The Washington State Legislature apparently traded away $100 million to get $2.6 million in new tax revenue this year as I detail in my latest open letter:
I am writing to call your attention to a report that I received via a public record request this week, on the estimated impacts of the Economic Nexus bill.
The report says that the apportionment of the royalty tax will result in only $2.6 million of the $84.7 million in estimated new out of state tax revenue in 2011. The vast majority of the new revenue is generated by apportionment of other service taxes such as those on out of state banks.
It appears that OFM did not provide this breakout in its earlier bill reports prior to your final vote on SSB 6143.
Why does this matter? Back in March, I wrote most of you asking that you remove the royalty tax from the economic nexus bill and that this would give the state the opportunity to challenge Microsoft for $100.1 million in annual royalty taxes (.484% of its $20.7 billion worldwide annual licensing revenue recorded in Nevada).
Instead, advocates pushed the bill through on the merits of the $84.7 million in new revenue without apparently highlighting that there was very little financial basis to bundle in the royalty tax. Essentially, in 2011, we’ve traded $100 million for $2.6 million. In fact, apportioning the royalty tax will likely cost the State of Washington far more than $100 million annually going forward.
Would the Department of Revenue prevail if it had to take Microsoft et al. to court to challenge its Nevada-based tax avoidance operation? I believe it would.
In United Gas Corp. v. Fontenot, 241 La. 488, 129 So.2d 748 (1961), the Court writes:
Under the separate and independent exception to the mobilia rule, the state where the corporation's "commercial domicile" exists is, in effect, placed on a parity with the legal domicile of an individual, and it may, therefore, upon the soundest principles, subject its intangible property to the income tax laws of the state, wherever located, as if it were a "citizen" of that state, without violence being done to the due process and equal protection guarantees of state and national constitutions, or the interstate commerce clause of the Constitution of the United States...
Further, in Louisiana Dep't of Revenue v. Gap (Apparel) Inc., 886 So.2d 459 (La.Ct.App. 2004), the State Court of Appeals wrote:
“Because [intangible] assets have no physical location by their very nature, the jurisprudence has developed three separate doctrines applicable to their taxation...if the intangible property is used in another state in such a way as to become an integral part of a business carried on within the state, the intangible property acquires a "business situs" in that state and is subject to taxation in that state [and]…where the business of the corporation is actually managed and function in a state other than the state of incorporation, a "commercial domicile" exists in the state where the corporation's principal place of business is, and the corporation's intangibles may be taxed there.”
Royalties from Nevada constitute nearly a third of Microsoft’s revenue – making it in integral part of its Washington-based activities, home of its commercial domicile.
So far, the Department of Revenue has not produced compelling evidence of the legality of Washington State corporations evading the pre-SB6143 royalty tax by operating from Nevada.
Each time I hear Microsoft complain about Washington's inadequate transportation or its inability to find well-educated, appropriately trained job applicants in our state, I wonder why the Legislature missed its chance to enforce existing tax law and get them to help pay for it.
After reading the attached report, I really don’t understand.
Founder, Citizens for Fair Tax Enforcement