Your Software Downloads Are Getting Taxed to Fund a New Child Tax Credit

The Bottom Line

If you buy software online or download apps, you're going to start paying state sales tax on those purchases. But the state isn't keeping that money—they're funneling it directly into a brand new child tax credit for low- and middle-income families, while also tossing a couple of valuable tax breaks to the restaurant industry.

What This Bill Actually Does

Right now, Colorado's tax code treats software differently depending on how you get it. If you buy a physical video game disc or a CD-ROM at a retail store, you pay sales tax. But if you download that exact same software from the internet, it's exempt. This bill repeals the downloaded software sales and use tax exemption starting January 1, 2027. Going forward, any software prepackaged for repeated sale—think TurboTax, Adobe subscriptions, video games, or mobile apps—will be subject to state sales tax.

So, where does that new tax money go? Because Colorado operates under strict revenue limits (TABOR), the state can't just pocket the extra cash. Instead, the bill creates the Expanded Family Affordability Credit (EFAC). Recent federal tax changes effectively wiped out Colorado's existing family tax credits for the 2026 tax year. To fix this, the state is using the revenue generated by the new "app tax" to fund a refundable income tax credit for parents. The total size of the credit pool is literally calculated each year based on exactly how much money the software tax brings in.

Finally, the bill quietly slips in two major, long-lasting perks for the food and beverage industry. First, restaurants where prepared food makes up more than 25% of their total sales can deduct 100% of their gas and electricity purchases from their net taxable sales. Second, for four specific high-traffic months (July, August, November, and December) in 2027 and 2028, eligible food and drink retailers can deduct up to $14,000 per site from their state net taxable sales.

What It Means for You

For the average Coloradan, the most immediate impact is that your digital life is going to get slightly more expensive starting January 1, 2027. When you download a $5 app, buy a $60 video game online, or subscribe to a monthly software service, you'll see state sales tax added to the final receipt. The state argues this simply levels the playing field, treating a downloaded game exactly the same as a physical copy bought at a local store.

But if you are a parent, you are likely on the winning end of this trade. The Expanded Family Affordability Credit directly targets low- to middle-income families to help offset the rising costs of raising kids. While the exact payout will fluctuate based on how much the software tax actually generates, initial projections for tax year 2027 estimate a credit of:

• $260 for each child under 6 years old
• $195 for each child between the ages of 6 and 16

This is a refundable credit, meaning if the credit amount is larger than what you owe in state income taxes, the state will cut you a check for the difference. To get the maximum amount, your Adjusted Gross Income (AGI) needs to be under $16,000 for single filers or $27,000 for joint filers. The credit phases out gradually—dropping by about $18 for every $5,000 you make above those limits. So, while mid-earning families will still see some benefit, the biggest checks are aimed squarely at households needing the most help making ends meet.

What It Means for Your Business

If you sell software, SaaS, or mobile apps to Colorado consumers, you need to prepare for a major compliance shift. By January 1, 2027, you'll need to update your payment gateways and point-of-sale systems to collect Colorado state sales tax on digital downloads and non-negotiable software licenses (often called "tear-open" or click-wrap agreements). If you are a B2B software provider, pay close attention to your contracts: software governed by a negotiable license agreement remains exempt from this tax, as does custom software developed specifically for a single client. If you're a business that buys standard software to run your daily operations, expect your SaaS overhead to inch up.

If you own a restaurant, bar, catering company, or food truck, this bill is a massive operational win. First, your utility bills are about to get less taxing. If prepared food makes up more than 25% of your total revenue, you can deduct 100% of your gas and electricity purchases from your net taxable sales. This expands an older, more limited deduction and effectively acknowledges that commercial kitchens require a staggering amount of energy to operate.

Second, mark your calendars for 2027 and 2028. For the months of July, August, November, and December in both years, you'll be allowed to deduct up to $14,000 per site from your state net taxable sales. If you operate multiple locations, that deduction applies to each site separately. You will want to coordinate closely with your accountant or bookkeeper well before these dates to ensure your point-of-sale reporting is set up to claim the absolute maximum allowable deductions on your monthly sales tax returns.

Follow the Money

This bill is designed as a massive, revenue-neutral swap to satisfy Colorado's TABOR requirements. Taxing downloaded software is projected to bring in about $44.4 million in its first six months (starting halfway through Fiscal Year 2026-27) and will jump to $92.2 million the following year. However, the state doesn't get to keep a dime of that new cash to pad the general budget.

The new restaurant tax breaks will cost the state roughly $15 million annually, and every remaining dollar is legally required to be paid out to families through the Expanded Family Affordability Credit. Implementing this logistical web isn't free, though. The Department of Revenue will require roughly $263,000 and 2.7 new staff members by FY 2027-28 to update tax software, process the new restaurant deductions, and manage compliance audits. For local governments, the impact is minimal: the bill explicitly requires local districts (like RTD or county governments) to get voter approval before they can adopt this newly expanded state tax base for their own local taxes.

Where This Bill Stands

HB26-1223 is currently Sent to Governor. The latest official action came on 06/03/2026: Sent to the Governor.

That means both chambers have finished with the bill and it is now waiting for the governor to sign it or veto it.