BoingBoing: House Bill Gives Microsoft Amnesty for Possible $1 Billion in Unpaid Taxes

That BoingBoing headline--"Broke-ass Washington state set to give MSFT $100M annual tax cut and amnesty for $1B in evasion"--should make the people (well, Jeff Reifman) at Microsoft Tax Dodge happy--they've been wondering where the Seattle Times has been on this issue. Who needs old media? BoingBoing is here.

To catch you up, many people have long known about Microsoft's bid to avoid paying Washington state's B&O royalty tax by setting up Microsoft Licensing Incorporated in Reno, Nevada. Jeff Reifman has been reporting on that story since 2004, as he will be the first to mention, in a slightly incredulous, "Has it been that long?" way. (Reifman has worked at both Microsoft and Seattle Weekly.)

Although Microsoft makes no secret of producing its software in Washington state, the idea is that since the sales "location" is domiciled in Nevada, they're not subject to Washington state taxes. Notes Reifman:

Nevada's tax rate for licensed software is zero. Washington's is .484%, lowered in 1998 from 1.5% by lobbying from...the software industry.

Washington state, to my knowledge, has never bothered to challenge the legality of this blatant tax dodge, though the Department of Revenue is well aware of it. Reifman estimates that the tax avoidance amounts to over $700 million by now, before interest and penalties. But collection doesn't seem to be top-of-mind in Olympia. Taxes on bottled water and soda are. Says Reifman, "Allowing Microsoft to evade the royalty tax to date appears to be an administrative decision."

Rep. Ross Hunter

Instead, with a Fish-like "Bygones," there is House bill 3176, with Rep. Ross Hunter as lead sponsor, which would close the Nevada dodge down by specifying that any company with a "substantial nexus" in Washington needs to pay taxes here.

But, the bill goes on to say, the taxes will be figured by apportionment. So in the case of Microsoft software sales, the tax will be levied only on income from software sales to Washington state residents. That, says Reifman, amounts to a $100 million tax cut (so far as Washington state is concerned--other states would have their chance at taxing sales to their residents). But the biggest issue is that the bill's language seems to give Microsoft legal amnesty, since it sets July 1, 2010, as the date at which, going forward, the state will crack down on "abusive" tax dodges.

Is it appropriate to mention here that Hunter worked at Microsoft for 17 years? I don't say that to impugn his motives, so much as clarify them. I don't always agree with Hunter, but I've never felt he didn't have a defensible rationale for his actions. Still, since the state already has a five-year statute of limitations on uncollected tax revenues, it seems peculiar to limit the bill's impact even further.