As Denver’s labor force grows with its rapidly increasing population, workers who move from other parts of Colorado or outside the state may be surprised when they look at their paycheck deductions and see something like a “Denver Local Tax” notation.
The $5.75 monthly deduction is for the City and County of Denver’s Occupational Privilege Tax, also known as a “head tax” to those familiar with business-related taxes. And the employers of Denver’s thousands of workers pay another $4.00 per month per employee, all to help the city and county provide services and keep its infrastructure in good condition.
Last year, the head tax generated nearly $50 million for the city. And it does not matter — for the most part — if an employee does not live in or even work most of the time within the city and county limits. At least some tax still must be paid, according to an instructional video posted online by the City and County of Denver.
According to a city website page, the tax was enacted in 1969 at the rate of $2 each for both the employee tax and business tax. As of Nov. 1, 1988, the rates were increased to $5.75 and $4 for the employee and business taxes, respectively.
Revenue from both taxes is used for the planning or design, replacement, expansion, acquisition, construction, installation, repair or improvement of city facilities, along with municipal services for Denver citizens and businesses. And it doesn’t matter if the business is located in the city or not; if it meets other conditions, it has to pay the tax.
Denver business attorney Elizabeth Lewis wrote in a blog on her website that “This can get complicated if a business is located in Glendale but the employee works in a satellite office or from their home located in Denver. In a situation like this, the employee should not have to pay the Glendale tax, but likely would have to pay the Denver tax.”
Lewis noted Glendale and Aurora also have these taxes, at different rates and amounts. For instance, Glendale’s head tax is $5 each for employees and employers, with an income threshold of $750 a month. Aurora’s rates are $2, $3 and $250, respectively. Other Colorado municipalities with head taxes include Sheridan and Greenwood Village.
Lewis told The Colorado Statesman she works with many startup businesses who are not aware of the need to pay the tax.
“I’ve talked to (certified public accountants) who didn’t know they needed to file to pay the tax,” she said.
Like all taxes, Lewis said there are penalties and fines for not paying the taxing authorities.
Lewis recalled hearing Denver first imposed the tax because people were moving to the suburbs and the city was losing sales tax revenue.
Courtney Law, the communications director for the Denver Finance Department, wrote in an email that the Denver Revised Municipal Code describes the legislative intent of the tax:
“Sec. 53-237. — Legislative intent.
“(a) The city council determines and declares that the performance of services within the city by an employee for an employer, for any period of time in a calendar month for wages, is the exercise of a taxable privilege, whether or not all or only part of the services of such natural person are performed within the city.
“(b) The city council further determines and declares that considering the relationship existing between the exercise by employees of the taxable privilege set forth in subsection (a) and the expenditures required by the city for street maintenance, police and fire protection and other municipal services and to provide for the general welfare, and the relationship of the exercise of the taxable privilege by employees to a proper, just and equitable distribution of the tax burdens within the city, and all matters considered in relation thereto, that the tax herein imposed on employees is reasonable, proper, uniform, nondiscriminatory and necessary for a just and proper distribution of the tax burdens within the city.”
Law also wrote that, based on the 2015 Comprehensive Annual Financial Report, Denver’s occupational privilege tax generated about $48.3 million in 2015, or 2.6 percent of all city revenue.
Employees who perform “sufficient services in Denver to receive compensation of at least $500 per month meet the requirement of a taxable employee,” according to the city webpage, and are liable to pay the employee tax. The employer is also required to pay the business tax for each taxable employee, along with each owner, partner or manager engaged in business in Denver, regardless of how much they earn.
A city instructional video explains how corporations, sole proprietorships and other types of businesses are affected by Denver’s head tax and who qualifies, doesn’t qualify and to what level. For example, corporations must pay the tax for every employee they hire, but if a business is a sole proprietorship or a partnership, the owners and partners are not considered employees and the tax is not paid.
If an employee works inside and outside of Denver, the business should use an “acceptable method” to divide earnings between jurisdictions and pay the tax accordingly, the video explains.
More information about Denver’s Occupational Privilege Tax can be found here.