Microsoft Tax Dodge

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 

Washington State Doesn't Have a Budget Deficit

Washington State doesn't have a deficit, it just has a destructive array of tax breaks for wealthy corporations such as those highlighted by the Economic Opportunity Institute and Seattle Weekly's ongoing Candyland of Tax Breaks series. Amazingly though, the impact from Microsoft's lobbying and dodging of the state's Royalty Tax is enough on its own to make up the entirety of last year's draconian cuts and the current budget shortfall.

Until 2010, Washington State's Royalty Tax required Microsoft to pay about half a percent (.484) of its worldwide licensing revenue in taxes (cumulatively, about $180 billion since 1998). By recording its revenue through a small Reno, Nevada accounting office, the company claimed the revenue was not taxable (for deeper background, read our Overview and 2010 Fact Sheet). The company has never denied this activity and in fact has confirmed its Nevada tax practices in public statements.

Here's three ways to look at Microsoft's impact on the state's budget deficit:

1) $1.51 Billion in Tax Savings: Based on Microsoft's own reporting, I estimate the company has saved $1.51 billion in taxes, interest and penalties since 1998. For the first time, we've published our entire analysis in a Google Docs spreadsheet: Financial History of Microsoft's Nevada Tax Dodge.

This estimate includes the $104 million that Microsoft saved last year after Chair of the Finance Committee Ross Hunter, a former Microsoft Executive, led the Democratically controlled Legislature to drastically shrink the Royalty Tax from a tax on worldwide revenue to one based just on sales to Washington State customers. Hunter's action will continue to cost the state more than $100 million annually going forward. Hunter even slipped in a section to grant Microsoft amnesty from its past abuses.

2) $4.37 Billion in Tax Savings: 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) $6.1 Billion in Tax Savings: 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.

In general, Microsoft's geographic accounting practices are so deceptive that the Institute of Tax and Economic Policies had to exclude the company from its 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."

It's time to question the frame that Governor Gregoire and the Legislature talk about the budget and education cuts. There is no budget deficit; we've just made a choice to give the region's most profitable company a huge pass on our Royalty Tax law. There is no budget deficit - only the money we've let Microsoft keep for itself through harmful insider lobbying and Nevada tax practices.

So in response to Governor Gregoire's and Microsoft's General Counsel Brad Smith's call for an increase in the already regressive sales tax to stabilize education funding, tell them where they can find the money: One Microsoft Way. 

 

Ballard's Anti-Microsoft Banner Wrong on the Facts

Love to see this agitprop trying to raise awareness about Microsoft's Nevada tax dodge. It's just wrong on the latest facts (photo courtesy of Geekwire):

In 2010, the Legislature changed the state's Royalty Tax in Microsoft's favor. The change was led by (wait for it) former Microsoft executive Ross Hunter, Democratic Chair of the Finance committee. The Royalty Tax used to be a .484%* tax on worldwide revenue from software licensing. Microsoft claimed its licensing revenue from its Alter Ego corporate sub-identity in Nevada to avoid the tax. It saved between $1.51 billion and $6.1 billion depending on how you calculate it. However, Hunter changed the tax so the Royalty Tax is now apportioned. The tax now only applies to sales to Washington State customers (not worldwide revenues).

It was a huge gift (tax cut) for Microsoft. And, of course, Governor Gregoire appointed another Microsoft executive to run the Department of Revenue last year ... so it's unlikely the department will crack down on Microsoft's Nevada activities.

So a more accurate banner would have to read, "Microsoft's dodged $6.1 billion in Washington State taxes before it lobbied the legislature to rewrite the law to eliminate the tax."

* Prior to 1998, the Royalty Tax was actually 3x higher (1.5 percent) but was reduced to .484 percent after (wait for it) lobbying from the software industry (aka Microsoft)

 

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."

 

Crosscut Strips Anti-Microsoft Paragraph from Published Editorial on Tax Policy

Last week, a colleague excitedly emailed me about an opinion piece on Crosscut about Initiative 1098 (the progressive income tax initiative) which hammered Microsoft for its Nevada tax dodge on many of the points previously mentioned on this blog: 

"Microsoft's behavior regarding B&O taxes — dodging them for years by doing their licensing from Nevada — has been shameful. The state's failure to call them on it has been shameful. Last session's legislation legitimizing this was shameful."

However, by the time I read the editorial, the quote was gone. This concerned me as I've had trouble getting Seattle's journalism community to cover Microsoft's thirteen year billion dollar Nevada tax dodge. It may concern you too because Crosscut has relied heavily on $500,000 in grants from the Gates Foundation over the past year. Is there a conflict of interest at play? Additionally, the author of the editorial, Ed Lazowska, holds the Bill and Melinda Gates Chair in Computer Science & Engineering at the University of Washington.

