Top Reader Excuses for Microsoft’s Tax Avoidance

After my editorial suggesting Washington State close the loophole on Microsoft’s tax avoidance schemes was published by Crosscut and linked by Slashdot (Creative Capitalism Gets Microsoft a $528M Tax Break), readers posted more than 542 comments, many defending Microsoft’s practices. I am always struck by the arguments people use to defend corporate entities that dodge taxes, so I decided to summarize and respond to the most common arguments below:

(If you missed the earlier article, Microsoft has 35,510 employees and leases or owns 11.2 million square feet of real estate in Washington but avoids taxes on a third of its revenue by selling its software to PC makers and large corporate clients from Nevada, a state with no corporate income tax. Since 1997, Microsoft has earned $92 billion in profits and avoided $528 million in Washington State taxes.)

1. Microsoft has an overall positive impact on the region. Microsoft’s 35,510 employees purchase goods in the state and pay sales tax on those goods. The employees own property and pay property taxes.  Microsoft purchases goods from many businesses in the state.

This argument essentially says the degree to which a corporation should pay its taxes is proportional to the degree of positive impact it has on the state. This makes no sense to me. Our law, to be just, must be applied equally, including tax laws. i.e. should there be special treatment under the law to celebrities? wealthy corporations? No, of course not. If exceptions are made, they should be made explicitly by the legislature not through the non-enforcement of existing tax law.

2. Washington is better off with Microsoft even if they don’t pay all their taxes.

That may be true, but again, this does not excuse Microsoft from having to pay its taxes in the way that the law requires. Many other corporations in Washington State do pay taxes on software licensing.

3. Washington shouldn’t try to get Microsoft to pay all of its taxes because it might leave the state. It might even move its entire operation to India. The state would be wise not to “rock the boat”.
Microsoft is actively moving more of its operations overseas already (despite its existing Washington state tax dodge). This is an important point better addressed at the federal level by Congress. However, I think Microsoft would admit that it has been successful because of the employees and infrastructure here in Washington State. It’s success would not be quickly and easily reproduced in another country.

Besides, if Microsoft gradually left the state, many of our infrastructure costs would be reduced. Other companies would move in to take the place of Microsoft because of our rich infrastructure and employee pool.

4. Washington should keep its taxes low to attract and keep corporations like Idaho and Nevada have done.

This is a common argument and there are pros and cons to each side. I would just respond that the past ten years have been a period of successful growth and wealth in Washington state and for Microsoft. Yet, our infrastructure needs are failing to keep up with the costs of the region’s growth. For example, we have terrible traffic in the region. We have bridges and highways (520 and the Viaduct) that need to be replaced but no funds to pay for them. So, apparently, our taxes are not high enough to pay for all the things that we need to keep the state running smoothly.

5. Microsoft’s $528 million in tax dodges is a drop in the bucket compared to money Bill Gates and other Microsoft employees donate locally.

Again, this argues that people who give back a lot should be able to pay less taxes. In other words, there should be a special class of citizens who can opt to pay their taxes directly to NGOs/charities. I’d love not to have to pay for the Iraq War and instead pay my taxes directly to a local homeless shelter. But if we gave people these kinds of choices, our government would only be able to pay for popular infrastructure needs or those in populous areas.

6. Bill Gates paid $1,012,321.14 in property tax last year on his residence.

This argument makes no sense. Just because Gates paid a million dollars in taxes doesn’t mean that the company he runs should not have to pay all of its corporate taxes ($76 million last year, half a billion over the last eleven years).

7. It’s up to the state legislature to enforce/close the loopholes. It’s not Microsoft’s responsibility.

This is why I wrote the editorial. I think the Attorney General and the State Legislature should act against Microsoft. $528 million is a huge amount of money and Microsoft’s tax tactics are indefensible. Yet, I’d also argue that Microsoft has a duty to shareholders not to break the law and not to create additional risks by avoiding its taxes and eroding good will in its home community.

8. A corporation has a financial duty to avoid paying unnecessary taxes.  “Just be glad it’s Nevada and not Belize.”

See #7 above. Corporate officers also have duties to follow the law. Corporate officers know that the health and good will of the communities they operate in is important to manage as well. Why should whether something is good for Nevada affect whether a company in Washington state has to follow the law and pay its taxes? This makes no sense. See #3 above: Corporations that launder profits through Belize should be addressed by Congressional action at the Federal level.

9. Corporate taxes are just double taxation. Every dollar Microsoft pulls in is “taxed _multiple_ times by the time it makes it into the shareholders’ pockets”. 

