On Monday, we made a virtual road trip to Olympia, mailing letters to the entire Washington State Legislature about Microsoft's $1.24 billion tax dodge.
The Legislature just got into session for what looks to be an ugly year. Basically, there's a $2.6 billion deficit and as the Seattle Times put it: "nothing but bad choices".
We hope our letter (below) offers new ideas for enforcing existing tax laws that raise revenue before lawmakers enact painful cuts and new tax increases.
January 8, 2010
To the Honorable <Senator/Representative LastName>:
I am writing to call your attention to the Department of Revenue’s lack of enforcement of RCW 82.04.2907, the tax on royalties, with regard to Microsoft Corporation.
Since 1997, Microsoft has used a series of Nevada subsidiaries to excuse itself from paying up to $728.8 million in royalty taxes. With interest and penalties, Microsoft may currently owe the state $1.24 billion.
I first wrote about Microsoft’s tax practices in “Citizen Microsoft” for Seattle Weekly in 2004. Recently, I created a website with more detailed analysis at www.microsofttaxdodge.com
In the interest of full disclosure, I am a former Microsoft Group Program Manager and one of its multi-millionaire alumni. I am very grateful to the company for the opportunities it gave me, but this is more than an issue of whether Microsoft should be allowed to use loopholes to minimize its taxes. This is an issue of whether Microsoft’s practices are illegal and contributing to the insolvency of Washington State.
The royalty tax requires every business engaging in software licensing to pay a .484 percent tax on gross revenue. Since 1997, I estimate Microsoft has earned $127 billion in profit from $460 billion in revenue. About $143 billion in revenue came from software licenses to OEMs and large customers and is subject to this tax.
Microsoft has nexus here; its 40,224 employees at its 79 Washington sites create most of its software.
For tax purposes, Microsoft tells the state, its licensing business doesn’t operate here, yet it maintains a Volume Licensing Group in Redmond and to this day continues to leisurely migrate employees to Reno.
For legal purposes, Microsoft executes the majority of its Nevada-based licensing contracts so the laws of Washington govern them. Microsoft has even used King County Superior Court to sue and collect millions in damages on behalf of its Nevada subsidiary despite evading taxes on revenue from the disputed contracts that might otherwise provide funding for the court’s budget.
Microsoft Licensing GP of Nevada is simply an Alter Ego to illegally provide cover for Microsoft to evade the royalty tax. Seven of twelve registered officers of Microsoft Licensing’s parent corporations are based in Redmond, and eleven are company employees. If Microsoft properly paid the B & O tax for the fair market value transfer of its software licenses to its Nevada subsidiary, it would have no motive to record its licensing transactions in Reno.
Similarly, the Step Doctrine can be applied when a corporation creates additional artificial steps to appear as if it is not liable to pay tax – such as recording the licensing revenue in Nevada. The Department of Revenue says it does not apply the Step Doctrine to B&O taxes because of a Washington Supreme Court case, Estep v. King County, 66 Wn.2d 76, (1965). However, this case related specifically to real estate excise taxes – not intangible goods such as software licenses. The court probably did not anticipate the capability of a Washington-based corporation to electronically transfer license codes in seconds over the Internet to evade a billion dollars in taxes.
In 2009, 3,088 Washington taxpayers paid the royalty tax under threat of enforcement. How can Washington State continue to assess this tax on these taxpayers but not on Microsoft?
To add insult to injury, Washington State contracts with Microsoft Licensing GP of Nevada for its own Volume Licensing Agreement. The tens of millions of dollars annually Washington cities and state agencies spend on Microsoft software are therefore a component part of its tax evasion.
Washington’s Budget Crisis: The Result of Good Times
Microsoft’s had an incredibly profitable decade. How is Washington State’s financial insolvency the result of such good times?
In 2009, Microsoft paid €63.5 million in corporate tax to the Republic of Ireland, often considered the Nevada of Europe. Why is Microsoft paying more tax in Ireland than it does in Washington State?
Microsoft’s strong earnings rest on a precipice. There may not be an opportunity in the future to tax Microsoft for the state infrastructure it’s relied on to enrich its shareholders. The growing success of mobile smartphones, tablets and netbooks that do not require Windows as well as Google’s upcoming Chrome operating system and free Internet-based Office applications all threaten the company’s cash cows.
Microsoft’s already exporting jobs away from Washington as fast as it can. Nothing the Legislature does will change this.
I urge you to enforce our existing royalty tax law before contemplating drastic spending cuts or higher taxes; before Microsoft falls on hard times.
Please feel free to contact me with any questions. I would be glad to offer my assistance in sharing what I know about this matter.
Sincerely,
Jeff Reifman
