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.  

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.