I’m writing to express concern about Sections 201 and 2304 in HB 3191
which I believe may harm the state’s ability to collect substantial
back royalty taxes from companies such as Microsoft that have used
Nevada subsidiaries to avoid taxation since 1997. Please be aware that
* Defines the royalty tax down. Under a strict reading of existing
law, Microsoft’s taxable licensing sales would plummet from its
worldwide estimated annual total of $20.7 billion to a tiny fraction
of this, just that sold to Washington customers. While this isn’t
necessarily bad tax policy going forward, be aware it is a gigantic
tax cut for Microsoft of approximately $100 million annually.
* The apparent amnesty clause in Sec 2304 could be a huge give up of
tax receipts between $430 million and $1.2 billion. Using very
conservative assumptions, I roughly calculated that HB 3176 would not
catch up to strict enforcement of existing law until 2017.
While the legality of Microsoft’s tax dodge may be in dispute, no one
has countered that this issue is less than a $1.2 billion dollar
matter to the state.
When a scam artist wants to avoid the royalty tax in Washington, she
may open up a post office box in Nevada to save $100,000. But, when a
multibillion-dollar software company wants to do so, it can easily
afford to and does set up a small office in Nevada. Why is one of
these operations a sham and the other legitimate? Small and large sham
transactions look different – but they are both shams.
For example, while our state cracks down on residents who seek to
evade sales tax by purchasing a car in Oregon and driving it North
across the border, the act of wrapping this type of transaction in the
shell of a corporation registered in Nevada apparently renders the
Department of Revenue powerless.
What purpose did Microsoft open its Reno office other than to avoid
the royalty tax? And, has Microsoft been properly taxed for the fair
market value of its transfers of software licenses from Washington to
Nevada? If so, why has it bothered to maintain its Reno office? Has
the department properly assessed the degree to which Microsoft has
historically conducted and managed its software licensing business
The legality of this sort of activity under current Washington law
remains in dispute, at least outside of the Department of Revenue.
And, I hope to respond to its arguments with you in the near future.
The analysis that I’ve seen from the Department to date is scarce on
applicable precedent, biased towards a pre-existing conclusion based
on existing administrative policy and fails to balance the risk of the
failure of enforcement vs. the mounting costs of its inaction.
Specifically, with respect to HB3191:
* HB 3191 Section 201, which would allow the Department of Revenue to
disregard abusive tax transactions such as those using Nevada, appears
to have been badly watered down from HB 3176 to the point that its
effectiveness will be in question.
* While I agree with Department policy to honor its letter rulings, HB
3191 Section 2304 goes too far, essentially providing amnesty for
Nevada tax dodgers such as Microsoft that have likely had a recent
field audit. A corporation should not be absolved of past wrongdoing
simply because it was audited without penalty under the Department’s
existing (weaker) administrative policies regarding abusive tax
* Furthermore, while I applaud the Department’s embrace of the step
transaction doctrine, the substance over form doctrine, and the
awareness of Alter Ego corporate entities that evade taxation, it’s
not clear to me that new legislation is required to collect tax under
these generally accepted federal (and some state) precedents.
* In fact, attempting to apply strict new legislation in Sec. 201 back
to 2006 may give future tax defendants a winning argument that
Washington essentially acknowledged it lacked enforcement authority
prior to passage of HB 3191.
* Finally, the research requirement in HB 3191 Section 204 could be
strengthened to specifically include studying the benefits and risks
of strict enforcement of existing royalty tax law under Washington
State and other state and federal precedents.
Before legislating amnesty, let’s study the legal and financial pros
and cons of stricter enforcement of existing law.
Given the state’s $2.8 billion deficit and Microsoft’s estimated $149
billion in licensing revenue since 1997, I hope you’ll agree its
reasonable for a citizen to ask hard questions about the enforcement
policies of the Department of Revenue, much of it kept secret from the
I hope you or a member of your staff take a moment to let me know your
thoughts on this matter.
Please contact me if I may be of any assistance. Much of this
information has been posted to http://www.microsofttaxdodge.com.
Founder, Citizens for Fair Tax Enforcement