Creative Capitalism Gets Microsoft $528M Tax Break

NewsCloud writes "Microsoft makes products in Washington but records software sales to PC makers and high-volume customers through an operation in Nevada, where there is no corporate tax. So Washington has missed out on more than half a billion in taxes; revenue it could use for badly needed infrastructure needs — such as the needed replacement of the 520 bridge which connects Seattle ... to Microsoft. Reported by Slashdot in 2004, the numbers have increased with the company's growth to approx. $76M in savings last year alone. The author questions the legality of the practice given Microsoft's 35,500+ employees and 11.2 million square feet of real estate in Washington state."

Rock and a hard place

The 35k plus employees pay taxes in state and Washington State is certainly aware of that fact. If they make too much of a grumble about the corporate loop hole, they could lose the much larger 35k plus employee tax base. Those 35k are probably just the people who work for M$. There are probably lots and lots of other Washington residents whose primary income derives from Redmund.

This is rabble rousing.

A corporation has a financial duty to avoid paying unnecessary taxes. If you don't like the way those "fat cats" (I notice rabble rousers use that term a lot) get out of paying taxes, talk to the government and have them close the loopholes. More importantly, not that every dollar Microsoft pulls in is taxed _multiple_ times by the time it makes it into the shareholders' pockets. The fact is that it's a myth that corporations are pulling one over on the government, corporate taxes are a little silly since the money _is_ taxed before it goes into any individual's pocket.

personal vs. corporate tax share

The fact is that it's a myth that corporations are pulling one over on the government

They're not pulling one over on the government- they're pulling one over on us.

In the 1950's, the corporate share of taxes was about 50%. Citizens paid half, corporations paid half.

Now? it is about 2%. And why is that?

Corporate lobbying. Corporate lobbying pays for all the toys and the re-election campaigns.

Forget the non-payment of taxes

Microsoft has effectively paid its employees with your tax dollars for years.

http://www.fool.com/portfolios/rulemaker/2000/rulemaker000217.htm [fool.com]

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Basically, Microsoft receives cash by issuing employee stock options, after which the company then receives billions of dollars in tax deductions from the IRS for doing so. Add in the warrants it sells on its own stock, and the company made over $5 billion off the stock market last year (fiscal year ended July 1999), tax-free. For comparison, its after-tax net income was only $7.8 billion. Microsoft may not be much in the programming department, but its accountants are impressive.
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Corporations pay taxes on their own income (generally 35%), but money they pay out in salaries to employees is deductible from the corporation's income. Since granting options to employees results in taxable income to those employees, Microsoft gets to deduct that taxable employee income from its own taxable corporate income, and that's where Microsoft got a tax-free $3.1 billion in cash in fiscal 1999: "Stock option income tax benefits."
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Re:Forget the non-payment of taxes

Just so you know, while you were at work today, I broke into your house and stole everything except your widescreen plasma TV. I'll expect a thank you note for the free TV you got from me.

So?

I hate Microsoft as much as the next guy (okay, maybe not around here, but I really really hate them!), but why shouldn't they structure their corporation to reduce the tax burden? Just be glad it's Nevada and not Belize.

How about Boeing?

The other major business of Washington state - Boeing - flies their planes just outside the U.S. territorial limit offshore to sign the transfer papers with international customers so that they won't have to pay tax. Should we complain about them too?

Consider for a Moment

That Microsoft's behavior isn't unique in any way, shape or form. That what microsoft does is standard operating procedure for all mega-corporations.

Paying taxes in the state with the lowest corporate tax rate and forming corporations in Delaware is done for the same reason. It's the best deal.

If this is outrageous to the submitter, then I hope he never discovers how most electronics firms with an office in the U.S. work.

As an FYI, they are set up as subsidiaries that "buy" their product from the most attractive exporting/manufacturing office from some other part of the world of the same corporation. The U.S. office then operates at a perpetual loss (paying less tax) by hiding the income generated as the cost paid to "buy" the goods from some other part of the world.

Minimize tax, maximize profit!

Washington, the "soak the company" state...

Note that this is a complaint from the State of Washington (where I reside when in the US), the ONLY State that has the completely regressive and oppressive Business and Occupation Tax. A State tax on GROSS receipts. Yep, have $1,000 in revenue, but because you're a startup, or have a bad quarter or whatever, you lose $1,200 but STILL get the "luxury" of paying tax on that $1,000!

