Microsoft Tax Dodge

Microsoft's Influence in Washington State Hurts Our Budget and Our Kids

    Here's a brief overview of how Governor Gregoire, the legislature, the courts and The Seattle Times have enabled Microsoft's hypocritical stance on education and tax dodging to damage our budget and our educational system. Please share this widely with friends and colleagues. Also, new audio clip of Microsoft's Brad Smith acknowledging the company's Nevada tax dodge.

When Institutions Fail, Education Suffers

    As the Washington State legislature worked to close a record $2.8 billion deficit in April 2010, chair of the finance committee Rep. Ross Hunter slipped language into the final budget bill that granted amnesty to Microsoft on more than $1.25 billion in unpaid taxes, interest and penalties, savings the company had amassed by recording its licensing revenue in a small Nevada office since 1997. Hunter’s bill also changed how the state’s royalty tax is calculated, saving the company $91 million more annually. Prior to his public service in the legislature, Hunter spent 17 years as a Microsoft executive.

    To balance the budget (and pay for Microsoft’s tax breaks), the Legislature cut $120 million from K-12 education and $73 million from university budgets. After signing the bill, Governor Gregoire praised Microsoft for contributing $25 million over five years to a scholarship program that largely funds graduates in technical programs that the company can hire.

    Since then, the state’s deficit has grown to $5 billion requiring another $500 million in cuts to higher education. Recently, two ratings agencies downgraded the state’s financial outlook.

    Washington schools rank 47^th nationally in class size and 42^nd in per pupil spending. The Washington State Supreme Court recently ruled that the Legislature has failed its Constitutional duty to properly fund public education but continues to leave the problem in the hands of lawmakers to resolve. The Washington Superior Court acted more quickly when it awarded Microsoft’s Nevada corporation an $8.7 million summary judgment against delinquent customers. For tax purposes Microsoft leverages Nevada laws but for legal purposes, it uses Washington’s court system. 

    Few Seattleites have ever heard about Microsoft’s Nevada tax dodge in part because The Seattle Times never mentions it in coverage of our ongoing budget crisis. Since the Post-Intelligencer stopped printing in 2009, The Times has been Seattle’s only daily newspaper. After a year of trying, I landed a meeting in November 2010 to detail Rep. Hunter’s actions to five Seattle Times journalists and Executive Editor David Boardman. While Boardman expressed interest in reporting the story, the paper never followed through. The day after our meeting, Governor Gregoire appointed Suzan DelBene, another former Microsoft executive, to oversee the state’s tax department.

    While it’s easy to single out Microsoft’s $597 billion in cumulative revenue since the opening of its Nevada office, the truth is that Washington’s tax system is riddled with more than 567 corporate tax breaks. Closing all of them could result in more than $98 billion in new revenue. But if you include Microsoft’s successful 1997 lobbying to reduce the state’s royalty tax rate by two thirds, the company’s Nevada tax savings would pay off the entire state deficit on its own.

    When John Burbank, a columnist in the neighboring Everett Herald, wrote that Microsoft’s unpaid royalty taxes “could be funding high-quality schools for Washington's children,” the company demanded a correction from the paper but refuses to release data that would prove its position. Due to corporate personhood, the same privacy rights as individuals protect Microsoft’s state tax records. I’ve proven Microsoft’s tax savings by comparing its published licensing revenues to the state’s aggregate data on royalty tax collections.

    In January, The Seattle Times did publish an editorial by one of its designated "Luminaries" Microsoft Senior Vice President and General Counsel Brad Smith (seen at right in a house ad for the paper) who oversees the company’s Nevada corporations, “…it's [Washington] state's paramount duty to provide for the public education of all children. Unfortunately, steady declines in public resources now threaten our ability to live up to that commitment.” He supports Governor Gregoire’s call for to increase the state’s sales tax, already the most regressive in the country. Listen to Brad Smith acknowledge the company's Nevada tax practices in this clip from our 2004 interview for Citizen Microsoft (Seattle Weekly):

    Meanwhile, the Gates Foundation and Microsoft CEO Steve Ballmer are actively funding advocacy efforts in Washington State to funnel these dwindling public education dollars towards the creation of private charter schools.

