1. In
1997,
Microsoft
opened
a
Reno,
Nevada
office
to
record
sales
of
its
licensed
software
–
reducing
its
exposure
to
Washington
State’s
Royalty
Tax
RCW
82.04.2907.
2. Prior
to
1998,
income
received
from
royalties
for
the
granting
of
such
rights
as
copyrights,
licenses,
patents
or
franchise
fees
was
taxed
at
the
1.5
percent
services
rate.
3. In
1998,
upon
pressure
from
the
software
lobby,
the
Legislature
cut
the
tax
by
more
than
2/3,
from
1.5%
to
.484%.
The
current
law
states:
“(1)
Upon
every
person
engaging
within
this
state
in
the
business
of
receiving
income
from
royalties
or
charges
in
the
nature
of
royalties
for
the
granting
of
intangible
rights,
such
as
copyrights,
licenses,
patents,
or
franchise
fees,
the
amount
of
tax
with
respect
to
such
business
shall
be
equal
to
the
gross
income
from
royalties
or
charges
in
the
nature
of
royalties
from
the
business
multiplied
by
the
rate
of
0.484
percent.”
4. Historically,
about
1/3
of
Microsoft's
business
is
sales
of
software
licenses,
not
packaged
retail
software,
but
intangible
rights
granted
to
PC
Manufacturers
and
Fortune
500
customers
that
duplicate
high
quantities
of
Windows
and
Office
on
site.
5. In
2004,
Microsoft
stopped
publicly
reporting
the
percentage
of
revenue
earned
from
software
licenses.
6. When
I
interviewed
Microsoft's
General
Council
and
Vice
President
Brad
Smith
in
2004
for
Citizen
Microsoft,
a
Seattle
Weekly
cover
story,
he
admitted
the
tax
avoidance
effort:
"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
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."
7. Since
1997,
Microsoft’s
reported
$480
billion
in
revenue,
approximately
$149
billion
from
licensing.
8. Under
the
state’s
royalty
tax
at
.484%,
more
than
$757
million
dollars
should
have
been
paid
in
tax.
However,
since
1999,
the
DoR
reports
that
all
taxpayers
combined
have
only
paid
$72.9
million
in
royalty
taxes.
9. 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
reports
only
$6.3
million
in
royalty
taxes
paid
last
year.
10. Going
forward,
if
Microsoft
paid
its
royalty
tax
in
full,
it
would
add
approx.
$80
-
$100
million
annually
to
the
state
coffers.
11. Microsoft
uses
a
partnership
called
Microsoft
Licensing
GP
to
conduct
its
licensing
business
in
Nevada.
But,
who
is
Microsoft
Licensing
GP?
In
a
recent
lawsuit,
it
described
Microsoft
Licensing
GP
as
“a
Nevada
General
Partnership
comprised
of
Microsoft
Corporation
and
Microsoft
Management
LLC”.
The
Nevada
Secretary
of
State’s
Website
reveals
that
Microsoft
Corporation
is
a
Washington-‐based
corporation
and
Microsoft
Management
LLC
is
a
Nevada-‐based
corporation.
However,
all
eight
registered
officers
of
Microsoft
Management
LLC
are
Microsoft
employees
and
half
are
employed
by
and
based
at
its
Washington
State
corporation.
Microsoft
Licensing
GP
is
therefore
an
Alter
Ego
of
Microsoft
Corporation.
12. Microsoft’s
Nevada
is
a
“form
over
substance”
tax
dodge.
In
simple
terms,
Microsoft
is
using
the
corporate
“form”
of
its
Nevada
subsidiary
to
justify
tax
avoidance,
but
the
“substance”
of
the
transaction
is
that
it's
an
artifical
step
added
to
the
process
of
managing
their
license
business
designed
purely
to
avoid
the
tax.
There
is
no
net
increase
to
their
business
for
creating
the
Nevada
office
other
than
the
tax
savings.
The
company
argues
to
DoR
that
its
licensing
business
is
performed
in
Nevada,
while
the
bulk
of
its
R&D,
legal,
sales,
marketing
and
management
activities
are
performed
in
Redmond.
Commonly,
the
key
legal
test
is
whether
a
transaction
changes
in
a
meaningful
way,
apart
from
its
tax
effects,
the
taxpayer's
economic
position.
Microsoft
Nevada
fails
this
test.
13. The
majority
of
Microsoft
Nevada’s
contracts
are
governed
by
Washington
law.
14. Microsoft
has
used
King
County
courts
to
sue
on
behalf
of
Microsoft
Licensing
GP,
while
dodging
the
tax
that
supports
the
general
fund
for
the
courts.
15. When
Washington
state
agencies
and
cities
purchase
Microsoft
software
licenses
through
the
Wash.
Master
Contract,
these
payments
get
made
to
Microsoft
Licensing
in
Nevada
and
are
part
and
parcel
of
Microsoft's
tax
dodge.
16. The
statute
of
limitations
on
back
taxes
is
five
years
unless
fraud
is
involved.
For
Microsoft,
this
is
roughly
$425
million
or
more
plus
interest
and
penalties.
17. There
is
anecdotal
evidence
that
Microsoft
has
not
historically
maintained
strict
boundaries
between
management
of
its
Nevada
“royalty
generating
business”
and
its
Washington-‐parent.
Some
of
this
has
been
reported
to
DoR.
18. Microsoft
has
more
than
$40
billion
in
cash
and
short
term
investments
on
hand.
19. Strengthened
enforcement
of
existing
Royalty
Tax
law
against
Microsoft’s
Nevada
tax
operation
would
earn
more
revenue
for
the
state
than
SB
6143’s
new
B&O
Services
taxes
until
at
least
2017.
20. It’s
likely
that
Rep.
Hunter’s
language
in
HB
3191
and
3176
around
“field
audits”
would
Microsoft
amnesty
on
its
entire
back
tax
bill.
The
DoR
revenue
regularly
audits
large
companies
like
Microsoft,
but
under
its
non-‐enforcement
policy
re:
abusive
tax
transactions.
21. The
DoR
has
said
that
a
company
like
Microsoft
is
required
to
pay
tax
on
fair
market
value
of
intercompany
transactions
when
it
accounts
for
the
sale/transfer
of
licensing
assets
from
the
Washington
parent
company
to
the
Nevada
subsidiary.
However,
if
this
was
being
done,
it’s
not
clear
why
Microsoft
would
go
through
the
effort
of
setting
up
it’s
Nevada
office.