The Road to a Balanced Budget Leads to Microsoft

Update: The Guardian UK has written an excellent analysis of this post - it's a must read: Is Microsoft a Tax Dodger? Thanks also to Slashdot, TechFlash, PI & macnn!

Microsoft's Cumulative Tax Evasion Now Exceeds Washington State's Biennial Deficit

Last week, the Seattle Times reported that Washington State's tax revenue is expected to decline by $238 million creating a $430 million shortfall in the biennial budget. The deficit is expected to grow further as a result of "rising demand for state services and other factors". Luckily, there is an easy way to shore up our finances - ask Attorney General Rob McKenna to begin enforcing the state's existing tax law on software licensing.

Over the past thirteen years, I estimate that Microsoft has avoided paying more than $707 million in B & O taxes on sales of its corporate software licenses (see Citizen Microsoft and Microsoft's $528 million Washington tax break ). Although the majority of its software development is performed in Washington State, Microsoft records its estimated $18 billion in licensing revenue per year through a corporate office in Reno, Nevada where there is no licensing tax.

Under the state's .484 percent software royalty tax^{(lowered from 1.5 percent in 1998 after industry lobbying)}, I estimate that Microsoft should have paid more than $90 million in 2008 and $87 million in 2009 in state taxes.

Just by enforcing the state's existing tax law from 2008 onwards, we could reduce Washington's revenue shortfall by more than 70 percent. Alternately, we could pursue the entire $707 million from Microsoft's thirteen years of tax dodging and cover most of the expected deficit going forward - perhaps more if damages are awarded through litigation.

Since Microsoft began operations in Reno in 1997, it has enjoyed record-setting revenue of more than $446 billion and profit of more than $124 billion. If it paid its actual tax bill in full today, it would still have more than $24 billion in cash holdings.

Readers love to make excuses for why Microsoft should be exempt from state tax law but all I'm asking for is uniform enforcement of existing state tax law. If we're not going to enforce the tax, why have it?

Given the number of Washington state residents out of work as a result of the recession, I call on  Governor Gregoire and Legislature to enforce existing tax laws before trying to cut benefits to our most vulnerable citizens. How dare they even consider reducing access to health care and unemployment benefits before addressing this long-ignored issue!

Before you comment - please see the "Note to Commenters" below...

Notes

1. If the Washington State Legislature hadn't bowed to industry lobbyists and cut the tax rate by more than 2/3, Microsoft would owe $2.08 billion.

2. I single out Microsoft because it's, by far, one of the biggest offenders, but I would like to see the uniform enforcement of state tax law to all corporations using out of state facilities to minimize tax payments.

Related links

• Microsoft's $528 million Washington tax break (Crosscut)
• Top Reader Excuses for Microsoft's Tax Avoidance (Idealog)
  
• Horrible ten years for Microsoft shareholders (Idealog)
  
• Citizen Microsoft (Seattle Weekly) and Follow up (Idealog) 
• More budget cuts loom for Washington state government (Seattle Times)
• Wash. expected to lose about $238M in tax revenue (Seattle Times)

Note to Commenters

A lot of the arguments made below were already addressed in this piece. Please read it before you comment.

Secondly, please review Washington State's B&O tax before you comment:

RCW 82.04.2907 Tax on royalties from granting intangible rights.

Upon every person engaging within this state in the business of receiving income from royalties or charges in the nature of royalties for the granting of intangible rights, such as copyrights, licenses, patents, or franchise fees, the amount of tax with respect to such business shall be equal to the gross income from royalties or charges in the nature of royalties from the business multiplied by the rate of 0.484 percent.

     "Royalties" means compensation for the use of intangible property, such as copyrights, patents, licenses, franchises, trademarks, trade names, and similar items. It does not include compensation for any natural resource or licensing of canned software to the end user.

[2001 c 320 § 3; 1998 c 331 § 1.]

* Canned software to the end user = retail software sales in boxes with end user licenses, not mass license sales to corporations

* The law does not distinguish between license sales intrastate, interstate or international

* By transferring it's software to Reno for sale from Nevada, Microsoft is accomplishing a "sleight of hand" which probably would not pass muster in Washington State court.

Comments

[Jeff]

Marty, thanks for the informative comment. When I interviewed Microsoft's Chief Legal Council Brad Smith for Citizen Microsoft about this, he never once mentioned that this practice was okayed by the State. We gave Microsoft every opportunity to correct our figures or respond further to our conclusions - and they chose not to. So, if Microsoft has received past permission on this, they have chosen to keep this confidential.

In Visio's case are you specifically talking about the B&O Royalty tax? - there are lots of categories as I'm sure you know.

Furthermore, this article was not intended to make a legal case - but simply to once again raise the issue of Microsoft's practice ... that as we anticipate budget cuts that will harm the most vulnerable among us, we should consider enforcing existing laws to balance our budget.

[marty]

While I'm at it I'll also reply to the comment posted referring to Irish manufacturing tax of 4% as also being a tax evasion. For what it's worth, this tax reduction practice is widely pursued by many companies in technology. This is done by having the International rights to technology owned by the Irish entity by having them share the costs of development. Pretty simple process. If you assume 30% of your market is EU then you can charge 30% of the development costs of a product which reduces the US development expense for tax purposes. It keeps the jobs in US and allows the true profit of the sale and marketing of this product to be taxed at the rates where the activities occur (EU).

