As we pointed out in today’s Morning Fizz, Jeff Reifman, a former Microsoft employee who is on a crusade to get Microsoft to pay royalty taxes on software licenses, took me task for not asking Microsoft VP Brad Smith about their—estimated $100 million a year—tax dodge. (Reifman’s website has a helpful fact sheet on the issue.)
Here’s the deal: Microsoft has a shop in Reno, Nevada where it issues its software licenses. Even though dividends from those licenses come back to Redmond, the licensing transactions are not captured by Washington State because the business is technically generated out of Nevada. (I talked at length today with bureaucrats in Olympia who confirmed the situation.)
Reifman, who estimates that Microsoft has shorted the state about $787 million over the years, wants the state to tax Microsoft’s revenue on the licensing royalties.
In response to Reifman’s concerns, I followed-up on the Smith Q&A this morning to ask about the tax dodge.
Here’s what Microsoft told me, blandly, today about the tax dodge.
“Microsoft has offices all over the United States. As a global company we pay all due taxes in all jurisdictions in which we operate. Microsoft is proud to be headquartered in Washington. The company generates a significant amount of direct and indirect tax revenue for the state. As a global company we pay all due taxes in all jurisdictions in which we operate.”
Ironically, the legislature passed new tax rules this year that will tax revenues from out-of-state businesses that have a market in Washington State for services provided to customers here. That legislation included taxes on royalties. But the trade off is this: Companies based in Washington will not have to pay those taxes on out-of-state transactions. So, even if the legislature ever tries to go after Microsoft’s royalties based on the fact that the company operates out of Washington state, there’s a new loophole in place to shield the majority of their licensing business. (Reifman discusses this problem at length, here.) The state, of course, would argue that the new rule is an incentive to bring Microsoft’s licensing shop back to Washington, which has other benefits like employment and local business.
By the way, I take issue with Reifman’s assertion that I was “charmed” or “rolled over” by Smith and the dinner. Citing campaign finance data, I asked Smith to explain Microsoft’s limp investment in the 2008 pro-light rail campaign (that brought light rail to Microsoft) despite Smith’s grand pronouncements during the dinner that Microsoft was a big light rail supporter. I also asked him to explain Microsoft’s watered down position on net neutrality rules.
