The key legal question here is: does the State of Washington have taxing authority & jurisdiction over the intangible assets (software licenses) of Microsoft Licensing GP, a registered Nevada General Partnership comprised of Microsoft Corporation (registered in Washington) and Microsoft Management LLC (registered in Nevada, half of whose officers are Washington-based employees of Microsoft)?
Case law is extremely clear that Washington State can tax Microsoft Licensing GP for its royalty income despite that it is registered and based in Nevada. In fact, much of the law is based on a famous 1945 Washington State Supreme Court decision, International Shoe Co. v. State of Washington.
First, read these key excerpts from Louisiana Dep't of Revenue v. Gap (Apparel) Inc., 886 So.2d 459 (La.Ct.App. 2004) (PDF). The Louisiana State Court of Appeals wrote (casual readers can skip to the 2nd paragraph):
The Due Process test requires that in order to subject a nonresident defendant to a personal judgment, the defendant must have certain minimum contacts with the forum state, such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. International Shoe Co. v. State of Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945); de Reyes v. Marine Mgmt. & Consulting, 586 So.2d 103, 105 (La. 1991). With regard to taxation, the Due Process Clause requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax. The income attributed to the state for tax purposes must also be rationally related to values connected with the taxing state. Quill Corp. v. North Dakota, 504 U.S. 298, 306, 112 S.Ct. 1904, 1909-1910, 119 L.Ed.2d 91 (1992). If a foreign corporation purposefully avails itself of the benefits of an economic market in the forum state, it may subject itself to the state's personal jurisdiction even if it has no physical presence in the state. Quill Corp., 504 U.S. at 306, 112, S.Ct. at 1911.
While (Gap) Apparel may not have a physical presence in Louisiana, its intangible property clearly has a connection with Louisiana. In United Gas Corp. v. Fontenot, 241 La. 488, 129 So.2d 748 (1961) footnote 2, the Louisiana Supreme Court discussed the difficulties in determining the location or "situs" of intangible assets and property rights for taxation purposes. Because those assets have no physical location by their very nature, the jurisprudence has developed three separate doctrines applicable to their taxation. First, such property is normally taxable at the legal domicile of the owner, which in the case of a corporation is the state of incorporation. Second, if the intangible property is used in another state in such a way as to become an integral part of a business carried on within the state, the intangible property acquires a "business situs" in that state and is subject to taxation in that state. Finally, where the business of the corporation is actually managed and functions in a state other than the state of incorporation, a "commercial domicile" exists in the state where the corporation's principal place of business is, and the corporation's intangibles may be taxed there. United Gas Corp., 129 So.2d at 758. ... Clearly, the intangibles have acquired a business situs in Louisiana and are subject to taxation in this state.
Read the above again as follows: Microsoft Licensing GP of Nevada is Gap Apparel, the foreign corporation. Washington is the forum state. The "corporation's principal place of business" / "commercial domicile" is Microsoft's corporate headquarters in Washington State, home to its 40,224 employees and 9.8 million square feet of office space. The "business situs" for Microsoft's licensing business is therefore Washington State and its intangibles may be taxed here.
Again, the most damning language:
Because those assets have no physical location by their very nature, the jurisprudence has developed three separate doctrines applicable to their taxation...where the business of the corporation is actually managed and function in a state other than the state of incorporation, a "commercial domicile" exists in the state where the corporation's principal place of business is, and the corporation's intangibles may be taxed there.
A very famous Washington State case, International Shoe Co. v. State of Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 160, 90 L.Ed. 95 (1945), also applies to the state's jurisdiction over taxing out of state intangibles. Here is a summary of the case:
Issue
Did International Shoe’s activities in Washington make it subject to personal jurisdiction in Washington courts?
Holding and Rule (Stone)
Yes. Minimum contacts with the forum state can enable a court in that state to exert personal jurisdiction over a party without violating the Due Process clause.
A casual presence of a corporation or its agent in a state in single or isolated incidents is not enough to establish jurisdiction. Acts of agents of the corporation, because of the nature, quality, and circumstances of their commission, may be deemed sufficient. Consent may be implied from the corporation’s presence and activities in the state through the acts of authorized agents.
The activities carried on by defendant corporation in Washington were systematic and continuous rather than irregular or casual. The defendant received the benefits and protection of the laws of the state and is subject to jurisdiction there.
Relevant factors
International Shoe had conducted “systematic and continuous” business operations in Washington. A large volume of interstate business for the defendant was created through it’s agents within the state and the corporation received the benefits and protection of Washington’s laws. International Shoe had established agents in the state permanently
Since 1997, for all of the thirteen years of Microsoft's tax dodge, its Washington Headquarters, its Washington corporation's co-ownership of Microsoft Licensing GP of Nevada and the four Microsoft employees based in Washington registered as officers of Microsoft Management LLC of Nevada (the other co-owner of Microsoft Licensing GP) all represent systematic and continuous contact between Microsoft of Washington and its tax dodging Nevada corporation's intangible assets.
Microsoft's use of the protections of Washington law in its Nevada licensing contracts and its use of King County Courts to sue on behalf of Microsoft Licensing GP of Nevada is also relevant.
The case could not be clearer. Washington State's Department of Revenue has clear jurisdiction to sue Microsoft for its unpaid royalty taxes which we estimate to be $757 million or $1.25 billion with interest and penalties.
And then, United Gas Corp. v. Fontenot, via LexisNexis, the Court makes it even clearer:
Under the separate and independent exception to the mobilia rule, the state where the corporation's "commercial domicile" exists is, in effect, placed on a parity with the legal domicile of an individual, and it may, therefore, upon the soundest principles, subject its intangible property to the income tax laws of the state, wherever located, as if it were a "citizen" of that state, without violence being done to the due process and equal protection guarantees of state and national constitutions, or the interstate commerce clause of the Constitution of the United States...
The Court here says that Washington State is placed on parity with Nevada in taxing the intangible property of Microsoft Licensing GP.
The Washington Department of Revenue should demand full payment of Microsoft's royalty tax bill immediately.