    In Washington, the Governor, the Legislature, the Courts and the press are failing our children.

Please share this widely with friends and colleagues.

Jeff Reifman is the co-founder of Envision Seattle and publisher of the MicrosoftTaxDodge.com blog. He is also a former Microsoft employee and one of the company's estimated ten thousand multimillionaires. He's lived in Washington State since 1991.

To Refute Claims, Microsoft Should Disclose Its Royalty Tax Payments

Update: Microsoft refuses to release the amounts of its royalty tax payments to Washington State.

Beginning with the publication of Citizen Microsoft in Seattle Weekly in 2004, I've reported that Microsoft used its Nevada office to avoid payment of the state's Royalty Tax from 1998 - 2010. I've blogged that the amount of the tax dodge has likely exceeded $1.07 billion (not including penalties). 

Last week, after John Burbank, Executive Director of the Economic Opportunity Institute, wrote an editorial condemning the company's hypocritical record of tax dodging while advocating for more education funding, Jeffrey Reading, Microsoft's Senior PR Manager wrote The Herald to refute the claims Burbank made (Burbank based his article on my reporting):

"Mr. Burbank does not include sourcing to support his claims regarding Microsoft’s Nevada licensing, which is part of a very complicated piece of state tax law. Much of the information regarding this issue is misinformation primarily spread by a blogger, and no state official has ever provided any factual data supporting his claims."

I stand behind my research and all of my claims. If Microsoft wishes to prove that it paid Washington State Royalty Taxes during the years 1998 - 2010, it should disclose its worldwide licensing revenue and its Royalty Tax payments for this time period. It would be quite simple for the company to provide these two sets of numbers and would put the issue to rest once and for all (as I have done here). 

If it is not willing to provide this data, it should frankly stop sending knowingly false letters to journalists accusing this blogger of spreading "misinformation".

I know that Microsoft's accusations about my reporting are false for two reasons:

1) Using the same analysis we reported in Citizen Microsoft in 2004, we know that the state's Royalty Tax collections are much smaller than they should be given Microsoft's reported licensing revenue. 

Since 1997, Microsoft’s reported $480 billion in revenue, approximately $149 billion from licensing. Under the state’s Royalty Tax from 1998 - 2010, more than $757 million dollars should have been paid in tax. However, since 1999, the Department of Revenue (DoR) reports that all taxpayers combined have only paid $72.9 million in royalty taxes.

For example, in 2009, Microsoft earned approximately $18.7 billion in licensing revenue. Washington State should have recorded more than $87.6 million in tax receipts, but the DoR reported only $6.3 million in royalty taxes paid that year. 

2) When I interviewed Microsoft's General Council and Vice President Brad Smith in 2004 for Citizen Microsoft, he admitted the tax avoidance effort, while attempting to make light of its scope:

"Well, the principle focus of discussion inside the company and with people in state government here at times has been both the focus on revenue generation for the State of Washington and job creation in the State of Washington. And, obviously the company did make a decision, I'm not remembering exactly how many years ago to put Microsoft Licensing Incorporated in Nevada, in part to recognize the lower tax rate[sic - Nv. tax rate is zero] that was in place there. And, there have have been times when people in state government have mentioned to us the issue of whether we might move that back to the state of Washington. The reality is that in the scheme of things the impact is not very significant either for the company or for the state either the state government or the state economy."

Just prior to publication of Citizen Microsoft, Seattle Weekly handed over our facts and figures to Microsoft and asked them to correct our reporting. They did not refute the facts at that time. So, it seems odd that they are now refuting these facts to The Herald.

Microsoft has never outrightly denied not paying the Royalty Tax for its licensing revenue during the years of 1998-2010. It's time for them to set the record straight and release the data. In my interview, Mr. Smith said that at the time that the company would consider releasing such data. It never has.

In closing, I'd like to make three important final points:

1) A Microsoft employee reported to me that the company used to send invoices for Microsoft Nevada from its Washington State office with envelopes printed with Reno, Nevada return addresses. Perhaps the company would also like to explain at this time how this practice might affect the legal independence of its Washington and Nevada based corporations that it claims in its tax records. If evidence of fraud is found in Microsoft's tax reports, this could potentially expose the company to severe financial penalties. 