One reader responded most eloquently to this comment: “You’ve been taken in by right wing propaganda. Republicans trot out the ‘double taxation’ argument any time they see a tax that might make rich people slightly less rich. They do it for the estate tax and corporate income tax. There is no dividing line where flow of income starts and ends. All income taxes, capital gains taxes, sales taxes, gift taxes, and estate taxes are taxes on transfers of wealth. I earn a salary and pay income taxes. I then use my income to buy a toaster and pay sales taxes. Double taxation! Then the store pays taxes on its income. Triple taxation! Then the store employees pay income taxes. Quadruple taxation! And then the store employees pay sales taxes on their purchases. Quintuple taxation! And so on. It’s a totally meaningless argument.”

But at a basic level, while this commenters might want different tax laws, this does not change the fact that existing state tax law seems to require Microsoft to pay for software licensing revenues in its home state of Washington. Just because we may want a different system does not free us from having to operate under the existing laws.

10. Other companies are dodging their taxes too. “What microsoft does is standard operating procedure for all mega-corporations.” “This is how most electronics firms with an office in the U.S. work. “”Lots of companies are in Nevada to not pay tax”. “Other software companies work the system too, especially those that have to pay for microsoft server monitoring and such“. One commenter alleged that Boeing flies its planes just outside the U.S. territorial limit offshore to sign the transfer papers with international customers so that they won’t have to pay tax. 

This is definitely true but certainly not an argument for non-payment of taxes or non-enforcement of tax law. Just because some people drive in the carpool/HOV lane illegally doesn’t make it right for me to do it.

11. Washington’s tax rate on revenue must be too high (“punitive”) or there wouldn’t be any incentive for the company to be incorporated in Nevada.

As I mentioned in the editorial, the year before Microsoft opened its office in Nevada, the Washington legislature cut the tax rate by 2/3. Apparently, this wasn’t enough to satisfy Microsoft, which moved its operations to a state that had zero taxes. Microsoft’s unpaid taxes are $528 million, a small fraction of its $92 billion in profits during the same time period. Would it really hurt the company so much to pay this debt? Meanwhile, $528 million is a large amount to the state of Washington.

12. Microsot has paid for a lot of individual projects. Microsoft PAID for the overpass across 520 when it wanted to join its two campuses. It PAID for the Metro transit center in front of the Redmond campus. It PAID for widening 40th Street. It PAID for the rework that’s happening on 150th.

The idea that Microsoft can pick and choose the infrastructure that it pays for and then choose the taxes it wishes to pay and which to dodge makes no sense. This also goes against the ideas of taxation for the good of the commons. See #5 above. We all pay our taxes and trust our elected officials to spend the money wisely. If we all designated our taxes towards projects that benefitted our neighborhoods, only populous areas or popular projects would be funded. I’d love to pay for a park in my neighborhood in lieu of sales taxes on my purchases for the year, but luckily for the good of everyone in the state, we’re not each allowed to pick and choose pet projects.

13. Washington State government is “out of control”. Washington’s budget has increased 33% in the last 3 years alone. We’re going from a $1.5 billion dollar surplus and $2 billion dollar rainy day fund to $600 million dollar deficits and no rainy day fund. “We have the highest gas tax in the nation.”

Just because I may not like the way the government operates doesn’t give me the right to dodge taxes. That system would be anarchy. In fact, Microsoft spends quite a large amount of money lobbying Washington state so it has more impact than any individual on the way the state is actually run. Microsoft employees also give a lot to the campaigns of Washington state legislators. Therefore, they are not in the best position to complain about how the state government operates.

I could argue that the Federal government is out of control with its war in Iraq but that doesn’t excuse me from having to pay my taxes.

14. Washington should only tax sales inside Washington.

Again, this reader seems to disagree with current tax laws which do require taxing out of state commerce. The majority of Microsoft’s revenue comes from customers around the world who are not touched by Washington State sales taxes. Therefore, the Washington State licensing tax is the only way that revenue for many of these purchases is taxed. Until the reader changes the system, Microsoft should be required to follow the existing tax laws.

In conclusion, I’d like to highlight what one reader said:

“There is a reason why the top performing companies are found in areas with the highest tax brackets. Those territories, which tax for the needed infastructure, are the ones which can support businesses of Microsofts size.” 

To the extent, we allow some corporations to avoid taxation, we strip the system of equity and fairness and reduce our ability to maintain and expand this exact infrastructure.