State and Local Tax Update: CA, CO, TX (Nov 2026)
What changed this week
| Development | Who it affects |
|---|---|
| California OTA Says Nonresident Section 751(a) Partnership Gain Is Not California-Source | Nonresident individuals who sold or expect to sell an interest in a California partnership or LLC, and the California partnerships and LLCs they invest in. |
| California FTB: TPP Delivered to Out-of-State Hub Warehouses Is Not California-Source Revenue | Manufacturers, wholesalers, and consumer-brand sellers that use third-party distribution hubs located outside California to reach California retail. |
| Colorado: Downloaded and Remote-Access Software Lose Sales Tax Exemption on January 1, 2027 | Software vendors, SaaS providers, and resellers selling into Colorado; and Colorado buyers who should expect to see sales tax on recurring software charges and renewals. |
| Texas: EMR and EHR Systems Are Moving Out of the Information Services Sales Tax | Texas hospitals, physician practices, dental offices, and other healthcare providers that pay sales tax on EHR, EMR, patient portal, and medical records retrieval systems. |
California OTA Says Nonresident Section 751(a) Partnership Gain Is Not California-Source
In Appeals of J. Burch, J. Carden, and K. Carden (2026-OTA-527P, July 24, 2026), the California Office of Tax Appeals held that the entire gain from a nonresident’s sale of a partnership interest, including the portion recharacterized as ordinary income under IRC section 751(a), is intangible income sourced under California Revenue and Taxation Code section 17952. The OTA declined to follow FTB Legal Ruling 2022-02, which had treated 751(a) ordinary income as a distributive share of partnership business income subject to apportionment. The panel instead followed the D.C. Circuit’s reasoning in Rawat v. Commissioner, concluding that section 751(a) recharacterizes a portion of the gain without treating the sale as an asset sale by the partnership.
Who it affects: Nonresident individuals who sold or expect to sell an interest in a California partnership or LLC, and the California partnerships and LLCs they invest in.
What to do
If you are a nonresident who paid California tax on 751(a) gain in a year that is still open, evaluate a protective refund claim. The opinion is designated pending precedential, so track final precedential status before filing. On a going-forward sale, document the sourcing analysis contemporaneously, especially the characterization of inside gains and the residency of each selling partner.
Primary source: OTA opinion — Burch, Carden, and Carden (2026-OTA-527P)
California FTB: TPP Delivered to Out-of-State Hub Warehouses Is Not California-Source Revenue
FTB Chief Counsel Ruling 2026-01 (October 22, 2026) addressed a California-based company that ships products to third-party distributors at hub warehouses located outside California. The FTB concluded that for taxable years beginning on or after January 1, 2024, the sales are assigned outside California under R&TC section 25135, even when products are later shipped by those distributors to retailers inside California. The key facts were that title, possession, risk of loss, custody, and control transferred to the distributor at or before the hub, the company had no role after shipment, and the distributor’s hub activity (de-palletizing, sorting, repackaging, labeling, holding for several days) was far more than temporary storage. The FTB treated the sale as terminating at the out-of-state hub, so subsequent transportation did not pull the sale back into California.
Who it affects: Manufacturers, wholesalers, and consumer-brand sellers that use third-party distribution hubs located outside California to reach California retail.
What to do
Pull the sales contracts and shipping terms for your top distributor relationships and confirm when title and risk of loss transfer. Document the activities performed at each hub so the file can show the sale terminates there. Note that the ruling is binding only on the named taxpayer and only on the facts submitted, so treat it as persuasive guidance, not a safe harbor.
Primary source: FTB Chief Counsel Ruling 2026-01
Colorado: Downloaded and Remote-Access Software Lose Sales Tax Exemption on January 1, 2027
House Bill 26-1223, signed on June 4, 2026, repeals Colorado’s sales and use tax exemption for computer software delivered by download or remote access. Effective January 1, 2027, software is taxable regardless of how it is delivered, with two narrow exceptions: software developed for use by a particular user (true custom software) and software governed by a negotiable license agreement. The Colorado Department of Revenue has updated its Sales and Use Tax Topic for Computer Software to reflect the change and confirms the same treatment applies to downloads, remote access, and physical media. Click-through license agreements do not qualify for the negotiable-license carve-out.