2) The Royalty Tax rate actually was 1.5 percent (more than three times higher) prior to 1998, but was cut in response to software industry lobbying. Scenario B in the Financial History shows that if not for its lobbying to cut the Royalty Tax from 1.5 to .484 percent, Microsoft would owe $4.37 billion in taxes, interest and penalties.

3) A 2010 job listing at Microsoft's Nevada website (see background) claimed the sub-corporation records more than $30 billion in revenues annually. If accurate, this figure is about half the company's revenue and 40 percent greater than our earlier estimates. After re-calculating Microsoft's tax avoidance based on this figure (it stopped publicly reporting licensing revenues in 2004), we estimate Microsoft would owe $6.1 billion in taxes, interest and penalties - enough to fund all of the Legislature's 2010 cuts and the current shortfall.

Related Links:

• Overview of Microsoft's Nevada Tax Dodge including video by Amanda Congdon
• 2010 Fact Sheet
• Historical Financial Analysis of Microsoft's Nevada Tax Dodge (Google Docs Spreadsheet)
• Washington State Doesn't Have a Budget Deficit

John Burbank Tells Legislature to Target Microsoft

In his Everett Herald column today, John Burbank, Executive Director of the Economic Opportunity Institute, zeroes in on Microsoft's tax dodge and its harmful effects on the state's educational system:

Seeds planted by corporate lobbyists in our state's tax code, and fertilized by an obedient Legislature, have grown to the point where waste, fraud and abuse in corporate taxation is crowding out our kids' K-12 education, the paramount duty of the state. ...

Microsoft made over $23 billion in profit on $69.9 billion of revenue in its 2011 fiscal year, a tidy profit rate of 33 percent. But apparently the company still needs to skimp on taxes. By running its licensing sales through a shop in Reno, Nev., it avoids royalty taxes that could be funding high-quality schools for Washington's children.

The Legislature has enabled Microsoft to continue this ruse. Last year the state budget included a provision to ensure that only Microsoft's licensing revenue from Washington state customers is taxable. For good measure, the Legislature agreed to an amnesty clause that legally prohibits the state from trying to collect back taxes owed by Microsoft before the narrower definition of taxable licenses was passed.

So how much did public school students and their teachers and professors lose from this ruse? Somewhere between $100 million and $400 million a year for the past 15 years. (We can't get much more accurate because we can't see Microsoft's internal corporate accounting.)

Read the full article: State Must Stop Coddling Corporations 

Hypocritical, Tax-dodging Microsoft Supports Increased Sales Tax to Fund Higher Education

TechFlash reports that Microsoft's General Counsel Brad Smith has called for the Governor to end cuts to higher education and is supportive of an increase to our state's sales tax. Microsoft loves the sales tax because it's a regressive tax - meaning that the poor pay a higher percent of their income in taxes than the rich:

"People earning less than $20,000 annually pay 17.3 percent of family income toward sales and excise taxes and property taxes, the report said. People making between $99,000 and $198,000 each year pay 7.6 percent toward their tax bill. Meanwhill, people in the top 1 percent of earners – those making more than $537,000 a year – pay just 2.9 percent, the report said."

The Institute for Taxation and Economic Policy (ITEP) reports that Washington State already has the most regressive tax structure in the country.

If it weren't for Microsoft's Nevada Tax Dodge and its lobbying effort, Washington State wouldn't have a budget deficit right now. We'll be updating our reporting on this soon (our earlier summary is here).

In general, Microsoft's geographic accounting practices are so deceptive that the ITEP had to exclude the company from its most recent Corporate Taxpayers and Tax Dodgers report:

"We [had] to leave out from the study companies whose geographic allocations were obviously ridiculous (e.g., almost all or even more than all of their pretax profits were reported as foreign, even though most of their revenues and assets were in the United States). Google and Microsoft are two examples of such apparently “liar companies” that we left out of the study. For such companies, it may be that they reported in their annual reports how they misallocated their profits on their tax returns, rather than where their profits were really earned."