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Public banner in Seattle criticizes Microsoft over taxes, but it’s not quite accurate

by 16 Comments

It’s not unusual to see banners in the public square at the busy intersection of Market Street, 22nd Ave. N.W. and Leary Ave. in Seattle’s Ballard neighborhood, touting traditions such as Norwegian Constitution Day and the annual Seafood Fest.

But it was a bit of a surprise to see this banner there on Friday afternoon: “MICROSOFT PAYS NO WASHINGTON STATE SOFTWARE LICENSING TAX.”

It’s certainly eye-catching, but there’s one problem: Even the most outspoken critic of Microsoft’s tax tactics says the banner is inaccurate, or at least behind the times, even though he’s glad to see the overall issue getting attention.

To be strictly accurate, the sign would need to say Microsoft “dodged $6.1 billion in Washington State taxes before it lobbied the legislature to rewrite the law to eliminate the tax,” wrote Jeff Reifman on the Microsoft Tax Dodge site this afternoon, after GeekWire sent him the picture above.

Somehow that’s not quite as catchy.

The background: Washington state previously taxed royalty income on worldwide sales of software licenses and other intangible goods according to whether or not the selling company had a “physical nexus” in the state, regardless of where the sales took place.

Although Microsoft is based in Redmond, it records large portions of its licensing revenue through an office in Nevada. That’s the basis for Reifman’s calculation that Microsoft dodged more than $6 billion in Washington state taxes. Reifman, a former Microsoft employee, believes that the state should have gone after Microsoft for back taxes, particularly in light of Washington state’s severe budget shortfall.

Last year, the state changed the rules to levy the tax based on sales to Washington customers, no matter where the selling company is based. That’s where the sign goes astray, as Reifman points out. Microsoft is now required to pay the royalty tax, regardless of its Nevada licensing office, albeit on a much smaller slice of its revenue than if the tax applied to its worldwide sales.

We’ve asked a Microsoft representative if the company wants to comment on the Ballard banner.

Who put the banner there? That appears to be a mystery. But Microsoft isn’t the only subject. Here’s what the other side says.

  • Guest

    This confirms that Washington is truly a great place for business! A few citizens go to great lengths to point out injustices, but they lack the means to effect real social change. Everyone wins: the well-meaning citizens believe that their mission is just, and businesses get to maintain the status quo.

  • Guest

    First, the sign itself is stupid. MS doesn’t pay Venezuelan oil extraction tax either. Neither apply.

    Second, I don’t understand why you continue to give this fired and clearly disgruntled ex-employee coverage. For years he said Microsoft was guilty of “tax evasion” and had “broken the law”, even though he could never show any evidence for either serious charge. He’s extremely lucky that he wasn’t sued for libel. Only after he was thoroughly embarrassed over that did he finally change it to “tax avoidance” or now ”dodging”.

    When you, Reifman, or I, organize our affairs as we see fit while considering various factors including tax implications, that’s called being a normal citizen. It’s our *right* to do that. Similarly, MS and other large corporations are entitled to determine where and how they operate while assessing those same factors. Indeed they have a further obligation to do so, specifically their fiduciary responsibility to shareholders.

    If you don’t like the rules of the game, lobby to have the rules changed. But don’t blame the players for maximizing within them.

    • Guest

      Thank you. Thank you. The world needs more Bill Gateses (men with ideas who create jobs) and fewer Jeff Reifmans (men devoid of ideas who seek to destroy jobs). 

    • http://twitter.com/microsofttaxes Microsoft Tax Dodge
      • Guest

        A web site that posts manifestoes and has no comments section? Way to join the conversation, Jeff.

        You can read informed comments about the “Microsoft Tax Dodge” allegations here: file:///dev/null

        • Guest

          Yeah, that says everything you need to know about this guy.

      • Guest

        No Jeff, they’re  not. Anyone who wastes their time to go there will only find more failed circular logic, ridiculous calculations based on false premises, and baseless accusations.

  • Jonah

    1) Reiman’s whole argument is based on the conclusion that ruling’s in the courts are wrong.  In addition, he loses almost all his credibility through the insinuation, with no proof whatsoever, that the government is colluding with Microsoft and that is why this is all happening (and I quote “…Governor Gregoire appointed another Microsoft executive to run the Department of Revenue last year … so it’s unlikely the department will crack down on Microsoft’s Nevada activities.”). 