It's also worth noting that even though this tax is minimized in the period where it is earned, it ultimately gets taxed at the US rate if the cash comes home in the form of a dividend.

Every country tries to get it's fair share of tax revenues and this process is an even handed attempt to minimize taxes. If you don't believe it is a Corporations responsibility to minimize it's tax cost, than I can only assume you are not taking itemized deductions that you are entitled to by the Internal Revenue Code.

[marty]

Jeff, your response while measured still appears quite disengenuous. You on one hand claim that they owe back taxes and/or encourage the state to enforce the existing laws and then hide behind a statement that you aren't making a legal case. The logic just doesn't hold up under any reasonable examination. Either what they have done historically is legal or it isn't. If it's legal and a justifiable tax minimazation (which every company has a duty to pursue as a responsibilitiy to it's shareholders) then why the headlines? How do you then ask why the state isn't "enforcing the existing laws" Hard for this simple mind to understand how to fix fiscal spending issues by linking them to a corporate entity who has followed the law though through enforcement of the law would owe massive back taxes, interest and penalties. Hmmm.

On the other hand if what they have done is illegal you might have a reason to write this blog. Unfortunately you continue to claim that you're not making a legal case...just benefiting from the doubt caused by the inference illegality.

You might also want to consider the same "most vulnerable among us" when you continue to take pot shots at the golden calf. I have no idea how large the amount is, but when you look at the amount of charitable giving that has benefitted our region due to the presence and success of Microsoft, it would likely cause your purported tax discrepancy to become a rounding error.

[Jeff@reifman.org]

Marty, I am a blogger - I was writing an editorial. Does The New York Times publish legal briefs on bank fraud? No, they report and editorialize about it. I am not providing a legal case here. I'll leave that to attorneys. Please understand the difference.

You lose me again when you repeat the argument that wealthy individuals and corporations in the state who make lots of donations should be exempt from tax law. If you read my top reader excuses for Microsoft, you would have seen this one already in there.

[marty]

Jeff-You cannot claim editorial license without the duty to stand behind your claims and be held accountable. Take a look at your own statments:
* "...perhaps more...through litigation"
* "...consider enforcing our existing laws to balance our budget"
* "However, I disagree with you that this is legal"

Your words not mine. These are clearly opinions on legality as opposed to editorial commentary. Clearly these types of comments would never have graced the Op Ed section of any major publication without some clearer distinction about what was conjecture.

I have no problem with an argument that our state system of taxation is in need of major rewrite. It is regressive and unreliable. We should be ashamed of not adopting a progressive system of taxation that incorporates the ability to pay instead of what we currently have. Adding additional road use/gas tax/sin tax/sales tax, etc. which all tend to be disproportionately paid by lower income generating tax payers is wrong. Microsoft in the category of higher wealth tax payers can and should pay more if it is part of an overhaul of our tax system. However, that is not your position in this blog and is why I've challenged your claims that they owe back taxes.

[marty]

BTW-I guess you were just "editorializing" again when you claim that I argue that wealthy individuals and corporations should be exempt from tax law. I make no such claim and your stating I did is insulting both to me and your readers. The comparison I was drawing was that anti-business activities such as rewriting tax law retroactively as you are suggesting would serve to encourage businesses to leave the state which would have much larger economic ramifications than those we are currently facing.

And yes I did read similar comments from other readers, but the statement to which I was referring was in your response where you played the "most vulnerable among us" card. Those most vulnerable would be exponentially worse off if as you suggest we pursue a policy of attacking businesses retroactively who have done nothing other than apply the tax code that was in effect during the period of time in question.

[Jeff@reifman.org]

Marty - I think we just disagree on this. This is a blog - not a Court. And, I've been reporting on Microsoft's tax policy for 4 years now. Just because the state hasn't investigated this matter, doesn't mean the B&O Royalty statute does not apply. Until the Legislature decides to repeal the B&O Royalty tax and offer amnesty for past offenses, Microsoft's tax policy is actionable.

[marty]

Ok I'm done. Thanks for your legal opinion that this is "actionable" lol. Feel free to "not approve" this one as you must have done with my last comment.

[Steve]

This guy really doesn't get it. You posted another link to a site supposedly covering peoples comments here, yet nothing on their covers even half of the problems people have pointed out.

Namely

MS is operating WITHIN the law, you may not like it but that doesn't make it illegal.
The AG can't go after them without changing the law. the current laws DO NOT give the state any rights what so ever over MS licensing.
You seem to be asserting that all MS development is done in Washington, IT IS NOT, MS have Development offices in multiple states within the US and foreign countries like Canada and the UK as well, so what entitles washington to the income even if they changed the law?
Even if they changed the law you can't just make it retroactive within massive impact to hundreds if not thousands of businesses, not to mention a then complete lack of trust in the state.

[KDRoad]

Every major corporation in the world takes advantage of tax loopholes. Just look at those incorporated in Delaware, Nevada and Ireland.

So lets pick on the one company that actually gives back. In 2008 there were $87.7 million in employee donations and matches through the Microsoft giving campaign alone. This doesn't include the Gates Foundation - Bill has pledged to give it all back.

And if you have any guts, just say it's tax evasion (not avoidance). You imply it, but that lacks conviction.