Keeping Microsoft Happy

Jeff writes "In Citizen Microsoft, I report on Microsoft's use of Nevada corporations to avoid approximately $327 million in Washington state taxes while telling voters they need to pay more to fund education. I also contrast Microsoft's attacks on the open source community with its in-state lobbying efforts and its recent promise to get more involved in local politics. The cover has Gates in a gorilla suit."

Comments

Wake up and join the Real World...

[Hangtime]

all sorts of companies incorporate in Nevada not just Microsoft for this same purpose. In fact, while Delaware is the number one state to incorporate, Nevada follows up close behind because of the lax laws. Just like I'm sure you, your friends, and your family go down to Oregon to do your Christmas shopping so you don't have to pay state sales tax. If you want to close these loopholes then every state needs to have consistent incorporation statutues and laws. The only companies that incorporate in their own state are the ones who can't afford to incorporate in another and/or follow another state's governance laws and procedures .

Re:Wake up and join the Real World...

[Fnkmaster]

Well, in general, there are lots of reasons to incorporate in different states other than just saving money on taxes. I don't know what the specifics in Washington state vs. Nevada are, so I won't comment on that. But in Massachusetts, a corporation doing business in the state and registered as a business entity in the state has "nexus" in the state and thus is subject to the corporate excise tax on all income apportioned to or attributable to the state. It doesn't matter where you are incorporated - I run a Delaware Corporation, and still have to pay a minimum 456 dollar excise tax to Massachusetts every year.

You generally incorporate in a different state to take advantage of their chancery courts, anonymity laws and corporate stucture statutes (allowing more flexible or customized corporate structures, like the Delaware Series LLC for example). And you want to have your corporate entities in a state that doesn't add a substantial amount of tax on top of what you'll already owe to the states where you do business and generate income (Delaware, for instance, charges only a nominal amount of tax every year based on the number of shares outstanding - but like I said, this doesn't mean I don't pay excise or corporate taxes, I still pay them in MA since that's where I do business!). Additionally Massachusetts has a foreign corporation registration fee which makes up for any money you save by registering your corporation in another state - so you literally save nothing (and we're talking about differences here of a few hundred dollars a year, not something Microsoft cares about).

If Microsoft is doing business in Nevada and attributing income to that state, then that's not really a loophole at all. If they are mis-attributing income, that's just fraud. There are tax loopholes out there, but this article doesn't really make clear what loopholes Microsoft is actually using, or if Microsoft just uses Nevada corporations for business entities and groups subsumed within Microsoft Inc. because of their flexible corporate law. Maybe Washington just isn't as anal as Massachusetts about collecting their taxes from all businesses, or just are failing to enforce the appropriate attribution of income to Washington state? This stuff is always confusing in the software world, since it's not always so clear cut to say where the work was performed and where the income came from.

Since the submitter forgot...

[mblase]

...here's a link to the actual article.

Didn't read the summary did you?

[maggeth]

submitter WROTE the article. you are the one who didn't read.

Amazon Loves Nevada Taxes Too

[theodp]

Check out the testimony of Paul Misener, Amazon's VP of Global Public Policy, as he reminds Nevada legislators who questioned Amazon's failure to pay sales tax that Amazon solved its Washington and Georgia tax problems by closing fulfillment centers in the two states.

There's no loophole

[melted]

If you haven't paid sales tax while being in another state you have to pay "use" tax in your home state. This tax is equal to the amount of sales tax you'd have to pay if you made the same purchase in your home state. For someone in WA this means that if they went down to Oregon and spent $1K on merchandise taxable in WA, they owe the state $88 in taxes or whatever they pay in their county.

not as simple as that

[plasm4]

This is very easy to circumvent. You set up a company where all your employees are located. You set up another company in the tax shelter state. You have the taxed company do business with the untaxed company. Maybe the taxed company pays a consulting fee to the untaxed company. The taxed company suddenly shows no profit, therefore it pays no income tax. The untaxed company shows a huge profit but it pays no income tax anyway so it doesn't matter. There are a million other ways to legally get around paying taxes.

Re:The Article.

[TechnoPope]

So basically, Open Source is suddenly going to eat up all of MS's market share. MS will cease to be. World Hunger will end. And Peace will break out around the world.

