Struggling to close a $2.8 billion fiscal deficit, the Washington State Legislature ended its recent special session with two huge gifts for Microsoft:
1) It gave Microsoft an effective $100 million annual tax cut by revising the definition of the royalty tax. Under the old law, all of Microsoft's $20.7 billion annual software licensing sales were taxable in Washington state at .484%. Under the new law, the royalty tax will be apportioned so that only the portion of sales to Washington State customers would be taxable, a tiny fraction of Microsoft's taxable revenue.
2) It also gave Microsoft amnesty on an estimated $1.25 billion in unpaid taxes, interest and penalties that the company has avoided paying since 1997 by reporting this revenue from a small Reno, Nevada office. The state's Department of Revenue has ignored this practice and refused to address precedents that call the legality of Microsoft's accounting into question.
Most of the legislation was led by Chair of the Finance committee Rep. Ross Hunter, a 17 year veteran former employee of Microsoft.
To make ends meet, the Legislature cut $120 million from K-12 education and $73 million from university budgets. It also raised the service tax rate on all businesses from 1.5% to 1.8% and created new "7-11" taxes on the average Joe on beer, soda and candy. Over the next twelve months, the benefits of 4700 unemployed people with disabilities will expire.
Interestingly, yesterday, Bill Gates Sr., father of Microsoft Chairman Bill Gates, announced a state initiative to replace the business service tax with an income tax on high earners of $200,000 and greater. Washington doesn't currently have an income tax.
Asked if his son was on board with the tax initiative, Gates said they hadn't discussed it. "I don't know what my son is going to do."
Today, Microsoft reported record quarterly sales of $14.5 billion propelled by Windows 7. It now has $39.6 billion in cash and short term investments.
At the close of the special session, Governor Gregoire said: "Anyone who thinks that it's over and it's done, there's another story here... [Once the budget is signed into law]...there will be real cuts, there will be real people losing jobs."
Where was Bill (jr.) yesterday? Apparently, he was busy telling the Seattle PI that he appreciates investigative journalism:
But when you get into investigative journalism, particularly for topics that the public is less enamored of, particularly global health, but any policy issues in general: I mean, explain the 3,000 page health bill. What's in there? I don't have time to read the 3,000 page health bill. Is the Internet missing something that the top papers have collectively provided? Probably so. Propublica is small but those stories are interesting, they did a really good New Orleans story, they did three or four where you go geez, I'm glad someone did this story.
Given that the Seattle Times waited until almost the close of the special session to acknowledge the dispute about Microsoft's Nevada tax practice, we imagine that Chairman Gates has greatly appreciated this blog's investigative work of his company's tax practices and the quiet effective accomplishments of Rep. Hunter.
2) The joint legislature removed the controversial custom software tax on Microsoft's smaller competitors that had been previously passed by the house
3) The amnesty clause is carefully worded to avoid notice in Section 202:
(2) Section 201 [which enacts strict enforcement against abusive tax transactions] of this act does not apply to any tax periods ending before May 1, 2010, that were included in a completed field audit conducted by the department.
The Department of Revenue has told me repeatedly that it regularly conducts field audits on large customers. So, essentially, simply by having had a field audit of its tax practices in the past under the Department's non-enforcement policy, Microsoft earns amnesty for thirteen years of legally debatable activities.