Beginning with the publication of Citizen Microsoft in Seattle Weekly in 2004, I've reported that Microsoft used its Nevada office to avoid payment of the state's Royalty Tax from 1998 - 2010. I've blogged that the amount of the tax dodge has likely exceeded $1.07 billion (not including penalties).
Last week, after John Burbank, Executive Director of the Economic Opportunity Institute, wrote an editorial condemning the company's hypocritical record of tax dodging while advocating for more education funding, Jeffrey Reading, Microsoft's Senior PR Manager wrote The Herald to refute the claims Burbank made (Burbank based his article on my reporting):
"Mr. Burbank does not include sourcing to support his claims regarding Microsoft’s Nevada licensing, which is part of a very complicated piece of state tax law. Much of the information regarding this issue is misinformation primarily spread by a blogger, and no state official has ever provided any factual data supporting his claims."
I stand behind my research and all of my claims. If Microsoft wishes to prove that it paid Washington State Royalty Taxes during the years 1998 - 2010, it should disclose its worldwide licensing revenue and its Royalty Tax payments for this time period. It would be quite simple for the company to provide these two sets of numbers and would put the issue to rest once and for all (as I have done here).
If it is not willing to provide this data, it should frankly stop sending knowingly false letters to journalists accusing this blogger of spreading "misinformation".
I know that Microsoft's accusations about my reporting are false for two reasons:
1) Using the same analysis we reported in Citizen Microsoft in 2004, we know that the state's Royalty Tax collections are much smaller than they should be given Microsoft's reported licensing revenue.
Since 1997, Microsoft’s reported $480 billion in revenue, approximately $149 billion from licensing. Under the state’s Royalty Tax from 1998 - 2010, more than $757 million dollars should have been paid in tax. However, since 1999, the Department of Revenue (DoR) reports that all taxpayers combined have only paid $72.9 million in royalty taxes.
For example, in 2009, Microsoft earned approximately $18.7 billion in licensing revenue. Washington State should have recorded more than $87.6 million in tax receipts, but the DoR reported only $6.3 million in royalty taxes paid that year.
2) When I interviewed Microsoft's General Council and Vice President Brad Smith in 2004 for Citizen Microsoft, he admitted the tax avoidance effort, while attempting to make light of its scope:
"Well, the principle focus of discussion inside the company and with people in state government here at times has been both the focus on revenue generation for the State of Washington and job creation in the State of Washington. And, obviously the company did make a decision, I'm not remembering exactly how many years ago to put Microsoft Licensing Incorporated in Nevada, in part to recognize the lower tax rate[sic - Nv. tax rate is zero] that was in place there. And, there have have been times when people in state government have mentioned to us the issue of whether we might move that back to the state of Washington. The reality is that in the scheme of things the impact is not very significant either for the company or for the state either the state government or the state economy."
Just prior to publication of Citizen Microsoft, Seattle Weekly handed over our facts and figures to Microsoft and asked them to correct our reporting. They did not refute the facts at that time. So, it seems odd that they are now refuting these facts to The Herald.
Microsoft has never outrightly denied not paying the Royalty Tax for its licensing revenue during the years of 1998-2010. It's time for them to set the record straight and release the data. In my interview, Mr. Smith said that at the time that the company would consider releasing such data. It never has.
In closing, I'd like to make three important final points:
1) A Microsoft employee reported to me that the company used to send invoices for Microsoft Nevada from its Washington State office with envelopes printed with Reno, Nevada return addresses. Perhaps the company would also like to explain at this time how this practice might affect the legal independence of its Washington and Nevada based corporations that it claims in its tax records. If evidence of fraud is found in Microsoft's tax reports, this could potentially expose the company to severe financial penalties.
2) The Royalty Tax rate actually was 1.5 percent (more than three times higher) prior to 1998, but was cut in response to software industry lobbying. Scenario B in the Financial History shows that if not for its lobbying to cut the Royalty Tax from 1.5 to .484 percent, Microsoft would owe $4.37 billion in taxes, interest and penalties.
3) A 2010 job listing at Microsoft's Nevada website (see background) claimed the sub-corporation records more than $30 billion in revenues annually. If accurate, this figure is about half the company's revenue and 40 percent greater than our earlier estimates. After re-calculating Microsoft's tax avoidance based on this figure (it stopped publicly reporting licensing revenues in 2004), we estimate Microsoft would owe $6.1 billion in taxes, interest and penalties - enough to fund all of the Legislature's 2010 cuts and the current shortfall.
- Overview of Microsoft's Nevada Tax Dodge including video by Amanda Congdon
- 2010 Fact Sheet
- Historical Financial Analysis of Microsoft's Nevada Tax Dodge (Google Docs Spreadsheet)
- Washington State Doesn't Have a Budget Deficit