Or...

Maybe this is the same kind of analyzing that gets done on Apple every six months saying that it will go under. Let's just be honest for a second. Microsoft isn't going to go away. They may not be THE market share holder forever, but they aren't going to go away. The beauty of software is that people have a choice. Just like you can choose to use linux (or BSD,OSX,Netware,BE, whatever floats your boat), people can, and will, choose Windows. As great as Linux is, it has quite a few shortcomings, as does Windows, as does OS X. Everybody is basically equal.

So while their desktop market share will probably go down (at 90% it's hard for it not to), this doesn't mean that Linux will automagically become world leader supreme. Let's not kid ourselves.

It's an interesting point

[ebuck]

I've a father that is a CPA, but don't take tax advise from me, hire a CPA.

Tax law isn't something that is consistent and fair. It's a hodgepodge of well meaning laws all intended to do various things which will provide the goverment funding while not trying to destroy the economy at the same time.

That means a person may legally owe (depending on how he files) a whole range of taxes. If you choose to pay more, you're not a single bit more "legal" than if you pay the minimum. Add a few states into the mix, and some off-shore holdings, and I can mentally visualize the complexity of the problem growing.

As for the poor not paying enough taxes, well that's an opinion. But the lower taxing of the poor is a philosophical argument encoded in tax law. The argument is something along the lines of, well, if we tax them, then they'll never make it to middle class which is where we really make our money. Other arguements like, "big business is really what drives the economy, so they should get a tax break so they can do more business" are also philosophical in nature, but people tend to forget this.

As a result, you've got a lot of conflicting ideas on what is taxable, what is not, and how much. Just look at the relatively simple tax laws for food. There's literally cases where you can't know if an item is taxable until you lay down some sort of priority on which way you're going to interpert the laws.

Food is not taxable. Some snacks and candies are. Prepackaged food being consumed on the premises is. Beef jerky is a snack, yet it has a history of being a real food staple. Chewbacca lives on Endor. That means if the stop-and-go has a food court, then the beef jerky should be taxed, but if it lacks one, then no. It's not confusing because of political kick-backs, but because of political do-gooders who really tried to fix it on a case-by-case basis over the last 200 years.

Re:Unfortunately...

[Fnkmaster]

So having a branch in Nevada would mean Microsoft had to pay Nevada taxes AND Washington taxes.

You effectively do. You have to pay corporation registration and filing fees in the jurisdiction your corporation is registered in, in exchange for taking advantage of their general corporate organizational laws and chancery courts. You pay corporate excise or income taxes in the state where you actually conduct business, and if you conduct business in multiple states, you essentially are supposed to divide up that income and attribute it appropriately to each state. At least, this is the way the states that I'm familiar with deal with the issue. Delaware doesn't want to charge you full excise taxes for doing business there, they make good money out of having the best, most flexible, and well tested corporate structure statutes.

In any case, a state can't really tax a corporation or individual on income that is already getting taxed at a state level elsewhere, at least not without chasing everybody out. For a national corporation, anyway, this is all particularly confusing. If you employ all your people in state A and develop your software there, then you should probably pay taxes there. But it's possible to transfer ownership of that software to a corporation in another state, for example, and have it's income attributable to a totally separate entity in that other state, making it look like operations in state A are not that profitable while the corporation as a whole is raking in lots of profits (this may be what Microsoft is doing, but it's not clear from the article at all).

Anyway, the only way to make the kind of uniform changes you describe would be to do so at the federal level and impose them on the states (not likely). What if you have a branch in Nevada, Washington and Florida? How about in every state? Well, you already have to pay taxes in all these states, but you can't expect a company to pay taxes on all their income in ALL the states they do business in, they'd owe more taxes than they have income! So you come back to the problem of attributing and assigning income - it's a sticky problem, and ultimately you have to rely on a certain degree of honesty and tools like Sarbannes-Oxley to force that honesty. Beyond that, states need to deal with corporations that are abusing tax laws when they occur - if all your employees are in Washington and the company is making 10 billion dollars a year, but only attributing a billion dollars of it to work done in Washington, they are probably abusing the definitions provided for by law and they need to be cracked down on.