Microsoft Tax Dodge Letter Gets Sent to 150 Legislators, One Responds
Categories: Money, Technology
Microsoft makes a ton of money in Washington state. But for the past 12 years, because Microsoft takes advantage of a loophole in Nevada, some of the money that should have been taxed wasn't. Added up, it means the state has potentially missed out on more than one billion dollars in cash.
State Sen. Adam Kline was the only lawmaker to ask about Microsoft's billion-dollar tax dodge.
That, in a nutshell, is the argument of former Microsoft employee and SW contributor Jeff Reifman. A crusade which Daily Weekly has touched on before (and which now has a very catchy name and url to go along with it, at MicrosoftTaxDodge.com).
Monday marked the beginning of Olympia's 60-day legislative session. The most pressing issue this year is how to close the state's $2.6 billion dollar budget gap. Sensing an opportunity, Reifman sent all 150 legislators a letter summarizing his mission.
After the jump read Reifman's letter and the only response it's received thus far, from State Senator Adam Kline.
In an e-mail to Reifman, Sen. Kline said that he'd be getting in touch with the Department of Revenue to discuss the issue. A follow-up phone call to a staff member confirmed the conversation took place between Kline and the DoR and expects a longer one to happen again today.
Here's Reifman's letter:
January 8, 2010To the Honorable
<LastName>:</p> <p>I am writing to call your attention to the Department of Revenue'slack of enforcement of RCW 82.04.2907, the tax on royalties, withregard 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.</p> <p>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<br /> <br /> 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.</p> <p>The Legal Issues</p> <p>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.</p> <p>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.</p> <p>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.<br /> 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.</p> <p>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<br /> 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<br /> 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?</p> <p>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<br /> its tax evasion.</p> <p>Washington's Budget Crisis: The Result of Good Times</p> <p>Microsoft's had an incredibly profitable decade. How is Washington State's financial insolvency the result of such good times?</p> <p>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?</p> <p>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<br /> 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.<br /> <br /> 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<br /> contemplating drastic spending cuts or higher taxes; before Microsoft falls on hard times.<br /> <br /> Please feel free to contact me with any questions. I would be glad to<br /> offer my assistance in sharing what I know about this matter.</p> <p>Sincerely,<br /> Jeff Reifman</blockquote></p> <div class="tagsBadges"> <div class="tags"><h4>Tags:</h4> <a href="http://www.seattleweekly.com/search/index?collection=blogs&keywords=Jeff Reifman" rel="tag nofollow"> Jeff Reifman</a>, <a href="http://www.seattleweekly.com/search/index?collection=blogs&keywords=Legislature" rel="tag nofollow">Legislature</a>, <a href="http://www.seattleweekly.com/search/index?collection=blogs&keywords=Microsoft" rel="tag nofollow">Microsoft</a>, <a href="http://www.seattleweekly.com/search/index?collection=blogs&keywords=Microsoft Tax Dodge" rel="tag nofollow">Microsoft Tax Dodge</a></div> <div class="ClearIt"></div> </div> </div> <!-- NOGSA --> <div class="entryFooter"> <div class="comments"> <a href="http://blogs.seattleweekly.com/dailyweekly/2010/01/microsoft_tax_dodge_letter_get.php#Comments" id="disqusCommentEntryBottom-280857"></a> <script type="text/javascript"> addDisqusJob('280857','disqusCommentEntryBottom-280857','right'); </script> <a href="http://blogs.seattleweekly.com/dailyweekly/2010/01/microsoft_tax_dodge_letter_get.php#comments"><img src="http://blogs.vvmedia.com/common/img/icon-write.png" /> Write Comment</a> <a href="http://www.seattleweekly.com/feedback/sendToFriend/?objid=BLOG&blog_post_url=|dailyweekly|2010|01|microsoft_tax_dodge_letter_get.php&title=Microsoft%20Tax%20Dodge%20Letter%20Gets%20Sent%20to%20150%20Legislators%2C%20One%20Responds"><img src="http://blogs.vvmedia.com/common/img/icon-email.png" /> Email to Friend</a> <a href="http://blogs.seattleweekly.com/dailyweekly/2010/01/microsoft_tax_dodge_letter_get.php?print=true" target="_blank" rel="nofollow"><img src="http://blogs.vvmedia.com/common/img/icon-print.png" /> Print Article</a> </div> <div class="facebookLike shareButton" id="facebookLike-280857_footer" style="float:right;"> <script type="text/javascript"> socialInsert('facebookLike', '280857_footer', 'http://www.facebook.com/plugins/like.php?href=http://blogs.seattleweekly.com/dailyweekly/2010/01/microsoft_tax_dodge_letter_get.php&layout=button_count&show_faces=false&width=90&action=like&colorscheme=light&height=21'); </script> </div> </div> <div class="inform"> <div id="relatedInformArticles" class="relatedInformArticles"> <h2>Related Content</h2> <div id="relatedContent"> <ul> <li> <a href="http://www.seattleweekly.com/2012-01-11/calendar/hot-new-sounds-from-oly/">Hot New Sounds From Oly <span class="date">January 11, 2012</span> </a> </li> <li> <a href="http://blogs.seattleweekly.com/dailyweekly/2012/02/cannabis_defense_coalition_against_medical_pot_bill.php">Cannabis Defense Coalition Comes Out Against New Medical Pot Bill <span class="date">February 9, 2012</span> </a> </li> <li> <a href="http://blogs.seattleweekly.com/voracious/2012/02/sports_bar_to_open_in_downtown.php">Sports Bar to Open in Downtown Kirkland by Spring, Typhoon! 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