As long as Washington State doesn't go broke before 2017, we'll eventually catch up to the damage done by HB3176. But, HB3176 may throw away a lot of cash (Microsoft's tax debt) up front that the state could benefit from today.
Following up on yesterday's post on Microsoft's $100 million tax cut and potential tax amnesty, I've done a brief analysis of the impact of HB3176's proposed changes to the royalty tax. Based on this analysis, the current royalty tax alone will generate more revenue for the state until 2017 when the combined increased revenue sources from HB3176 will catch up with the loss of the domicile-based royalty tax.
Receipts from the existing royalty tax are in blue. Receipts from proposed HB3176 are in red. Click on the chart to see a larger, more readable view.
There are a number of rough assumptions in the model - which I can clarify in more detail later if requested:
* We assume Microsoft has committed no fraud in its tax reporting such that the statute of limitations would have run out on tax collections prior to FY 06.
* We assume a field audit under the old standards was conducted, so we assume passage of HB3176 is written so as to provide Microsoft tax amnesty for its $1.27 billion Royalty tax dodge 1997 - 2010.
* Revenue estimates for HB 3176 are based on the Fiscal Impact statement by the Department of Revenue through FY2013. After that, we assume a 5% growth in receipts.
* We project a 5% growth in royalty tax receipts (and Microsoft's licensing revenue) from 2011 - 2017. We're also estimating Microsoft's H2 FY10 licensing revenue based on H1.
* Revenue estimates for the existing royalty tax are based on actual reported B&O Royalty Income from the Department of Revenue for the years 1999 - 2009 combined with estimated figures based on Microsoft's reported licensing earnings through 2003 and estimated licensing earnings after it stopped reporting these figures. Typically, Microsoft earned an average 31% of sales from licensing through 2003 and we used this estimate to project forward.
* For the royalty tax estimates, we assume the state will pursue collection of Microsoft's Nevada tax dodge; the full payments due under the existing B&O Royalty tax law of .484% of licensing revenue.
* However, we include no receipts based on income and penalties for Microsoft's late royalty tax payments from 2006 - 2010, even though these likely would be collected. Penalties could range up to 35%.