Editor's Note: This story has been updated to clarify the timeline of when Microsoft opened its Nevada office and when the state lowered its royalty tax. The updated version also adds that Microsoft declined to say how much state royalty tax the company has paid.
The Washington Supreme Court is holding a hearing Wednesday to ask legislators why they shouldn’t be found in contempt of court for not meeting deadlines to fully fund public education, as ordered in the court’s decision in the case McCleary v. State of Washington.
But Jeff Reifman, a technology consultant and writer who used to work for Microsoft, is pointing the finger at his former employer, saying that Microsoft has used a subsidiary in Nevada to avoid paying Washington taxes. He’s written numerous articles about this over the years, and now published a recent commentary on Crosscut.com linking Microsoft’s tax policy with the state’s school funding shortfall.
Reifman acknowledges in his article that there are many reasons why the state is facing a budget shortfall when it comes to pay for public education, for example, the state’s lack of an income tax that would help offset the effects of economic downturns.
But he says Microsoft’s tax policies haven’t helped. In the late 1990s, he says Microsoft set up its Reno, Nevada accounting office as a way to skirt Washington’s royalty tax, which applies to the company’s software license sales. Nevada has no corporate income tax.
“[Washington] state decided for the most part not to try to enforce the tax,” Reifman said. “They told me it was because they were afraid of losing a lawsuit, but I think the reason was more around not wanting to take on Microsoft.”
Reifman says in 2010, Rep. Ross Hunter, who previously worked 17 years for Microsoft, shepherded a bill through the legislature that redefined the royalty tax to only apply to Washington customers instead of applying to Washington-based companies’ worldwide software licensing sales. The bill also granted amnesty so that companies like Microsoft that had ducked the royalty tax in the past wouldn’t be on the hook for back taxes.
“The article I wrote for Crosscut was really just adding up all of the impacts from Microsoft’s lobbying, tax dodging and changing the law and showing that it would add up with interest and penalties - at this point it would be $8 billion, which would be enough to fund the McCleary education deficit in whole for the next two or three years,” Reifman said.
In response, Hunter said that he and many other legislators tried for years to figure out whether they could tax the money Microsoft sends to Nevada. He said the answer from the state’s lawyers was always, “No.” And he said it’s similar to the recent move by Burger King to buy a Canadian company as a way to lower its U.S. tax bill.
“To move that big chunk of revenue to Nevada – it’s legal,” Hunter said. “So this is just like the Burger King thing. It’s frustrating, and you’ve got lots of people in Congress who are frustrated about it, but it’s legal.”
Hunter said the change he helped push through in 2010 was more about boosting tax revenue by collecting from out-of-state companies, such as big banks and cable companies, that do business here. He said it was not done to help Microsoft.
Microsoft said in a statement that it didn’t testify in favor of or against the bill change in 2010 regarding royalty tax changes.
The company didn’t address the Nevada subsidiary, but said it’s a global business with operations across the U.S. and in 100 countries.
“As a global company, we comply with tax laws in every jurisdiction in which we do business,” the company said. “Last year, Microsoft paid $5.5 billion in income taxes worldwide and our effective tax rate was 20.7 percent.”
Microsoft declined to say how much royalty tax the company has paid annually in Washington state since 1997.
Microsoft also pointed to its education efforts, such as providing $25 million to help fund the Washington State Opportunity Scholarship, which supports college students studying science or technology, as well as other initiatives to cultivate fluency in computer science.
Update (Sept. 4, 2014): In the audio interview, Reifman said Microsoft lobbied to have the state's royalty tax lowered by two-thirds in 1997 and was successful. He said after that, the company decided to open its Reno, Nevada, office to avoid the tax altogether. However, Microsoft provided a Seattle Post-Intelligencer story showing the company announced plans to open its Reno office in June 1997. The law changing the royalty tax passed in 1998 and went into effect later that year.