House committee advances repeal of downloadable-software exemption to fund family credit amid TABOR debate

House Bill 26-12-23 would repeal the state exemption that excludes downloaded or electronically delivered software from sales and use tax. Sponsors and supporters argued the exemption is outdated and creates horizontal inequity — consumers who buy identical software in stores pay sales tax while those who download the same product do not. Sponsors said revenue from repealing the exemption would be directed into a permanent Family Affordability Credit modeled on the FATC, returning dollars to low- and moderate-income families rather than the general fund.

Supporters included fiscal-policy groups, county commissioners and anti-poverty organizations. Caroline Nutter (Colorado Fiscal Institute) and others noted most states tax downloadable software and the Office of the State Auditor had identified that the exemption lacked a clear statutory purpose. County commissioners and CCAT representatives argued that the reallocation would produce direct local relief for families who claimed the FATC in 2024.

Opponents — notably the Colorado Chamber of Commerce and business trade associations — argued the bill creates new tax liabilities for software-as-a-service providers and hosted software (SaaS), expanding the taxable base in a way that MetroPCS v. Lakewood suggests could classify the change as a new tax requiring voter approval under TABOR. Counsel and witnesses from the Department of Revenue said the agency’s historical position is that digital goods are taxable and courts have upheld taxes on streaming services, while legal analysts warned TABOR analysis is complex and litigation risk may exist.

To narrow local consequences, sponsors adopted amendments (L003–L006) to align FAC eligibility thresholds, ensure the repeal applies at the state level while allowing local jurisdictions to opt in or opt out for their own bases, and to decouple RTD/SCFD from automatic base changes created by the state-level repeal. Committee members pressed sponsors on whether the bill creates a net revenue increase to state coffers and on safeguards for refundability and stacking of credits. One representative proposed a substitute amendment to use the revenue instead to restore a low-income senior renters’ credit; that substitute failed in committee.

The committee advanced HB12-23 as amended to Appropriations by roll-call (reported as passing 6–4). Sponsors said changes preserve local choice, limit district impacts, and direct funds to families. Opponents reiterated the bill’s legal risks and potential compliance burdens for businesses and small sellers.

Why it matters: Repealing the exemption would change how digital commerce is treated in Colorado and could create precedent for taxing other intangible deliveries; the revenue use — a refundable family credit — is a central political choice. The committee’s action sends the bill to Appropriations for fiscal analysis and raises the prospect of legal challenge under TABOR and precedent in MetroPCS v. Lakewood.