BOULDER - City of Boulder officials say they may have under-collected between $1.9 million and $5.2 million in construction permit use taxes during the past three years.

 

And although the oversight primarily was on its part - through an unreliable tax estimating system - the city expects nearly 1,000 local contractors to pay up.

 

Starting in August, Boulder officials sent notices to 339 contactors of projects valued more than $250,000, requesting they voluntarily reconcile the projects, determine taxes owed and pay the shortfalls by Dec. 31.

 

The city will send out another 335 notices in December to projects valued between $60,000 and $250,000, requesting the same actions by April 30, 2010. A final batch of 229 notices for projects valued between $20,000 and $60,000 will go out in April 2010, with a deadline of payment by Aug. 31, 2010. The spread out approach is meant to avoid overloading city staff.

 

If the proper payments are made by the deadlines, the city will waive all penalties and interest on the back taxes, Boulder Finance Director Bob Eichem said. Penalties involve a 10 percent surcharge on the unpaid taxes, plus a 1 percent interest charge per month.

 

If contractors don't voluntarily comply, and the city chooses to audit the project, then all penalties and interest will be assessed, Eichem said.

 

Eichem acknowledges that the decision will not be popular with contractors. However, he said the city is within the law to collect back taxes as far as three years back, even if the city previously accepted the estimated tax payments.

 

"This is part of our job," Eichem said. "If we found through an audit that we over-collected taxes, we would pay back the difference." Eichem said the city has yet to see a recent instance where a contractor overpaid taxes.

 

Since 2002, contactors had been paying their construction use taxes based on a city-recommended valuation of 50 percent of the property. This takes into account that half of the project involves materials - which are taxed at 3.41 percent - and half of the project is labor, which is not taxed by the city. Boulder has a table to estimate the tax based on size and building type.

 

The city then audits a small numberof projects to make sure the estimates are lining up with the actual valuations. They normally have, Eichem said. Some may underpay, some may overpay, but it's not by much. The city collects or pays the difference after the audits.

 

But recently, the city audits began to reveal increasing under collections. No longer were the estimate valuations close - one was off by as much as 757 percent, and the average was off by 389 percent during the past three years.

 

This wasn't because contractors were cheating the system, Eichem said. It was because the city's tax estimate formula had failed to account for economic changes. Among other things, Eichem believes that soaring commodity and building material costs threw off the estimates. If a contractor used the city's tax estimate formula, it calculated building materials at 50 percent of total valuation, when in reality the building materials had become a much larger percent of the project valuation.

 

Local contractors said the city is within its legal means to collect back taxes, but it should have caught the mistake sooner.

 

"The problem is, we played by the rules, filled out the paperwork and went by the city's basis at that time," one contractor said on the condition of anonymity, fearing backlash from the city. "Decisions to pursue the project were based on those tax estimate figures. Even if the city can legally do it, it's a horrible way to do business."

 

Contractors could be facing additional taxes of $20,000 to $30,000 for a typical commercial project, the contractor said. Others will face bills of more than $100,000.

 

By law, contractors will be stuck with the bill. Many will attempt to go back to developers and owners to recoup the extra costs, but it's not guaranteed they'll help pay.

 

"All these costs, taxes included, are in a contractor's bid to the developer at the start of the project," said Michael Gifford, executive director of the Associated General Contractors of Colorado, a group representing commercial builders in the state. "That's the set price used by the developer to get a loan from the bank. The contractor can't go back to the developer and ask for more money, because the developer can't go back to the bank and ask for a bigger loan."

 

Eichem said the city is being reasonable. It could have legally just conducted more audits and applied penalties and interest. With the voluntary request, it's offering to waive the interest and penalties.

 

But contractors point out that the requests and audits aren't being fairly applied. To date, the city says it will only go after projects with estimated values of more than $20,000.

 

"I think that's a basis for a lawsuit because it's unfairly targeting a project based on its size," the contractor said. "You either apply it fairly, or you don't apply it at all."

 

Contractors are also questioning the timing of the city's actions, amidst a down economy. "I think it's understandable that governments will take a close look at their revenue stream in a down economy, but it needs to pass a fairness test," Gifford said. "Will they conduct the same review in the future when building costs decline?"

 

Moving forward, Eichem said the city updated its tax estimate system in early 2009 for any future construction. It now requires contractors to submit estimates with more detailed attention on building material costs.