Tech entrepreneur Matt Jaffe privately stewed as Denver Mayor Michael Hancock rolled out the red carpet last month for Layer 3 TV, a Boston-based startup that was granted state and local tax incentives to relocate its headquarters to the Mile High City.

Jaffe’s 303 Software, an 8-year-old Denver company that employs 25, had been hit recently with an audit and $160,000 bill for failure to collect and remit an obscure sales tax on Web and mobile app development, services that are typically exempt.

Denver auditors also nailed the company for unpaid use taxes on seemingly trivial items such as food purchased in another city but consumed at its headquarters.

“That burns my biscuits,” Jaffe said. “My friends, also owners of software development firms — some with much larger staffs than mine — have been similarly audited and, like me, hit with six-figure bills for this obscure sales tax. And all the while Denver gives tax breaks to companies like Layer 3, who have created exactly zero jobs here.”

The uneven treatment is pushing some Denver software executives to consider their own relocations and threatening to spoil the city’s efforts to become ” Silicon Mountain” to rival California’s Silicon Valley tech haven.

Research by The Post and the city’s tax division shows Denver’s software tax policy is among the most unfriendly to business when compared with other tech hubs across the country and cities in the metro area.

“This has made us seriously consider not being in Denver,” said Mike Gellman, CEO of SpireMedia, which was also hit with a large bill tied to the software tax. “We really are huge supporters of technology in Denver. The problem is when Denver starts charging unfair taxes on software, we are really worried about how this is going to affect Denver moving forward.”

Denver city officials note that the business personal property tax credit granted to Layer 3 is also available to existing companies if they apply for them and expand operations. Additionally, Layer 3 received up to $2.9 million in job growth incentives from the state.

As for the 3.62 percent sales tax on Web and mobile app development services, the city says it fits within a broadly written tax code from the mid-1980s allowing it to levy sales and use taxes on data processing programs.

“Denver, like most cities across the U.S., has for the last several decades shifted from a goods-based economy to a services-based economy,” said Paul Washington, Hancock’s economic development chief.

As such, cities are leaning on tax revenue from custom software development to counter the drop in revenue generated from the retail sale of prewritten or packaged software programs, like the latest version of Microsoft Windows purchased at Best Buy, and other tangible goods.

Denver updated its tax guidelines in May 2013 to “address changes in the data processing program industry,” or essentially state that software-related practices, processes and technologies provided to other locally based companies are taxable.

Gellman and Jaffe said they weren’t aware of it until they were hit with audits. Both design and develop websites and mobile apps for business clients.

They compare their work to services offered by doctors and lawyers, which aren’t subject to sales tax.

Alan Goldenberg, manager of state and local tax for accounting firm Friedman LLP, said comparing software development to other professional services opens up a “big philosophical debate.”

“Certain professions have just been grandfathered into this. … They’ve never had sales tax applied to them,” Goldenberg said. “Because software as a service is an evolution of computer software itself, states and cities are saying, ‘Hey this has always been traditionally taxable.’ … For them, this is a huge generator of revenue.”

Denver’s review of software taxes in major tech hubs across the country shows that it has among the most stringent tax structures. The review was spurred by complaints lodged last year by local software companies.

Out of eight cities — including San Francisco, San Jose, Seattle and New York — only Denver and Austin, Texas, tax custom software. Web development and software programming services provided to individual clients generally fall under the custom software category.

Among other cities in the metro area, Lakewood also charges a sales tax on custom software work. But Arvada, Aurora, Boulder, Westminster and Thornton do not. Boulder notes that a company has to provide actual coding, rather than just installation services, for a custom software transaction to be exempt.

“If you hire a programmer to build a program for you, then that would be a service and wouldn’t be subject to a tax,” said Barb Dolan, sales tax manager for Westminster.

Other factors, such as property and employment tax, need to be considered when judging a city’s friendliness to business, said Washington, Denver’s economic development chief.

“When you are evaluating the overall tax policy of a jurisdiction, it’s equally important to understand the true tax burden” to businesses, he said.

A 2012 report by KPMG ranking the least-costliest cities to do business placed Denver 14th out of 27 major cities. San Francisco, Seattle and New York were the most expensive, according to the study that considered taxes, labor, transportation and other costs.

“I don’t think the amount of tax that we are imposing and the type of tax we are imposing is impeding or retarding business growth,” Washington said.

The city said it couldn’t disclose how much sales and use tax it collects annually on software and related services.

“Businesses are not required to itemize what they are remitting tax on,” said Denver spokesman Derek Woodbury.

Denver offers some exemptions to its software tax. For example, services that fall under the graphic design category are not taxable.

SpireMedia officials argue that the tax on Web and app development puts their business at a disadvantage.

“We’re at a competitive disadvantage to the tune of 3.62 percent,” chief financial officer Stephen Lloyd said. “Margins aren’t real thick in this industry to be able to cover that.”

After operating 16 years without collecting the sales tax, the company is now remitting $35,000 a quarter to the city, he said.

Denver hit ProtoTest with an audit last summer, a year after the tech services company relocated its headquarters to the city from the Denver Tech Center. Because the company tests rather than create software, its service was deemed to be exempt from the city’s sales tax.

But Denver still sent auditors to ProtoTest’s offices a handful of times during the audit. It ultimately levied ProtoTest with a bill for less than $800 covering use taxes on items purchased outside of Denver city limits in which an equivalent tax wasn’t paid.

“It was an unpleasant experience,” said Pete Dignan, CEO of ProtoTest. “Why wouldn’t they be friendlier? It was just an annoying and frustrating thing, and it was very time consuming. We had to reconstruct a staggering amount of receipts.”

303 Software was also subject to use-tax scrutiny. Denver tax officials say everything has to be examined during an audit.

“If we go out to Westminster to go to Costco to buy sodas for employees in the office in Denver, we’re on the hook to pay the difference between the sales tax in Westminster and the sales tax in Denver,” said Stefan Ramsbott, 303 Software’s co-founder.

The company was able to negotiate its bill down to $50,000 through exemptions and waived penalties.

“We had to go in debt to pay that off,” co-founder Jaffe said. “We had to put a hire on hold that we were going to bring in. It’s just a crappy situation.”

Andy Vuong: 303-954-1209, avuong@denverpost.com or twitter.com/andyvuong