Forget Boeing, Microsoft’s Tax Break Costs $776 Million

On Tuesday, The Seattle Times’ columnist Danny Westneat expressed shock that Boeing’s tax breaks cost the state $304 million last year. He failed to mention that the legislature’s actions in 2010 allowed Microsoft to save $776 million in taxes this year. And, he probably didn’t mention it because he didn’t know its scope — The Times has left everyone in our community in the dark, having chosen not to report the financial legacy of Microsoft’s twenty year Nevada tax dodge.

Microsoft began its Nevada-based tax dodge back in 1997, ironically as it completed lobbying to reduce the state’s royalty tax rate by two thirds. But last year, the legislature restored the original royalty tax rate to 1.5 percent pushing Microsoft’s effective tax savings for 2016 to approximately $776 million. Cumulatively, Microsoft’s saved $3.39 billion (including interest.) However, if not for the legislature’s 18 year cut to the royalty tax rate, Microsoft ultimately saved $8.6 billion.

At this point, Microsoft’s activities aren’t even illegal. Back in 2010, then Rep. Ross Hunter, a 17 year ex-Microsoft executive, led a redefinition of the state’s royalty tax which covered Microsoft’s global licensing revenue. Hunter’s change shrunk the tax from one on worldwide sales purely to sales to Washington state customers. He promised colleagues the change would generate $20.4 million more annually for the state by 2013 which never materialized. It was a huge tax break for Microsoft. And, just to be safe, Hunter added language to provide amnesty for the company’s past violations.

That fall, I briefed The Seattle Times’ former Editor in Chief, David Boardman, and five other journalists on the story for about two hours. Boardman said he was committed to raising coverage of the issue. The coverage never came but Boardman left Brad Smith, the executive at Microsoft overseeing its Nevada tax operations, one of the paper’s esteemed luminaries. Here’s audio of Smith acknowledging Microsoft’s Nevada tax dodge to me in a 2004 interview:

Meanwhile, sometime in the past five years, Microsoft’s cumulative revenues quietly surpassed $1 trillion. I discovered this as I updated the estimates for the company’s history of tax dodging in Nevada ^{(see footnote 1)}.

What Could Microsoft’s Tax Savings Have Paid For

Microsoft founder Bill Gates has been an outspoken advocate for education and the less fortunate among us. With Microsoft’s cumulative state tax savings, Washington state could have funded the entire McCleary education settlement for five years, Gates’ own initiative for forty state charter schools and restored almost all of the $961 million cut from the University of Washington’s annual budgets since 2009.

With just a small portion of its tax savings from this year, we could easily double Seattle’s city budget for emergency efforts to address the sharp rises in homelessness, heroin addiction and crime.

Or, the funds could cover 17 percent of the $50 billion cost for Seattle’s 25 year public transit initiative, ST3, saving taxpayers significantly.

Westneat mentions, “our booming aerospace and high-tech sectors combined paid just 3 percent of all state business taxes…the result…of decades of special deals won by lobbyists in Olympia…” and Washington state is the third highest ranked state in the country for tax subsidies. At a federal level, Microsoft holds more than $108 billion offshore, avoiding $35 billion in additional corporate taxes.

So far, there’s no one in Olympia that wants to step up to put an end to Hunter’s duplicitous legacy and Microsoft’s egregious actions that serve only its shareholders.

^{1. Microsoft stopped reporting its share of revenues from royalties in 2003. Since then, I’ve estimated its licensing revenue. Firstly, in September 2010, Microsoft Nevada ran a job listing on its site “Are you interested in leading the vision and strategy of an organization which processes in excess of $30B annually?” The ad implied that half of the company’s revenue came from licensing. And, more recently, this post reports Microsoft’s 2015 licensing revenue at 59.8 percent of all revenue.}