already impose SUT on SaaS and other remotely accessed software.
SaaS and Streaming Services in Utah
Effective 1 July 2026, Utah expanded and clarified the scope of its SUT base to include charges for streaming of, or subscription for access to, digital audio-visual works, digital audio works, digital books and gaming services regardless of whether the access is single-use or subscription based. Previously, Utah generally imposed sales tax on digital goods transferred electronically through a download. The new law expands the tax base to encompass on-demand access models, including streaming and subscription services, that do not involve the transfer or download of the underlying digital product.Utah also codified the imposition of SUT on the storage, use or other consumption of prewritten computer software delivered electronically or by load and leave, as well as seller-hosted prewritten computer software. Utah defines seller-hosted prewritten computer software as prewritten software accessed through the internet or a seller-hosted server, regardless of whether the customer receives a download or permanent access rights.
Accordingly, both electronically delivered software and software accessed through SaaS or other hosted environments generally fall within Utah's SUT base.
Data Brokering Services Tax in Kentucky
Effective 1 August 2026, Kentucky imposes sales tax on data brokering services. These services include the collection, aggregation and analysis of personal data for sale to a third party when the service provider or the third party retains possession of the underlying data. The tax applies whether charges are assessed per use, per user, per license or subscription.The tax does not apply to data brokering services purchased for use outside Kentucky and transferred electronically outside the state. As a transition rule, the tax also does not apply to lump-sum, fixed-fee or fixed-price contracts executed on or before 25 February 2026. Data brokering services sold by the Kentucky government or its agencies are exempt.
The statute's broad definition may reach businesses that would not traditionally view themselves as data brokers. Accordingly, businesses that collect, aggregate and analyse personal data for sale or commercial use by third parties should evaluate whether their activities fall within the scope of the new tax.
Other states
In 2026, other states, including Alaska, Illinois, Minnesota, Nebraska, New Jersey, New York and Washington, introduced various proposals aimed at imposing sales tax on data sales. Oklahoma is examining how imposing taxes on SaaS and other digital products may impact its state and local revenue.
Action Items
As businesses prepare for 2027, technology companies, software providers, SaaS vendors and purchasers of cloud-based solutions should monitor recent legislative developments and anticipate further expansion of U.S. state sales tax bases. Amid continuing budget pressures, states are increasingly seeking to tax digital products and services, including SaaS, data-related transactions, streaming services and other components of the digital economy. This trend is likely to continue in 2027 and beyond.At the same time, advances in data analytics and artificial intelligence are enhancing states' ability to identify noncompliance by cross-referencing marketplace information, prior audit findings and third-party data against taxpayer filings. As enforcement capabilities become more sophisticated, taxpayers may face greater scrutiny of their digital products and services tax positions.
Businesses should respond to these developments by evaluating where they have nexus, determining whether their offerings are taxable, reviewing sourcing and exemption rules, and updating systems and documentation before the new provisions take effect:
- Determine whether the company has nexus in each state through physical presence or economic activity. Economic nexus thresholds vary by state and should be evaluated under the applicable state’s rules.
- Assess whether software, SaaS, data, streaming and other digital offering are subject to tax in every state where the company has nexus, including applicable exemptions and effective dates.
- In states with home-rule jurisdictions, assess whether local tax rules diverge from state law. In Colorado, for example, businesses should evaluate whether home-rule cities apply different definitions, exemptions or tax bases than those adopted by the state.
- In states that currently tax SaaS and digital products, monitor further expansion of the tax base. In Kentucky, for example, businesses should evaluate whether collecting, aggregating or analysing personal data for third-party use constitutes a taxable data brokering service. In Utah, businesses should assess whether streaming or other access-based delivery methods create new sales tax obligations.
- Review customer contracts to determine whether separately stated customisation charges, negotiated license terms, places of use and delivery methods affect the taxability and sourcing of software licenses, SaaS offerings, data-related transactions and other digital products and services.
- Assign responsibility for updating invoicing practices, exemption certificate procedures, billing systems, ERP platforms and tax engines to calculate, source, collect and report tax accurately.
- Strengthen compliance procedures and monitor administrative guidance, regulations, enforcement developments and local tax changes. Businesses should also track legislation that would expand tax bases to social media, advertising and transfers of digital assets, such as cryptocurrency.
BDO in United States