    2) Please get someone more knowledgeable in tax to discuss this issue.  You wouldn’t have a CPA comment on the cleanliness of code in a software app, so why do you have this guy discussing as any sort of interpretation on the tax code?  Heck, I am a CPA, but I don’t specialize in tax and am in no position to make definitive arguments even after reading all of the facts and circumstances. 

    • http://geekwire.com Todd Bishop

      Appreciate what you’re saying on point two, but in terms of the specific change in the tax code, I’ve actually covered this in the past, talking with revenue department staff to get it right, and I spent some time last night digging back into the state guidelines to refresh my understanding.
      I feel like I have the right grasp of it, as expressed above, but I’m more than open to hearing evidence to the contrary if you have any. It’s important to me to get it right.

      I initially emailed Jeff with the picture of the banner because my first guess was that he was behind it.

  • Mark

    “believes that the state should have gone after Microsoft for back taxes, particularly in light of Washington state’s severe budget shortfall.”

    The state’s shortfall is irrelevant to the discusssion. And there are no “back taxes” to go after if in fact no taxes were ever owed. This is a vendetta, plain and simple. Not only is Reifman’s core argument completely devoid of merit, but he apparently thinks nothing of impugning the reputation of Government representatives, without evidence, based solely on their former affiliation with MS and his now decade long quest to get back at his former employer.

  • RNorbets

    “Who put the banner there? That appears to be a mystery. But Microsoft isn’t the only subject. Here’s what the other side says.”

    Gee, I wonder. Both slogans are textbook talking points for Mr. Reifman. Did he deny any involvement on the record?

  • http://twitter.com/CommStarter Community Starter
    • Guest

      Yeah, for example, you “address” the criticism that you’ve never shown “evidence” that MS is guilty of tax evasion by showing that they never paid the taxes that they and the state agree were never owed. Awesome job.

  • http://twitter.com/microsofttaxes Microsoft Tax Dodge
  • Gregr

    I worked in the US field around the same time as JR “left”. Reno was indeed the hub for anything volume licensing related. If WA state was stupid enough to contest that legally, it would lose. Beyond the significant employee presence there, MS could provide an avalanche of supporting documentation, including agreements, fax/phone/email records, testimony from thousands of field sales personnel and thousands more reseller reps. The state might as well argue that the earth isn’t round. Luckily they realize that even though JR refuses to.

    • http://twitter.com/microsofttaxes Microsoft Tax Dodge

      Gregr … the issue isn’t the size of Microsoft’s operation in Nevada, it’s the fact that software licenses are intangible goods, that Washington’s Royalty Tax (was) a tax on worldwide revenues, that Washington’s Nevada corporation is an Alter Ego of Microsoft Corporation and that Microsoft’s Nexus and Situs is in Washington State.

      Here’s our arguments:
      http://microsofttaxdodge.com/the-legal-argument.html
      http://microsofttaxdodge.com/2010/04/the-strongest-case-against-microsofts-nevada-tax-dodge.html

      Here’s the Dept of Revenue’s statement:
      http://microsofttaxdodge.com/department-of-revenue-response-to-louisiana-tax-precedents.html

      What is clear is that Microsoft has avoided more than $1.51 billion in taxes through its combined Nevada accounting and the Dept of Revenue’s position. If you include the impact of its two lobbying victories reducing the royalty tax to .484% from 1.5% and then apportioning the Royalty Tax in 2010, the company has saved $6.1 billion. Washington residents are now picking up the tab for this. I’m just trying to make this clear to folks. 

      In general, Microsoft’s geographic accounting practices are so deceptive that the Institute for Taxation and Economic Policy had to exclude the company from its most recent Corporate Taxpayers and Tax Dodgers report:”We [had] to leave out from the study companies whose geographic allocations were obviously ridiculous (e.g., almost all or even more than all of their pretax profits were reported as foreign, even though most of their revenues and assets were in the United States). Google and Microsoft are two examples of such apparently “liar companies” that we left out of the study. For such companies, it may be that they reported in their annual reports how they misallocated their profits on their tax returns, rather than where their profits were really earned.”
      See http://microsofttaxdodge.com/2011/11/hypocritical-tax-dodging-microsoft-supports-increased-sales-tax-to-fund-higher-education.html