I contacted Crosscut's publisher David Brewster via email to ask him about the post-publication edit as well as Director Lazowska. I asked each for an on the record response that I could publish.

Disclaimers: I invested $5,000 in Crosscut when it first started as a for profit. It later converted to a nonprofit entity (the investment was converted to a donation). I have written on Microsoft's tax dodge previously for Crosscut (here & here). I'm also a former Microsoft Group Program Manager. I consider myself a friend and colleague to Brewster et al. in the Crosscut community.

Q: Can you explain why the quote was removed?

Brewster: I thought it was too extraneous, and needs much more reporting and context, so took it out on further reflection, and with Ed's concurrence.

Q: Can you explain the post publication corrections policy at Crosscut or why this edit was made post publication? 

Brewster: No real policy. We often change stories after they are first put up, or as second thoughts become first thoughts.

Q: Could you tell me if this is a statement that you wrote and whether it's something you still stand behind?

Lazowska: The statement doesn't have anything to do with 1098.  I also don't feel that it's a defensible statement.

I'm not an expert in journalistic practice but none of these responses erased my doubts. Post-publication edits in a major online news site should be done with great care and transparency. Given that this was an opinion piece, the relevance of contextual reporting and defensibility seems less important. I don't understand why Lazowska would allow something to be published that he didn't think was defensible in the first place. If you read this blog, you know those comments are defensible. 

As investigative and online community journalism is increasingly funded by private foundation funds, it's important that the same ethical guidelines separating funders from coverage apply. While the Gates Foundation is not likely involved in editorial decisions at Crosscut, their support seems to be having an impact on what gets written on the site.

When I wrote an April Fools Piece on Microsoft's Tax Dodge for Crosscut earlier this year, Brewster removed a paragraph about the Gates Foundation: "The Experience Music Project will be razed to provide additional parking for the Gates Foundation, which will move its executive offices to the top of the Space Needle. A zip line will be installed from there to the foundation entrance." (The Foundation is building a new office on formerly public land at Seattle Center). I don't feel it's fair to quote Brewster's email to me from that time in this piece. However, he expressed that the Gates Foundation might have been unfairly dragged into the story. I felt uncomfortable about the change then - but felt it was more important that the piece get out there. 

The edited paragraph (without the Gates Foundation mention) was changed to: "Seattle Center will be transformed. The Experience Music Project will be razed to make room for a new retail store, the Experience Microsoft Project, designed jointly by local glass artist Dale Chihuly and architect of the popular Seattle Public Library, Rem Koolhaas. Koolhaas’ design also calls for a glass helipad atop the Needle and a zip line down to a new private airstrip, for which a portion of Memorial Stadium and McCaw Hall will be relocated."

In retrospect, Crosscut would have been in the final stages of receiving approval for the $400,000 July 2010 grant when my April 1st piece was published.

I have incredible respect for Brewster and the Crosscut team ... but I do not think that this reflects well on the organization or its capacity to effectively perform investigative work in our community. I hope that some thought is given to making the editorial process more transparent.

I also think this raises solid issues for discussion about funding of nonprofit community news sites by foundations who often have a vested interest in coverage.

The Seattle Times Earns "F" on Coverage of Microsoft Tax Dodge

    If there were a Pulitzer Prize for failing to cover vital issues facing a community, The Seattle Times would win for its lack of coverage of Microsoft's 13 year Nevada tax dodge throughout this year's budget session in Olympia.

    Since 1997, Microsoft has avoided the state's royalty tax on its now $20.7 billion annual software licensing business by recording these sales in Nevada. I estimate the company has saved more than $750 million dollars through this practice (with interest and penalties, the amount balloons to $1.2 billion). This year, Rep. Ross Hunter, Chair of the Finance Committee and a 17 year former veteran of the company, helped push through a change in the royalty tax that essentially legalized Microsoft's tax practice.

     With Washington State facing insolvency and a record $2.8 billion deficit, The Seattle Times never told its readers about Microsoft's tax dodge despite its considerable impact on the deficit and Rep. Hunter's efforts and potential conflicts of interest. Senior Microsoft executives like Hunter often leave with tens of millions of dollars of company stock. (Hunter is pictured below-right)

With the demise of the print-edition of the Seattle Post-Intelligencer, Seattle is a one daily newspaper town. If The Times chooses not to report on an issue, it's quite likely residents won't hear about it.

