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Fact Sheet - Microsoft Nevada Tax Avoidance

Fact Sheet - Microsoft Nevada Tax Avoidance

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Published by reifman
This fact sheet summarizes Microsoft's Nevada tax dodge activities.
This fact sheet summarizes Microsoft's Nevada tax dodge activities.

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Published by: reifman on Mar 25, 2010
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03/25/2010

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FactSheet-MicrosoftNevadaTaxAvoidance
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.

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