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Microsoft Tax Scam Costs our State $1 Billion per year!


Microsoft’s profit margins are among the biggest in the history of our planet. Whereas most businesses are lucky to achieve a margin of 5% to 10%, Microsoft has a profit margin of more than 30%. One third of every sale is pure profit.
For fiscal 2010 (which ended on June 30, 2010 for Microsoft), Microsoft made $19 Billion in profit on $62 Billion in sales. Sales and profits have continued at a record pace for the first two quarters of fiscal 2011. Microsoft has already made over $12 billion in profits in the first 6 months. It therefore will almost certainly go over $20 billion in profits for the fiscal year.
Documenting Microsoft’s Billion Dollar per year State Tax Scam
Like Boeing, Microsoft receives all kinds of hidden tax breaks - like millions in credits for equipment and property tax exemptions for their intangible property. But we will focus on the biggest State tax break, namely the Software Royalty License tax scam.

The Washington State B&O Software Royalty Tax applies to “…every person engaging within this state in the business of receiving income from royalties…for the granting of intangible rights, such as…software licenses.” Furthermore, “Royalty income from software licenses is taxed at the ‘domicile,’ or location, of the owner of the property.” Because it is a wholesale tax, it applies to sales regardless of the location of the customer – whether in the U.S. or in another country.
Our State’s Software Royalty License tax rate historically has been 1.5%. However in 1998, under pressure from Microsoft, the State legislature reduced this rate down to 0.5%. Nearly all of Microsoft’s revenue comes from selling software licenses. So one might assume that with $60 billion in gross sales, Microsoft would pay State sales taxes of 0.5% times $60 billion – or $300 million per year. But they don’t. According to a former Microsoft manager who has devoted an entire website to this subject (microsofttaxdodge.com), Microsoft ships about half of its licenses or $30 billion per year to Nevada where there is no corporate tax. The sole reason to do this is to evade paying $150 million per year in corporate B & O royalty taxes in Washington State.
But instead of taking Microsoft to court for tax evasion, Ross Hunter passed a bill in 2010 which exempted Microsoft from having to pay this B & O Royalty tax. To add insult to injury, during the same legislative session, Ross also raised the B & O tax rate on many other businesses from 1.5% to 1.8% to make up for the fact that Microsoft was not paying their fair share.http://microsofttaxdodge.com/2010/04/microsoft-gets-nevada-royalty-tax-cut-and-tax-amnesty.html
What would Microsoft pay if this tax exemption was eliminated and the royalty rate was restored to its historic rate of 1.5%? Microsoft’s projected sales for the current year is near $70 billion. 1.5% x $70 billion = $1 billion. The cost to Microsoft would be even less – because they could deduct their State taxes from their federal taxes.
Even though they would get about one billion per year less in profits by paying their fair share of State taxes, Microsoft is so profitable, that it would barely affect their profit margin. 
Can the Legislature cut $1 billion in School Funding in order to give Microsoft $1 billion in corporate welfare?
There is a serious legal question as to whether the legislature even has a legal right to exempt Microsoft from paying one billion per year in State taxes at the same time that the legislature is cutting more than one billion dollars per year in school funding. Our State Constitution makes it quite clear that the Paramount Duty of our State legislature is funding public schools – not handing out one billion in corporate tax breaks to Microsoft.
Microsoft is sitting on over $40 billion in cash. There is no significant benefit to Microsoft in their tax scam. But there is a real harm to our State’s one million school children in continuing with this sham. Because of Microsoft’s huge tax break, our schools are 49th in the nation in school funding and our kids are subjected to among the highest class sizes in the nation. One billion dollars could pay for 10,000 additional teachers and bring class sizes and school funding in our State much closer to the national average. With our State facing a $5 billion budget shortfall for the next Biennium, It is time to suspend the Microsoft tax exemptions.