    The Times also failed a key test of the new media landscape. If it lacked the resources or inclination to cover an important story, would it highlight a credible citizen blogger's report online or somewhere in print? Apparently not. The only coverage given to Microsoft's Tax Dodge was in a passing one sentence mention, made without much explanation or context, near the very end of the budget session.

    Meanwhile, the Microsoft Tax Dodge blog received a wide variety of other mentions. Local coverage included: Seattle Weekly (print and online), detailed coverage at TechFlash.com and Crosscut.com and online mentions at The Stranger's Slog, SeattlePI.com and local political blogs Publicola and HorsesAss. The Seattle NPR radio affiliate, KUOW, covered the issue in two of its shows: Weekday and The Conversation, which interviewed Mr. Reifman, the publisher of this blog. Other online mentions were made at The Guardian UK, BoingBoing, Huffington Post, Slashdot, Digg (popular), Reddit (hot) and Sometimes Daily which produced an introductory video. There were even April Fools' stories and a cartoon mocking Microsoft's tax practices.

     I know Times reporters knew of the issue because I began making calls to reporters at the paper back in October 2009 and continued peppering them with emails throughout the budget session. 

    On the same day that a technology reporter for The Times told me that he would want to investigate the issue for himself before he'd write about it and that he just didn't have time, I noticed he found time to post a video of the Windows 7 logo made with dominoes to his blog.

In general though, I do not want to make this post about individuals. I've had detailed discussions with Times reporters on the phone and in email. I have personal and professional respect for their talent, skill and the challenges they face. Yet, at this point, the paper's record on Microsoft's tax dodge stands on its own.

    At a time of fiscal crisis when Seattle readers really needed to know that their taxes would be raised and Microsoft's cut by $100 million dollars annually, The Times was essentially silent. As the largest print paper in the state, voters all over Washington State were left in the dark.

     The Times regularly reported on the growing deficit, lawsuits over education funding and evolving budget proposals to raise taxes on businesses, beer, candy, soda even bullion; but it never told readers how Microsoft dodged more than a billion in taxes, interest and penalties.

    I do believe that this is one case where having two newspapers in town would have helped drive coverage. The Seattle PI's Microsoft blogger mentioned Microsoft's tax issue several times even re-publishing one of my editorials.

    Last week, The Atlantic asked if anyone could replace the local beat reporter in uncovering local corruption and misdeeds, including whether bloggers might do this. I believe that they can, but it helps a lot if print journalists pay some regard for their effort.

Frankly, I'm amazed at the quantity and breadth of online coverage this blog generated for Microsoft's misdeeds this year, but extensive online coverage is not yet a replacement for local ink. Few people in Washington State seem to know about Microsoft's Nevada tax dodge and how it relates to their own increased taxes this year.

    As for why the Department of Revenue ignores legal precedents that seem to indicate Microsoft's past tax practices were illegal, we still don't know. Stay tuned, one Times reporter emailed me that they've been meaning to get back (sic) to this topic.

Disclosures: Last week, my OpEd submission "Balancing Microsoft's Interests with Our Own" was rejected by The Times. Earlier this year, a Times reporter had suggested I submit one. I am also an ex-employee of Microsoft and one of its grateful millionaires.

New Economic Nexus Report Raises Questions

The Washington State Legislature apparently traded away $100 million to get $2.6 million in new tax revenue this year as I detail in my latest open letter:

Dear Legislator,

I am writing to call your attention to a report that I received via a public record request this week, on the estimated impacts of the Economic Nexus bill.

The report says that the apportionment of the royalty tax will result in only $2.6 million of the $84.7 million in estimated new out of state tax revenue in 2011. The vast majority of the new revenue is generated by apportionment of other service taxes such as those on out of state banks.

It appears that OFM did not provide this breakout in its earlier bill reports prior to your final vote on SSB 6143.

Why does this matter? Back in March, I wrote most of you asking that you remove the royalty tax from the economic nexus bill and that this would give the state the opportunity to challenge Microsoft for $100.1 million in annual royalty taxes (.484% of its $20.7 billion worldwide annual licensing revenue recorded in Nevada).

Instead, advocates pushed the bill through on the merits of the $84.7 million in new revenue without apparently highlighting that there was very little financial basis to bundle in the royalty tax. Essentially, in 2011, we’ve traded $100 million for $2.6 million. In fact, apportioning the royalty tax will likely cost the State of Washington far more than $100 million annually going forward.

Would the Department of Revenue prevail if it had to take Microsoft et al. to court to challenge its Nevada-based tax avoidance operation? I believe it would.

