When you buy Microsoft software in a box for personal use, you pay sales tax at the point of delivery. But, when large corporations purchase Microsoft software, they are actually buying an electronic download with the right to install that software on a pre-determined number of computers. The same goes for PC manufacturers such as Dell that preinstall Microsoft Windows 7 on its computers.
Washington has a specific manufacturing tax for this called the B&O Software Royalty Tax that applies to “…every person engaging within this state in the business of receiving income from royalties…for the granting of intangible rights, such as…licenses.” Furthermore, “Royalty income from software licenses is taxed at the ‘domicile,’ or location, of the owner of the property.” Because it is a wholesale tax, it applies to sales regardless of the location of the customer – whether in the U.S. or in another country. Since the tax is small, less than half a percent of gross revenue, it does not violate the Commerce Clause of the Constitution, which regulates interstate trade.
"Offshoring" Revenue to Reno, Nevada
Microsoft began dodging the tax in 1997 by setting up a small office in Reno, Nevada to record the revenue it generates from software licensing. Since then, I estimate it’s earned $143 billion in licensing therefore avoiding the payment of $728.8 million in Washington State taxes. Using the historical interest rates for tax delinquency from the Department of Revenue, I estimate Microsoft’s unpaid tax bill at $995 million. This amount does not include penalties, often assessed at 25 percent - which could bring Microsoft's total tax bill to $1.24 billion.
Trying to Have It Both Ways
For tax purposes, Microsoft tells Washington State it's engaging in the software licensing business from Nevada. But for legal purposes, Microsoft relies on Washington courts and our laws to protect its Nevada contracts.
Microsoft's Washington legal department is actively involved in preparation and review of Microsoft Nevada's contracts. In fact, the majority of Microsoft Nevada's contracts are executed so that they are governed by the laws of Washington.
Microsoft uses Washington's King County Superior Court to sue on behalf of Microsoft Nevada as it did in the case Microsoft Licensing GP v. TSR Silicon Resources.
Even twelve years after it began this tax dodge, Microsoft continues to make adjustments to process and personnel in Washington to shield its misdeeds.
Recent Comments