The Third Anniversary of Washington State’s Big Tax Gift to Microsoft

Wednesday will be the third anniversary of the biggest corporate tax break in Washington State history. On April 10, 2010, the Legislature changed the definition of the state’s royalty tax and effectively granted amnesty to Microsoft, helping the company lock up $1.51 billion in savings from its thirteen-year Nevada tax dodge. The changes were led by Rep. Ross Hunter, Chair of the Finance Committee and a 17 year ex-Microsoft veteran. If you include the impact of the company’s 1997 lobbying to cut the royalty tax rate by 2/3, Microsoft’s Nevada accounting has saved the company more than $4.37 billion.

Coincidentally, Washington State has had to cut $4 billion from K-12 and Higher Education in the last five years.

So, as Governor Inslee and the Legislature look for $1.2 billion in court-mandated funding for education, let’s not pretend that we don’t know where the money went. Washington State slowly gave away critical funds to Microsoft’s global shareholders through non-enforcement of the state’s pre-2010 royalty tax, which required the company pay .484% of its licensing revenue on worldwide sales.  The company claimed the revenue was earned in its Nevada office, a state with no corporate revenue tax.

Dummies Guide to Microsoft’s Nevada Tax Dodge tells the whole story and includes audio of my 2004 interview with Microsoft’s General Counsel Brad Smith (mp3), where he acknowledges the company’s Nevada tax haven.

There are three ways to look at this story:

1. Ethical Issues: Microsoft Chairman Bill Gates, CEO Ballmer and General Counsel Brad Smith have all called for the state (and taxpayers) to step up and fund education. Education is also a key priority of the Bill and Melinda Gates Foundation. Microsoft’s recorded more than $579 billion in revenue since 1998. Why aren’t we calling these community leaders to account for the difference between their rhetoric on education and their actions on tax dodging?

2. Corporate Influence in Olympia: Should we have concerns about transparency and Microsoft’s influence in Olympia given the impact of Rep. Hunter’s 2010 legislation and his 17 year history with the company? State law treats Microsoft as a corporate person, entitled to the same privacy of other taxpayers – its actual royalty tax payments are secret. Shortly after signing Hunter’s bill, former Gov. Gregoire appointed another Microsoft Executive, Suzan Delbene (now in Congress), to run Washington State’s tax department. Delbene is married to Microsoft President Kurt Delbene. And, Gregoire regularly praised Microsoft for its $5 million annual scholarship fund saying it helped mitigate 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.

3. Legal Issues: The Department’s Communication Director Mike Gowrylow used to assure me that DoR audits large taxpayers like Microsoft regularly; so I knew right away why Hunter’s 2010 bill included language granting amnesty to companies “that were included in a completed field audit conducted by the department [before 2010].” If there was no legal exposure to Microsoft, why grant it amnesty? Recently, when Microsoft-owned Skype was accused of helping the chinese government eavesdrop on dissidents, it responded that it was acting under “established procedures to meet its obligations under local laws.” Similarly, when reporters ask it about its Nevada tax dodge, it says only “[it] pays all due taxes in all jurisdictions in which we operate including our home state of Washington.” Should the Department of Revenue been more aggressive in enforcing the state’s worldwide royalty tax on Microsoft’s licensing revenues? I’ve made my case here and here that it should have.

In the past the company has told reporters that I’m spreading misinformation but I continue to stand completely behind my reporting on Microsoft’s Nevada tax dodge. If the company would like to refute these claims, it should just release its actual state royalty tax payments from 1998 – 2010 and settle the issue once and for all.

In Closing

I often say Washington State doesn’t have a budget deficit. It’s just that it’s given its tax revenues over to a variety of corporate benefactors. In Microsoft’s case, this has amounted to all the money the state’s cut from our education system.

So, as you read the standard coverage of legislative handwringing over the budget and finding money for education this spring, don’t fall for it. The legislature knows where the money is.

Just as Microsoft’s used Nevada to dodge state taxes, it uses a variety of means to dodge federal taxes. In 2011, the Institute on Taxation and Economic Policy found Microsoft’s federal filings so laughable that it had to exclude the company from its reports: “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.”

On April Fools Day 2010, just before the legislature voted on Hunter’s tax bill, Microsoft gave $125,000 to save the Fourth of July  Fireworks in Seattle. This year there’s no tax break on the table … and apparently there will be no fireworks.

Links and Resources[/h3]

• Dummies Guide to Microsoft’s Nevada Tax Dodge (Summary)
• Audio mp3 clip of my 2004 interview with Microsoft’s General Counsel Brad Smith, where he acknowledges the company’s Nevada tax haven
• Summary of Media Coverage of Microsoft’s Nevada Tax Dodge
• Financial History of Microsoft’s Nevada Tax Dodge – My Google Drive spreadsheet detailing Microsoft’s revenue history, licensing revenue and it’s Nevada tax dodge
• Washington State Doesn’t Have a Budget Deficit – describes how I calculated the $1.51 billion and $4.37 billion tax dodge figures
• Summary of the Impact of Budget Cuts on Washington State’s Education System, by the Economic Opportunity Institute – shows the $4 billion in cuts to K-12 and Higher Education
• Corporate tax-dodgers Microsoft, Boeing throw colleges a bone, by the Economic Opportunity Institute’s John Burbank – discusses Gov. Gregoire’s praise of their $5 million education scholarships
• Bread & Circus: Microsoft Donates $125,000 to Save Seattle Fireworks Show
• Microsoft chooses key time to remind Olympia of its clout (Seattle Times)
• Rep. Hunter Makes April 10th Tax Freedom Day for Microsoft
• Microsoft Wins Nevada Royalty Tax Cut and Tax Amnesty; Reports Record Revenue
• The Case Law Against Microsoft and its Nevada Tax Dodge is Extremely Clear
• To Refute Claims, Microsoft Should Disclose Its Royalty Tax Payments
• Microsoft Won’t Release Royalty Tax Payments
• Corporate Taxpayers & Corporate Tax Dodgers 2008-10 (ITEP)
• Gov. Inslee’s Press Packet on the 2013 Budget
• Citizen Microsoft (Seattle Weekly) by Jeff Reifman

Disclosures and Contact Information

 I’m a former employee of Microsoft and one of its multi-millionaire alumni. I also used to work with Suzan Delbene and for Kurt Delbene at Microsoft. You can read more about me and my full list of disclosures. I am willing to to brief reporters or officials on the history of Microsoft’s Nevada tax dodge. Please contact me for more information.