In United Gas Corp. v. Fontenot, 241 La. 488, 129 So.2d 748 (1961), the Court writes:

Under the separate and independent exception to the mobilia rule, the state where the corporation's "commercial domicile" exists is, in effect, placed on a parity with the legal domicile of an individual, and it may, therefore, upon the soundest principles, subject its intangible property to the income tax laws of the state, wherever located, as if it were a "citizen" of that state, without violence being done to the due process and equal protection guarantees of state and national constitutions, or the interstate commerce clause of the Constitution of the United States...

Further, in Louisiana Dep't of Revenue v. Gap (Apparel) Inc., 886 So.2d 459 (La.Ct.App. 2004), the State Court of Appeals wrote:

“Because [intangible] assets have no physical location by their very nature, the jurisprudence has developed three separate doctrines applicable to their taxation...if the intangible property is used in another state in such a way as to become an integral part of a business carried on within the state, the intangible property acquires a "business situs" in that state and is subject to taxation in that state [and]…where the business of the corporation is actually managed and function in a state other than the state of incorporation, a "commercial domicile" exists in the state where the corporation's principal place of business is, and the corporation's intangibles may be taxed there.”

Royalties from Nevada constitute nearly a third of Microsoft’s revenue – making it in integral part of its Washington-based activities, home of its commercial domicile.

So far, the Department of Revenue has not produced compelling evidence of the legality of Washington State corporations evading the pre-SB6143 royalty tax by operating from Nevada.

Each time I hear Microsoft complain about Washington's inadequate transportation or its inability to find well-educated, appropriately trained job applicants in our state, I wonder why the Legislature missed its chance to enforce existing tax law and get them to help pay for it.

After reading the attached report, I really don’t understand.

Sincerely,

Jeff Reifman

Founder, Citizens for Fair Tax Enforcement

Governor Gregoire Isn't Clueless, She's Gutless

 Is Governor Gregoire Clueless?

Apparently, Governor Gregoire is not clueless, though I thought she might be after reading her recent interview with TechFlash. 

TechFlash asked Gregoire: "During the budget deliberations, there was a proposal at one point to tax custom software as retail goods, not as a service. At the same time, Microsoft uses its Nevada subsidiary to reduce its royalty tax on software licensing. How do you view those two issues, and where would you put the tax?"

She responded, "...On what Microsoft has done, there was an attempt to try and get them to come back with that, back into this state. We were trying to find a way to make sure that happened. Again, every attitude you can see by the Legislature was to try and bring what had left back and retain what we had here. Anything that's a disincentive to that isn't going to get a shot."

Her answer confused me since the bill she just signed gave Microsoft a huge effective tax cut, changing the royalty law from a tax on gross worldwide revenue to one only on sales to Washington State customers. Whereas Microsoft will earn approximately $20.7 billion in worldwide licensing revenue this year, its sales to Washington State are a tiny fraction of this. So having slashed Microsoft's tax exposure, what exactly did Gregoire want to bring back?

Furthermore, every effort in the Legislature, spearheaded by 17 year veteran ex-Microsoftee and Chair of the Finance committee Rep. Ross Hunter, seemed geared towards rewriting the system in favor of Microsoft ... the legislation even includes language which grants Microsoft amnesty on its past 13 year Nevada tax dodge, an estimated $757 million in unpaid taxes.

Then, TechFlash asked, "Would you like to see Microsoft record those royalty revenues here ..." The Governor replied "Yes." Was the governor aware that she just cut Microsoft's tax exposure by an estimated 99 percent? Had she been clueless to Rep. Hunter's efforts on behalf of his corporate alma mater? Had she signed a bill without any knowledge of its impact?

TechFlash followed up: "...to therefore pay the tax here?" Gregoire responded, "I'd like them to have everything back here. I'm upset that they think they have to send anything out of state. So I'm willing to try and look at ways that would be an incentive to them."

So, now that the Governor signed the bill that guts Microsoft's royalty tax exposure and grants amnesty for its past tax dodge, she wants them to pay their fair share. I was flabbergasted.

What does Gregoire want Microsoft to bring back to Washington State?

I contacted the Governor's office for clarification. They put me in touch with Department of Revenue spokesperson Mike Gowrylow before eventually having me speak with Gregoire's Deputy Communication Director Viet Shelton. Shelton offered me this statement via email after we spoke:

I feel confident saying that the Governor’s comments to techflash are pretty clear. But, after talking to you and your request for additional comments, let me elaborate on the topic.

Some companies have moved their royalty operations out of state and one of the reasons was how we taxed all their gross revenue on sales worldwide. It is hard to compete with states such as Nevada that impose no business taxes on such income. The “Economic Nexus” legislation that passed this session will make us more competitive by taxing businesses only on the revenues they receive from Washington customers. That way, it doesn’t matter where a company’s operations are based -- Washington will be entitled tax its fair share of the company’s income. To be clear, one of the primary motivations behind this law is due to the existing loophole that many out of state companies that do significant business in Washington don’t pay taxes. The “Economic Nexus” legislation was designed to close this loophole and level the playing field between in-state and out of state companies. In fact, the expected result of the legislation is that the state will get an additional $84.7 million in additional revenue just in the next fiscal year alone.

There is also hope that the legislation will encourage companies that have moved their royalty operations out of state to return to Washington. We’ll get those jobs back and tax revenue on Washington sales that we don’t now get. Again, the goal is about getting jobs back in the state.

Gregoire's Not Clueless, She's Gutless

In the year of a $2.8 billion budget gap, Gregoire chose not to cast Microsoft as a tax evading villain, enforcing the old royalty tax in a PR and legal coup that might have netted the state $100.7 million this year (note: that's more than $84.7 million) not to mention $1.2 billion in past payments, interest and penalties, instead she chose to raise the business service tax rate, create new "7-11" taxes on beer, wine and candy and to cut vital services including unemployment benefits to the disabled.

Governor Gregoire isn't clueless, she's gutless. You see, the next reporter to interview the governor should ask, "Why did you think it was fair to cut taxes on the state's most profitable company and forgive them for their evasive tax practices while choosing instead to raise taxes on hard working Washington businesses and the lower and middle classes and cut services to the most vulnerable among us?" Gregoire doesn't have the guts to say that Microsoft is the home team, that she's playing for the home team and that they get to play by different rules than the rest of us.

It doesn't take guts to stand up for Microsoft, it takes guts to stand up to Microsoft on behalf of everyday Washingtonians.

The Two Biggest Myths About Microsoft in Washington State

Rather than worry about the next ten thousand high paying technology jobs Microsoft's creating in India, China, Texas and elsewhere, she wants us to believe she's fighting the company to return its 100 - 200 Nevada managed lawyers, paralegals and accountants who run its (formerly) tax avoiding royalty business. As it only takes a small number of lawyers and accountants to dodge $100.7 million annually in taxes, Microsoft's tax avoidance jobs don't scale the way it's next big technical success like Azure, or Natal or Kin might.

The biggest myth in Washington State is that Microsoft plans to grow its next ten thousand jobs here. The second biggest myth is that if we tax the company more it will leave. The painful truth is that it's already engaging in a number of steps to reduce its growth (and even downsize) here and we'd have to pass a lot more bad law like the one Gregoire just signed if we want them to stay.

Meanwhile, no one in state government has responded to legal precedents that suggest the state might have prevailed in a lawsuit to collect that billion in unpaid royalty taxes from Microsoft. Why would they, aren't we all on the same team?

Bill Gates & William Gates Sr. - Not Quite Like Father Like Son

Excerpted from an editorial I posted at my personal blog:

    Last week, 84 year-old William Gates Sr., father of Microsoft Chairman Bill Gates, launched a ballot initiative that would create an income tax in Washington State for high income earners. The initiative would raise $1 billion for education and health programs while cutting property taxes by 20 percent and eliminating most small business taxes.

    In initial polling, 66 percent of residents favored Gates Sr.'s initiative. But when asked if his son supported the measure, he said they hadn't discussed it, "I don't know what my son is going to do."

    Both Gates' are known for their public service and philanthropic leadership. Gates Sr. has campaigned for tax fairness for years and co-authored, "Wealth and Our Commonwealth " in support of the estate tax. His son co-founded the Bill & Melinda Gates Foundation providing innovative global leadership and financing for public health and development issues. Admirably, the younger Mr. Gates has dedicated his fortune and more recently, his time, to critical global causes. But this is not the whole story.

    When it comes to taxes in Washington State, Mr. Gates has led an aggressive campaign to minimize Microsoft's corporate tax bill that has contributed significantly to our state's recent budget crisis.

     Since 1997, Microsoft has avoided paying an estimated $757 million in taxes by recording revenue from software licensing in a small Nevada office. ...

    I’m not sure why Mr. Gates and Microsoft put the thumbscrews to Washington's citizens when it comes to taxes. ... No one wins if Washington's budget woes deepen and its infrastructure fails. If his father's initiative passes, Microsoft's high earning employees will have to pick up the tab for the company's aggressive tax tactics.

...The leadership and wisdom of octogenarians like William Gates Sr. is just what our state needs right now.

Read the full editorial at my personal blog