Apparently, Governor Gregoire is not clueless, though I thought she might be after reading her recent interview with TechFlash.
TechFlash asked Gregoire: "During the budget deliberations, there was a proposal at one point to tax custom software as retail goods, not as a service. At the same time, Microsoft uses its Nevada subsidiary to reduce its royalty tax on software licensing. How do you view those two issues, and where would you put the tax?"
She responded, "...On what Microsoft has done, there was an attempt to try and get them to come back with that, back into this state. We were trying to find a way to make sure that happened. Again, every attitude you can see by the Legislature was to try and bring what had left back and retain what we had here. Anything that's a disincentive to that isn't going to get a shot."Her answer confused me since the bill she just signed gave Microsoft a huge effective tax cut, changing the royalty law from a tax on gross worldwide revenue to one only on sales to Washington State customers. Whereas Microsoft will earn approximately $20.7 billion in worldwide licensing revenue this year, its sales to Washington State are a tiny fraction of this. So having slashed Microsoft's tax exposure, what exactly did Gregoire want to bring back?
Furthermore, every effort in the Legislature, spearheaded by 17 year veteran ex-Microsoftee and Chair of the Finance committee Rep. Ross Hunter, seemed geared towards rewriting the system in favor of Microsoft ... the legislation even includes language which grants Microsoft amnesty on its past 13 year Nevada tax dodge, an estimated $757 million in unpaid taxes.
Then, TechFlash asked, "Would you like to see Microsoft record those royalty revenues here ..." The Governor replied "Yes." Was the governor aware that she just cut Microsoft's tax exposure by an estimated 99 percent? Had she been clueless to Rep. Hunter's efforts on behalf of his corporate alma mater? Had she signed a bill without any knowledge of its impact?
TechFlash followed up: "...to therefore pay the tax here?" Gregoire responded, "I'd like them to have everything back here. I'm upset that they think they have to send anything out of state. So I'm willing to try and look at ways that would be an incentive to them."
So, now that the Governor signed the bill that guts Microsoft's royalty tax exposure and grants amnesty for its past tax dodge, she wants them to pay their fair share. I was flabbergasted.
What does Gregoire want Microsoft to bring back to Washington State?
I contacted the Governor's office for clarification. They put me in touch with Department of Revenue spokesperson Mike Gowrylow before eventually having me speak with Gregoire's Deputy Communication Director Viet Shelton. Shelton offered me this statement via email after we spoke:
I feel confident saying that the Governor’s comments to techflash are pretty clear. But, after talking to you and your request for additional comments, let me elaborate on the topic.
Some companies have moved their royalty operations out of state and one of the reasons was how we taxed all their gross revenue on sales worldwide. It is hard to compete with states such as Nevada that impose no business taxes on such income. The “Economic Nexus” legislation that passed this session will make us more competitive by taxing businesses only on the revenues they receive from Washington customers. That way, it doesn’t matter where a company’s operations are based -- Washington will be entitled tax its fair share of the company’s income. To be clear, one of the primary motivations behind this law is due to the existing loophole that many out of state companies that do significant business in Washington don’t pay taxes. The “Economic Nexus” legislation was designed to close this loophole and level the playing field between in-state and out of state companies. In fact, the expected result of the legislation is that the state will get an additional $84.7 million in additional revenue just in the next fiscal year alone.
There is also hope that the legislation will encourage companies that have moved their royalty operations out of state to return to Washington. We’ll get those jobs back and tax revenue on Washington sales that we don’t now get. Again, the goal is about getting jobs back in the state.
Gregoire's Not Clueless, She's Gutless
In the year of a $2.8 billion budget gap, Gregoire chose not to cast Microsoft as a tax evading villain, enforcing the old royalty tax in a PR and legal coup that might have netted the state $100.7 million this year (note: that's more than $84.7 million) not to mention $1.2 billion in past payments, interest and penalties, instead she chose to raise the business service tax rate, create new "7-11" taxes on beer, wine and candy and to cut vital services including unemployment benefits to the disabled.
Governor Gregoire isn't clueless, she's gutless. You see, the next reporter to interview the governor should ask, "Why did you think it was fair to cut taxes on the state's most profitable company and forgive them for their evasive tax practices while choosing instead to raise taxes on hard working Washington businesses and the lower and middle classes and cut services to the most vulnerable among us?" Gregoire doesn't have the guts to say that Microsoft is the home team, that she's playing for the home team and that they get to play by different rules than the rest of us.
It doesn't take guts to stand up for Microsoft, it takes guts to stand up to Microsoft on behalf of everyday Washingtonians.
The Two Biggest Myths About Microsoft in Washington State
Rather than worry about the next ten thousand high paying technology jobs Microsoft's creating in India, China, Texas and elsewhere, she wants us to believe she's fighting the company to return its 100 - 200 Nevada managed lawyers, paralegals and accountants who run its (formerly) tax avoiding royalty business. As it only takes a small number of lawyers and accountants to dodge $100.7 million annually in taxes, Microsoft's tax avoidance jobs don't scale the way it's next big technical success like Azure, or Natal or Kin might.
The biggest myth in Washington State is that Microsoft plans to grow its next ten thousand jobs here. The second biggest myth is that if we tax the company more it will leave. The painful truth is that it's already engaging in a number of steps to reduce its growth (and even downsize) here and we'd have to pass a lot more bad law like the one Gregoire just signed if we want them to stay.
Meanwhile, no one in state government has responded to legal precedents that suggest the state might have prevailed in a lawsuit to collect that billion in unpaid royalty taxes from Microsoft. Why would they, aren't we all on the same team?