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News & ArtsMonday, October 26, 2009
News / Tech Microsoft's $1,000,000,000 Tax Dodge?
Posted by Anthony Hecht on Mon, Oct 26, 2009 at 11:40 AM
"Seattle-based technologist, writer, and media activist" Jeff Reifman has an interesting post up about how Microsoft claims all of its licensing revenue in Nevada, thus avoiding paying nearly $1 billion in Washington taxes, according to Reifman's calculations.
For tax purposes, Microsoft reports that it’s earned its estimated $143 billion in software licensing revenue in Nevada, where there is no licensing tax. However, for legal purposes, Microsoft executes its licensing contracts so they are governed by and rely on the protections of Washington law and its courts (some regional contracts are governed by the laws in Ireland or China).When necessary, as in the case Microsoft Licensing GP v. TSR Silicon Resources, which lasted two years, Microsoft uses the resources of Washington courts to enforce its licensing contracts. It does this while simultaneously dodging the taxes it would normally pay for engaging in the software licensing business in Washington - the same taxes that fund the courts.
Reifman's analysis continues, hitting on things like The doctrine of Nexus, The Step Doctrine, and Alter Ego Theory, which are all a bit over my head and frankly sound like Scientology terms.
Any Slog legal eagles out there care to comment? Is this legit? Because from what I understand, Washington could really use a billion dollars right about now.
1
A $ Billion, eh?
Makes they chump change they bought the gays off with on R71 look pretty small, don't it...
Makes they chump change they bought the gays off with on R71 look pretty small, don't it...
2
What Microsoft is doing is normal and legal though arguably crooked. The controversy here is that they're using favorable Washington state courts to pursue licensing suits, licenses that were sold in Nevada to avoid WA taxes -- they're having their cake and eating it, too.
3
Oh, I could comment alright, but it would probably take me the better part of half an hour to give you an in-depth analysis. Bottom line: What they're doing is perfectly legal.
BTW, I should note that requiring a contract to be interpreted according to Washington law doesn't necessitate suing in Washington. You can sue anyplace where there's jurisdiction. The case then proceeds as if it were in Washington.
BTW, I should note that requiring a contract to be interpreted according to Washington law doesn't necessitate suing in Washington. You can sue anyplace where there's jurisdiction. The case then proceeds as if it were in Washington.
4
I think it's a pretty normal business practice for major companies to claim certain types of income in states with favorable laws.
The courts thing sounds a little fishy, but I doubt it's not legal for them to do what they're doing. That would be a major oversight for the courts and the people working at microsoft. I would guess it's just morally questionable, but not actually illegal, as I've heard of people doing similar legal moves with ALL sorts of cases.
The courts thing sounds a little fishy, but I doubt it's not legal for them to do what they're doing. That would be a major oversight for the courts and the people working at microsoft. I would guess it's just morally questionable, but not actually illegal, as I've heard of people doing similar legal moves with ALL sorts of cases.
5
This is a normal business practice. Do you know how many companies are incorporated in Delaware?
This is pretty old news though. Also, didn't the cities of Bellevue and Redmond take them to court over an employee head tax for similar reasons? (i.e. permatemps and consultants don't work in those cities because their agencies aren't in those cities.)
This is pretty old news though. Also, didn't the cities of Bellevue and Redmond take them to court over an employee head tax for similar reasons? (i.e. permatemps and consultants don't work in those cities because their agencies aren't in those cities.)
6
It's up to states to close loopholes like this, such as fairly simple rules requiring that taxation is based on:
a. any US presence (including online sale) at all; and
b. physical presence in the state as a proportion of worldwide revenue.
The main problem is they can offshore to India and Ireland and claim not to be American-based.
a. any US presence (including online sale) at all; and
b. physical presence in the state as a proportion of worldwide revenue.
The main problem is they can offshore to India and Ireland and claim not to be American-based.
8
Reifman is a Microsoft millionaire, who wrote a story about this in the Seattle Weekly years ago:
http://www.seattleweekly.com/2004-09-29/…
Not unlike Bill, he seems to be genuinely trying to absolve himself of his sins by doing good with his blood money, and should be applauded for this. It would be even better, however, if people found their moral core *before* they lended their energy and talents to such sketchy practices.
http://www.seattleweekly.com/2004-09-29/…
Not unlike Bill, he seems to be genuinely trying to absolve himself of his sins by doing good with his blood money, and should be applauded for this. It would be even better, however, if people found their moral core *before* they lended their energy and talents to such sketchy practices.
9
If I can make a suggestion, abusive comments serve no good purpose.
However, the misuse of tax shelters, like the one that Microsoft uses, is an important issue. Even Bill Gates Sr.'s tax policy task force looked at how tax shelters are misused in Washington.
First, let's understand that what Microsoft is doing is totally legal. Other companies do the same thing. Including Boeing. Especially Boeing.
Microsoft is not engaged in 'tax evasion.' It is using the tax laws exactly the way they were intended. It is not different, say, from someone buying a CD online to avoid sales taxes.
The best approach would be to have a committee look at all the tax exemptions and preferences. Oh wait, we had that last year, and they got rid of ZERO tax exemptions and preferences. If they did get rid of them, it would go a long way to filling the budget gap (but would not fill it).
Mike Weisman
However, the misuse of tax shelters, like the one that Microsoft uses, is an important issue. Even Bill Gates Sr.'s tax policy task force looked at how tax shelters are misused in Washington.
First, let's understand that what Microsoft is doing is totally legal. Other companies do the same thing. Including Boeing. Especially Boeing.
Microsoft is not engaged in 'tax evasion.' It is using the tax laws exactly the way they were intended. It is not different, say, from someone buying a CD online to avoid sales taxes.
The best approach would be to have a committee look at all the tax exemptions and preferences. Oh wait, we had that last year, and they got rid of ZERO tax exemptions and preferences. If they did get rid of them, it would go a long way to filling the budget gap (but would not fill it).
Mike Weisman
11
Wow, if the rules on this were to change, I'm sure Microsoft would just write a check for a billion dollars rather than, you know, actually relocating to Nevada.
It's a totally normal arrangement, and unless you want to go federal to prohibit Nevada from having different tax laws (which serve to attract business), there's really nothing to be done about it.
And really, how much of Washington's economy is Microsoft responsible for? How many direct employees? How many people rely on indirect revenue from subcontractors and Microsoft vendors? What's the quality of MS health care benefits?
Is this *really* the time to be trying to make it $1B more expensive for Microsoft to stay in-state?
It's a totally normal arrangement, and unless you want to go federal to prohibit Nevada from having different tax laws (which serve to attract business), there's really nothing to be done about it.
And really, how much of Washington's economy is Microsoft responsible for? How many direct employees? How many people rely on indirect revenue from subcontractors and Microsoft vendors? What's the quality of MS health care benefits?
Is this *really* the time to be trying to make it $1B more expensive for Microsoft to stay in-state?
12
I do not understand why this is news to people. Like most commenters have said, this happens all the time. See: Large banks licensed in Delaware and a former employer of many Seattleites licensed in Delaware as well as Nevada.
13
@11,
You think picking up and moving would be that cheap for them? $1 billion is peanuts to Microsoft.
You think picking up and moving would be that cheap for them? $1 billion is peanuts to Microsoft.
14
I believe a similiar tactic is used by international corporations setting up an office in Ireland to avoid paying some onerous EU taxes. It's all legal, just like maintaining your "official residence" in a state that doesn't have income tax while spending most of your time living in one that does to avoid state income tax. Smart people with resources find advantageous tax laws, the rest of us call them "loopholes" and gnash our teeth in...envy.
Oh, and buying a CD online to avoid paying sales tax? I believe that's actually illegal--you're supposed to voluntarily pay it even if the vendor doesn't add it into your purchase.
Oh, and buying a CD online to avoid paying sales tax? I believe that's actually illegal--you're supposed to voluntarily pay it even if the vendor doesn't add it into your purchase.
15
Differences in state's laws like these are the only reason we've got credit cards. Thanks for nothin' South Dakota!
16
This isn't new and everyone does it. Why pick on Microsoft?
Here you can search for companies incorporated in Delaware, go ahead, search for ANYONE.
https://delecorp.delaware.gov/tin/GIName…
Here you can search for companies incorporated in Delaware, go ahead, search for ANYONE.
https://delecorp.delaware.gov/tin/GIName…
17
Thanks for linking Slog. Upcock nailed it: "The controversy here is that they're using favorable Washington state courts to pursue licensing suits, licenses that were sold in Nevada to avoid WA taxes -- they're having their cake and eating it, too."
While it's legal for Microsoft to sue in Washington on its Nevada-based contracts, doing so further erodes their tax argument that they aren't in the software licensing business in Washington.
This article, if you take the time to read it, explains why Microsoft's tax practices may constitute illegal tax evasion. It's really up to the Department of Revenue to explain why it's as yet chosen not to contest Microsoft's returns.
While it's legal for Microsoft to sue in Washington on its Nevada-based contracts, doing so further erodes their tax argument that they aren't in the software licensing business in Washington.
This article, if you take the time to read it, explains why Microsoft's tax practices may constitute illegal tax evasion. It's really up to the Department of Revenue to explain why it's as yet chosen not to contest Microsoft's returns.