Ignore this story - Washington is taxing itself into oblivion. Boeing moved their corporate headquarters - and most of their taxable profit - to Chicago over the taxation and treatment of business in this State. The ONLY things that is keeping Washington alive right now are:

1. Agriculture. Hard to move a farm, so they're stuck. Of course, our State wants to breach all the dams and eliminate the irrigation systems, which would kill these businesses.

2. Boeing. Already moved their corp headquarters, and unfortunately for Boeing, the physical assets here - buildings, equipment, and people - are so huge that you can't afford to move them. But more and more work is shifted outside the State...

3. Microsoft. Faces the similar situation with Boeing, because of the size of the campus and people. Stuck for now, but does more and more outside the State.

Washington is screwed. It has the highest gas tax in the nation, and still hasn't repaired road damage from the 2001 Nisqually Earthquake. The legislature and governor raised the State budget by 33% in 3 years, and now projects deficits left and right, yet it's also decreased MANDATORY funding of the State employee's pension fund. And now it wants to put the screws to Microsoft...

Washington is dead, it just doesn't know it yet...

Textbook Tax Case

This is a textbook case of high taxation modifying the behavior of the taxed. If Washington's tax rates weren't punitive for these sales, there wouldn't be any incentive for the company to be incorporated in Nevada. This is a common corporate practice, and demonstrates the necessity of small laboratories of democracy, aka, states. Washington is seeing how Nevada's tax code is modifying the behavior of Microsoft, and Washington has the choice to modify their tax code or continue pursuing their own version of it. It's not Microsoft's fault for playing by the rules to maximize profit.

Re:So what?

I guess Microsoft should maintain their own bridge then.

Nevada may have lesser public services than Washington, or higher non-corporate taxes. Either way, Microsoft and it's employees are enjoying privileges in Washington that they've skipped out of paying for, placing more burden on Washington's other residents.

If Nevada is such a great, efficient state then I see no reason why Microsoft shouldn't move their actual operation there, instead of just maintaining a front for tax evasion purposes.

Re:So what?

If Nevada is such a great, efficient state then I see no reason why Microsoft shouldn't move their actual operation there, instead of just maintaining a front for tax evasion purposes.

And, as you file your own tax returns this year, I'll bet you carefully record each internet transaction from out of state, ensuring that you pay full taxes even though it would have been easy to avoid it? Of course, your charitable deductions will be paid at the lower rate you really know your junk was worth rather than the higher "standard rate" you know you can get away with? Similarly, when you realize your itemized receipts don't add up to as much as the standard deduction, you'll still take the lower amount you know you really deserve? You'll also stop using lower rate credit cards issued out of Delaware in favor of higher rate ones from your own state?

Sure, you could be saving money on your own taxes. But won't anybody think of the children in your own state who are in cramped classes because there aren't enough tax dollars. Thank God for people like you who make a point of paying every dollar they can, rather than looking for the best possible savings.

When an individual figures out ways to avoid paying taxes - or paying as little as possible - it's considered frugal. When a corporation does it, it's evil?

Re:So what?

If Nevada is such a great, efficient state then I see no reason why Microsoft shouldn't move their actual operation there, instead of just maintaining a front for tax evasion purposes.

Why don't we really punish Microsoft? Let's kick them completely out of the USA! If the taxes aren't good enough for Washington, then Microsoft isn't good enough for Washington and therefore the USA. We should make them relocate to India and fire all their American employees! That would show those bastards. Then the next time some evil company wants to hire American workers while reducing their costs of doing business, they'll think twice because we took a stand for more taxes and less profits.

I for one will not stand for good paying jobs in the USA. Any candidate that encourages more tech jobs to move to India has my vote!

Re:So what?

Amusingly enough, MS has paid a fair bit into King County municipal infrastructure issues. They bought a bigger fire truck (in exchange for being allowed to build a building taller than 4 stories). They built a bus transit center. I beleive they've had a part in paying to get bridges widened and other traffic improvements near the MSFT campus.

The MSFT employee base does a hell of a lot more for King County than the other way around.

WA politics are horribly corrupt and stupid.

Former Redmond resident, Current MS employee (in Fargo, ND, where the local government is much less stupid)

As an MS employee and shareholder, I hope we continue to diversify away from the Redmond campus. It is extremely expensive and the business climate in WA is unstable and increasingly hostile. The overwhelming majority of MS employees are transplants from elsewhere.

The nice thing about markets is that socio-economic conditions are a market also, and as US cities get stupider and stupider, they'll lose business and "lose" in the market place. Hopefully corrections occur before there is too much uncomfortable displacement for all parties.

Re:So what?

And take their employees with them you twit. Just think of the tax-base loss Washington State would see.

Washington has no personal income tax, so that amount is smaller than you think.

Re:So what?

So they pay corporate taxes in Nevada, where there are no corporate taxes, and they pay their employees in Washington, where there is no income tax?

It would be fun if everyone started parasitising like that...

No taxes!

Let's do away with taxes. And, we can do away with all the things taxes pay for: the education system that trains Microsoft's employees, the roads that allow the employees to get to work, the police that help protect Microsoft from the roving bands of rabid cats, the standing militia that protects Washington from invasion by Canada. (Those bastards covet Washington, and are just *waiting* to invade.)

Corporations benefit from -- nay, depend on! -- public infrastructure. Public infrastructure costs money. It's been proven time and again that private interests cannot provide neutral, equitable infrastructure at a reasonable price. Taxes are necessary.

Now, taxing both corporations and individuals seems a bit of double-dipping, I agree. Tax the corporations, and let the individuals keep their wages. Politicians would end up with a lot more votes that way (though a lot less money through corporate sponsorship and whatnot).

Re:No taxes!

Corporations never pay taxes. Their customers do, and they don't even realize it. That's why I believe we need to eliminate ALL corporate taxes at all levels. Each individual person should be able to calculate to the penny how much they pay the government. How much of the cost of your last Windows license went to Uncle Sam? Don't know, do you?

Re:No taxes!

Tax the corporations, and let the individuals keep their wages. Politicians would end up with a lot more votes that way (though a lot less money through corporate sponsorship and whatnot).

Unfortunately, it is very difficult in practice to "target" a tax to hit a particular demographic group. This is the same reason why it makes no sense for the Social Security Administration to talk about the "employee's share" and the "employers share". Both shares are paid by the employees (i.e. their wages are lower than they otherwise would be if the employer wasn't paying "their share"). It is a frequent mistake here on Slashdot to ignore what economists call the incidence [wikipedia.org] of a tax. In fact, it is often the very people whom the tax advocates propose to help who are ultimately hurt the most by new taxes.

"prying hands of the state"

Remember that statement next time you drive along a road. Where TF did that road come from?

Re:You eat the food, you pay the bill

There is no valid contract for you to pay for your food when you go into a restaurant, yet few people dine and dash. No one would assume the restaurant is just giving you the food for free. What there is is an implied contract.

I see things like this written all of the time on Slashdot. It usually doesn't come up in stories about tax, but usually ones about EULAs.

When you place an order for food, there is actually a contract. A valid contract requires: offer, acceptance, consideration and assent. Absent some extraordinary situation, the moment the restaurant starts making the food you've ordered, there's a contract. You're obligated to pay. Dine and dash is a sort of breach of contract. It's also conversion.

An "implied contract" is somewhat of a different beast. It's more of a legal fiction that prevents someone from knowingly obtaining the benefit of another's mistake. E.g. a court might imply a contract if you eat the $1000 meal meant for another table and then try to say that you're not going to pay for it because you only ordered a diet soda.

And, as it relates to taxes, a contract analogy is not a very good one. Lots of people don't pay taxes and yet get the benefits of the tax system. Moreover, a number of people pay more taxes than the value of the actual benefit received from them. There's also no way to reject the benefit since moving elsewhere is not usually a viable option--in a contract, this might be an example of duress.

Re:from whom does the benefit come?

Absolutely not, they already pay WA state taxes, the article is misleading. MS does pay WA taxes, and presumably quite a bit. They pay property taxes on the land they occupy and sales tax on anything that is purchased for the business.

People who purchase MS software or services have to pay sales tax on those transactions and anything that MS sells online is also subjected to WA tax for anybody that lives in the state. I don't believe that MS is required or really should be paying more taxes than they are presently to my state.

I haven't seen the figures themselves, but it doesn't matter where the sales are recorded, the amount of taxes that corporations can be taxed here are extremely low compared with the money that MS products bring in through sales tax. We're talking 6.5% base sales tax compared with corporate taxes of 0.00484% for gross manufacturing receipts, 0.00471% for retailing and 0.015% for other services.

The money just isn't that large compared with the additional sales tax, gas tax, property tax and the taxes paid to the state by their employees.

Re:"small government"

I had a girlfriend that had mental problems... now she is on the street.

...and my ex-wife had mental problems. *I* ended up on the street.

Correlation != causation...

Re:So...

Paper tiger arguement.

They are in Redmond because it has the infastructure to support them. The telecommunications, roadways and educational system to supply those tens of thousands of employees. Nevada, by contrast, cannot supply these (sorry nevada, you're a great state, but your infastructure is horrid). For microsoft to do such a move would be to cut off its nose to spite its face.

There is a reason why the top performing companies are found in areas with the highest tax brackets. Those territories, which tax for the needed infastructure, are the ones which can support businesses of Microsofts size.

Re:So...

Obviously you don't live in Washington... Microsoft (and Boeing) each PAY millions of dollars when expanding their campuses FOR things like increased roads, transit, power, and the such. They PAY those costs right up front, before or during construction (with the requirement that the infrastructure be built and completed prior to signoff of the new construction).

Additionally, because of "community needs" and "environmental impact" and "public awareness" campaigns, Microsoft and Boeing pay MILLIONS to build parks, schools, and other government-specific projects MILES away from the construction, just to get their permits approved.

Microsoft PAID for the overpass across 520 when it wanted to join its two campuses. It PAID for the Metro transit center in front of the Redmond campus. It PAID for widening 40th Street. It PAID for the rework that's happening on 150th. Cash up front.

This is a case of a State out of control. Washington's budget has increased 33% in the last 3 years alone. Not promised outlays, actual CASH BEING SPENT. We're going from a $1.5 billion dollar surplus and $2 billion dollar rainy day fund to $600 million dollar deficits and no rainy day fund.

We have the HIGHEST GAS TAX in the nation. That gas tax is supposed to be dedicated to roads. Yet we still have floating bridges that are at risk of sinking with each storm, and a viaduct that carries half the North/South transit through the city of Seattle yet is in danger of imminent collapse PER THE STATE'S OWN EXPERTS.

Yet neither of these infrastructure problems - which were to be addressed by the latest 9 cent per gallon tax - has been started. We're still arguing about whether to just tear them down and not replace them (where did the money go?) or replace them with structures that carry FEWER vehicles, when our population is increasing.

We have an out-of-control L&I system. Woe be to you if you have a warehouse or shop and the State knows about it - EVERYONE that can walk into the warehouse can be considered "high risk" for your L&I costs, regardless of their position or the use of that warehouse.

Unemployment? I ran a business for 10 years in this State, and never ONCE had an unemployment claim. Not one. Employed over 80 people over the years, never ONE claim. Yet every year my unemployment tax rates would increase by 6-8%.

We mandate HUGE income to the State by having the highest minimum wage in the nation. And of course, that means the State gets more income because their income is based on spending, gross receipts by businesses (which must increase when the mandatory wages increase), and those same L&I costs (which are a percentage of your wages).

No, taxation is not the problem - the State's budget is growing faster than the wealth or income of the State's residences. Record budgets are being pushed through with taxation growing 2-3 times that of the wealth of the State... Well what's going on?

Spending - it's up 33% in just 3 years. Oh, and that doesn't include the UNDERFUNDING of the State's pension plan. Or the spending of the rainy day fund. Both of those are "off book" items...

We're spending over a billion dollars a MILE for a light rail system that runs at grade. And cannot climb the hills of Seattle. And originally wasn't even going to go to the airport, but changed because of overwhelming public outcry. The existing example spur - the South Lake Union Trolley (yes, it is actually called the SLUT) - has had 3 train-car accidents in just 3 months, bringing it to a standstill for hours.

This State has seen property taxes rise on average at 15% per year for the last 5 years. And now that it's looking to slow down to only 3-4% per year, the State is figuring out how to increase the taxation rates to bump their revenue intake up.

This State is all about take-take-take, and what YOU can do to contribute to it. Competition is not allowed - no school vouchers, private tollways are illegal, private ferries ar