The threat of losing local software developers because of an arcane sales-and-use tax invigorated Denver officials to listen and discuss and change the tax guide — all within about four months.
“Absolutely, this was expedited,” said Paul Washington, executive director of the Denver Office of Economic Development. “And probably more important is that this was a collaborative process with the industry.”
The city’s tax policy did not change, but a six-page clarification of what software gets taxed — and what does not — was announced Wednesday by the city. In essence, custom software built for a client is not taxable. Software built to resell at retail still is subject to the 3.62 percent sales tax.
“Mayor Hancock’s leadership is exemplified in the speed and timeliness to convene in the summer and work in the fall and publish a new policy in less than 120 days,” said Erik Mitisek, CEO of the Colorado Technology Association, which bridged conversations with local businesses and the city. “In a city of our size, that’s unheard of.”
CTA and several businesses worked to make sure city officials understood what was at stake.
At SpireMedia, a custom Web and mobile applications developer, the company learned of the tax about a year and a half ago when auditors smacked it with a $200,000 bill in back taxes and penalties. Spire hired a tax attorney and ended up paying $37,000. It has been paying $15,000 a quarter since August 2013.
“This is exactly what we were hoping for,” said Stephen Lloyd, Spire’s chief financial officer, who has spent hours each week meeting with the city to offer feedback. “I think the reason it happened so fast is the city was eager to work with us. Their objective is to try to attract this kind of industry to the city, and they didn’t want to do anything that would be viewed controversial.”
A Denver Post story in June found that city auditors were going after software developers for unpaid taxes on “data processing,” levied under the 1987 tax code. But for the most part, few even knew about the tax. A report said only two out of eight tech hubs — Denver and Austin, Texas — taxed custom software.
“I think the new tax guide not only brings clarity to the issue, but there was an educational process that happened on both sides,” city treasurer Steve Ellington said, adding that an August meeting between the city and the tech community helped set guidelines and deadlines.
For the most part, cities nationwide operate under similar rules adopted by Denver, said Alan Goldenberg, manager of state and local tax for accounting firm Friedman LLP.
“Custom software and other intellectual property is usually exempt from sales tax and canned software is taxable. That’s the general trend throughout the country,” he said.
Cities that levy the tax do count on it as a revenue source, Goldenberg said. “But by not taxing the intellectual property … it’s a way for jurisdictions to get new business to come in.”
Ellington, the treasurer, said the sales-and-use taxes “generate easily in the several millions a year” for Denver. But such taxes aren’t broken down, and he was unable to say what impact the tax guide clarification will have on future city revenues.
Tamara Chuang: 303-954-1209, tchuang@denverpost.com or twitter.com/Gadgetress