18
@5: pretty much all of them. I know Boeing is a Delaware Corporation; I would actually be surprised if Microsoft and Amazon aren't also.
20
This is why all those fine offers from credit card companies come from just 2 states, Delaware and South Dakota. They have a rather high tolorance for usury. This is the same reason why just letting us buy insurance from any state won't fix healthcare. It'll be just like the banks.
21
@13: Nice hand waving, but $1B isn't peanuts to anyone, and we're talking annually. That's more than what they'll spend developing the next Xbox, more than they make from their entire online presence, and more than they spend on health care.
They could easily move elsewhere for less than $1B/year. Breakeven would be maybe 2-3 years out, which would make it clearly the right thing to do.
But hey, what do I care? I'm moving out of state myself. So go ahead and soak your major employers at a time when other states are offering huge incentives for relocation as they desperately seek jobs. Let me know how that goes for you.
They could easily move elsewhere for less than $1B/year. Breakeven would be maybe 2-3 years out, which would make it clearly the right thing to do.
But hey, what do I care? I'm moving out of state myself. So go ahead and soak your major employers at a time when other states are offering huge incentives for relocation as they desperately seek jobs. Let me know how that goes for you.
22
This is standard operating procedure among software companies. Tax law varies by state and most of the time, sizable licensing is "shipped electronically" from a state that does not tax licenses, Delaware, North Carolina, Nevada, Michigan (I think) etc. When you're selling a $7,000,000 software package, 8.8% adds up, so lots of companies have set up shell operations in non-taxed states for installation purposes and then roll out the applications etc from there. You see the same thing with all the other multinationals as well.
23
People need to quit blaming business people for the failures of public policy officials. That's true for Wall Street and Microsoft.
24
Like Bill Gates said when he was on The Simpsons "You think I got this rich by writing a bunch of checks?"
25
I just can't take anyone seriously who doesn't understand the difference between "it's" and "its."
26
It's actually a dated story broken a month or so back -- only then the amount they should have owed the state was only equal to Washington's $430 million fiscal shortfall for this biennium.
See: http://tinyurl.com/msEvasion
And Windows 7 profits (don't get me started...) will likely continue to push that number upward for the forseable future.
See: http://tinyurl.com/msEvasion
And Windows 7 profits (don't get me started...) will likely continue to push that number upward for the forseable future.
27
Microsoft would never move to Nevada. There's almost no technology sector there. In Washington there are armies of eligible employees/contractors, and tons of firms that you can pay to lighten your development load. Experience dealing poker or stocking a buffet isn't really applicable.
28
"[Business name] would never move to [Taiwan/China/India/Philippines/Mexico/Etc.]. There's almost no [basic labor input easily developed] there. In [fat, dumb, happy current locale] there are armies of [fat, dumb, happy] employees/contractors, and tons of firms that you can pay to lighten your [wallet]. Experience [performing similar but lesser paid work] isn't really applicable.
Think I am kidding? Go ask old Detroit engineers now living in Florida if they thought South Korea would ever make better cars than GM, Ford and Chrysler.
Think I am kidding? Go ask old Detroit engineers now living in Florida if they thought South Korea would ever make better cars than GM, Ford and Chrysler.
29
21 and 28 nail it..
Gee, I wonder how this sort of thing usually turns out?
http://www.techflash.com/seattle/2009/08…
My guess is that some bean counter would run a cost benefit analysis, figure he could save the company 10-15 billion over 20 years, and make a business case for moving. ND, NV or OK would fall all over themselves competing with crazy incentives to sweeten the deal in order to have Microsoft to bring jobs to the local economy. The next thing you know, employees would face a decision to move or scramble for work in a decimated area, the local Uhaul business would boom for a short time, our real estate market would be in worse shambles than it is now and 20-30 years later the fat and happy locales in the new city would say, "Microsoft would never leave here".
A little before 1980, Microsoft used to be a New Mexico based company. Can anybody guess what one of the factors was that caused them to move to Washington?
Gee, I wonder how this sort of thing usually turns out?
http://www.techflash.com/seattle/2009/08…
My guess is that some bean counter would run a cost benefit analysis, figure he could save the company 10-15 billion over 20 years, and make a business case for moving. ND, NV or OK would fall all over themselves competing with crazy incentives to sweeten the deal in order to have Microsoft to bring jobs to the local economy. The next thing you know, employees would face a decision to move or scramble for work in a decimated area, the local Uhaul business would boom for a short time, our real estate market would be in worse shambles than it is now and 20-30 years later the fat and happy locales in the new city would say, "Microsoft would never leave here".
A little before 1980, Microsoft used to be a New Mexico based company. Can anybody guess what one of the factors was that caused them to move to Washington?
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