Dummies Guide

In 1997, Microsoft et al. lobbied to reduce Washington State’s Royalty Tax from 1.5% to .5%, a threefold reduction. This wasn’t low enough. The company decided to open a small Reno, Nevada office to dodge the tax completely.

Between 1997 – 2011, the company used its Nevada office to avoid $1.51 billion in Washington state taxes, interest and penalties. If you include impacts from the company’s lobbying and calculate its savings at the original 1.5% rate, it’s saved $4.37 billion.

Since 2008, Washington State has cut $4 billion from K-12 and Higher Education. We rank 31st in K-12 spending. 18% of University of Washington freshman are now foreigners (because they pay more) up from 2% six years ago. We rank 47th nationally in 18-24 yo college enrollment and 48th in K-12 class size.

In 2010, after we raised these issues to the legislature, Democratic State Representative Ross Hunter, Chair of the Finance Committee and a former Microsoft executive, led the Legislature to change the state’s Royalty Tax from a tax on sales to worldwide customers to just a tiny tax on sales to Washington State customers. This reduced Microsoft’s effective Nevada tax dodge by about 99%. He also included language that gave Microsoft amnesty on its back taxes.

Shortly after, Democratic Gov. Gregoire appointed another Microsoft Executive, Suzan Delbene, to run the Washington State’s tax department. Delbene is married to Microsoft President Kurt Delbene.

Gregoire regularly praises Microsoft for its $5 million annual scholarship fund for technical graduates at the UW saying it helps mitigates all the unfortunate cuts to higher education – while failing to mention Microsoft’s been saving $100 million annually through its Nevada tax office and the changes Hunter made to the law.

Watching Hunter, Gregoire and the Democrats cater to Microsoft rather than repair our unfair tax system (Microsoft’s recorded more than $579 billion in revenue since 1998) was the last straw for me. This is one of the key reasons I’ve left my job to help launch Initiative 103 in Seattle and gather signatures to place it on the ballot. I103 would make corporate spending on elections illegal in Seattle and restrict corporate lobbying to public forums.

Microsoft tells journalists privately that we’re publishing misinformation but when confronted publicly to release its Royalty Tax payments from 1998-2010 it has refused to.

We know that Microsoft’s not paid its fair share of royalty taxes because the state’s published totals for revenue from the royalty tax are far less for all companies than they should be if Microsoft had been paying it.

Here’s Microsoft’s General Counsel Brad Smith speaking about the company’s Nevada tax dodge when I interviewed him in 2004 for Seattle Weekly’s Citizen Microsoft:

“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.”

Few Seattle residents know about this because The Seattle Times has never reported this story. 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.  Microsoft has never disputed any specific facts that we’ve reported.

In January, The Seattle Times did publish an editorial by Smith, one of its designated “Luminaries” (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.

If you want to learn more, read our overview, our 2010 fact sheet and our recent summary of where things stand today. You can also watch Amanda Congdon’s fun introductory video to Microsoft’s Nevada Tax Dodge.

Update: Thx Slashdot, GeekWire & Macsurfer for linking. This blog has received a big jump in traffic since the New York Times’ story on Apple’s Nevada tax dodge. Here’s a simple summary for Seattleites learning about this for the first time: