Earlier this week, Seattle's new mayor took the oath of office and assumedly turned in his beloved Mac for a city-issued PC running Microsoft Windows. Seattle's IT Director Bill Schrier (@billschrier) thinks it's great for the city to use the software of one of our great local companies. Under Schrier, Seattle just completed a six month city-wide migration to Microsoft Exchange and Outlook. But, it turns out that while Microsoft's software is built in Washington, the city (and at least 84 other Washington cities and governmental agencies) purchase its software with a volume licensing agreement from Microsoft Licensing GP of Nevada.
In other words, while Washington cities and state agencies think they are buying local, they're actually purchasing software through a scheme designed to provide cover for Microsoft to evade the state's B & O Royalty Tax.
Over the past twelve years, Microsoft has avoided paying an estimated $1.24 billion in taxes, interest and penalties on its software licensing revenue. Washington State's current projected budget deficit is $2.6 billion.
Any Washington city or state agency can purchase software licenses through a convoluted contract between Washington State, Microsoft Licensing GP of Nevada and Dell. The agreement provides software licenses to at least 85 agencies and municipalities including cities such as Seattle, Bellingham and Olympia and agencies such as the Washington State Patrol, the Port of Seattle and Seattle Housing Authority.
Humorously, while Microsoft justifies its B & O Royalty Tax dodge by contracting with Washington State from Nevada, Washington State's agreement with Dell explicitly requires the Texas-based PC manufacturer to pay B & O Taxes on its revenue (section 6 here).
Theoretically, no explicit mention is necessary in the state's contract with Microsoft since Washington State's Royalty Tax law clearly requires the company to pay B & O tax on wholesale revenue from sales of software licenses.
So, while Microsoft reports to Washington's Department of Revenue that it's not in the business of software licensing in Washington, Microsoft Licensing GP of Nevada's contract with Washington State requests that copies and correspondence be sent to its Volume Licensing Group in the legal department in Redmond, Washington (section 17 here).
Over the past two years, Washington cities and agencies have purchased more than $22.7 million in software licenses. To date, I've been unable to get accurate sales numbers prior to this.
While the amount Microsoft evades in taxes in sales to state agencies is relatively small, perhaps $55,030 per year - it's an instructive example of how Microsoft architects its tax scheme. In these same two years, Microsoft earned an estimated $36 billion in licensing worldwide, evading taxes of up to $174 million through its Nevada operation. Note: last year 3,088 Washington taxpayers paid their B & O royalty tax under threat of enforcement.
So, while Washington officials may think they're buying local, they're actually just being fleeced from Nevada.
While Microsoft continues its unapologetic, not so secret $1.24 billion tax dodge of the state's active B & O Royalty Tax law, the Legislature is debating ending tax exemptions on candy and chewing gum which might reduce the deficit by $28 million next year. Suckers.