Who it affects: Software vendors, SaaS providers, and resellers selling into Colorado; and Colorado buyers who should expect to see sales tax on recurring software charges and renewals.
What to do
Add Colorado to your taxability matrix for software and SaaS and update tax engines, invoicing, and quotes before year-end. Review existing contracts and renewals to see whether any qualify as negotiable license agreements (not click-through) and keep a copy of the signed terms in the exemption file. Home-rule city taxes are a separate analysis — self-administering jurisdictions are not required to follow the state.
Primary source: Colorado HB 26-1223 — Final Act (signed version) · Colorado DOR — Sales and Use Tax Topics: Computer Software
Texas: EMR and EHR Systems Are Moving Out of the Information Services Sales Tax
Executive Order DH-2026-02 (signed October 6, 2026, by Comptroller Don Huffines) directs the Comptroller’s office to publish a proposed amendment to 34 Tex. Admin. Code section 3.342 so that charges for electronic health record systems, electronic medical record systems, patient portals, and related systems used by doctors and hospitals are no longer taxed as information services. The order presents the change as a prospective policy shift. The Comptroller has already stated that no sales or use tax refunds will be processed for charges occurring before the rule revision’s effective date. The proposed rule goes through a public comment period of at least 30 days after publication in the Texas Register before it can be finalized.
Who it affects: Texas hospitals, physician practices, dental offices, and other healthcare providers that pay sales tax on EHR, EMR, patient portal, and medical records retrieval systems.
What to do
Watch the Texas Register for publication of the proposed Rule 3.342 amendment and, if the terms work for you, submit comments during the 30-day window. Line up EHR and EMR vendor invoices and ask vendors to confirm when they will stop charging Texas sales tax once the amendment takes effect. Do not budget for refunds of prior-period tax — the Comptroller has already said none will be processed.
Primary source: Texas Comptroller Executive Order DH-2026-02
What this means for your business
- Nonresidents selling an interest in a California partnership or LLC should document section 751(a) sourcing based on R&TC section 17952 — the OTA has pushed back on the FTB’s prior approach.
- If your California sales flow through an out-of-state hub operated by a third-party distributor, the delivery terms and hub activities now carry the sourcing argument. Keep the file strong.
- Colorado has about two months before downloaded and remote-access software become taxable. Update your tax engine and quote templates now; buyers should expect sales tax on 2027 renewals.
- Texas healthcare providers should see EHR/EMR sales tax disappear going forward, but the Comptroller has pre-emptively ruled out refunds for prior periods. Comment during the Texas Register period if the terms matter to you.
This week’s state tax takeaway
Four state moves business owners should flag: California limits how the FTB can source a nonresident’s partnership gain, confirms out-of-state hub warehouses break California sourcing on tangible goods, Colorado ends its downloaded-software exemption on January 1, 2027, and Texas starts clearing sales tax off medical records systems — prospectively, with no refunds for prior charges.
Frequently asked questions
Q. I’m a nonresident who sold my interest in a California LLC last year. Does the Burch opinion help me?
Possibly. The OTA held that a nonresident’s entire gain from the sale of a partnership interest, including the portion treated as ordinary income under IRC section 751(a), is intangible income sourced under California Revenue and Taxation Code section 17952 rather than California business income. If you paid California tax on 751(a) gain and the year is still open under the statute of limitations, a protective refund claim is worth evaluating. The opinion is designated pending precedential, so facts matter and the FTB’s response is still developing.
Q. Does Colorado’s software change apply to out-of-state vendors?
Yes. HB 26-1223 adds computer software to Colorado’s definition of tangible personal property. Any vendor with Colorado sales and use tax nexus should expect to collect state tax on downloaded and remote-access software starting January 1, 2027. Only software developed for one specific user (true custom work) and software covered by a negotiable license agreement remain exempt — click-through agreements do not qualify. Home-rule city taxes are a separate question and depend on each jurisdiction’s own choice.
Q. Can a Texas hospital get a refund of sales tax it already paid on EMR access?
Not under the current executive order. The Comptroller has framed the Rule 3.342 amendment as a prospective policy change and stated that no sales or use tax refunds will be processed for charges occurring before the effective date of the rule revision. The practical response is to track the Texas Register publication, submit comments during the comment period if the terms matter, and plan for the tax to come off future EHR, EMR, and patient portal invoices once the amendment is final.
