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Creative Capitalism Gets Microsoft $528M Tax Break
NewsCloud writes "Microsoft makes products in Washington but records software sales to PC makers and high-volume customers through an operation in Nevada, where there is no corporate tax. So Washington has missed out on more than half a billion in taxes; revenue it could use for badly needed infrastructure needs — such as the needed replacement of the 520 bridge which connects Seattle ... to Microsoft. Reported by Slashdot in 2004, the numbers have increased with the company's growth to approx. $76M in savings last year alone. The author questions the legality of the practice given Microsoft's 35,500+ employees and 11.2 million square feet of real estate in Washington state."
Do I hear someone call for "Small government" ? This is what happens when the sheeple are being led by corporate hacks calling for small government: no checks on the corporations, while people are starving on the streets.
Would Washington rather MS move their operations to Nevada and lose the tax base of all the employees? This situation is actually a good argument for getting rid of corporate taxes. Corps wouldn't just sit on the money they saved. They would invest it by hiring more people and spending more money where they are actually based.
The 35k plus employees pay taxes in state and Washington State is certainly aware of that fact. If they make too much of a grumble about the corporate loop hole, they could lose the much larger 35k plus employee tax base. Those 35k are probably just the people who work for M$. There are probably lots and lots of other Washington residents whose primary income derives from Redmund.
A corporation has a financial duty to avoid paying unnecessary taxes. If you don't like the way those "fat cats" (I notice rabble rousers use that term a lot) get out of paying taxes, talk to the government and have them close the loopholes. More importantly, not that every dollar Microsoft pulls in is taxed _multiple_ times by the time it makes it into the shareholders' pockets. The fact is that it's a myth that corporations are pulling one over on the government, corporate taxes are a little silly since the money _is_ taxed before it goes into any individual's pocket.
Microsoft has effectively paid its employees with your tax dollars for years.
http://www.fool.com/portfolios/rulemaker/2000/rulemaker000217.htm
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Basically, Microsoft receives cash by issuing employee stock options, after which the company then receives billions of dollars in tax deductions from the IRS for doing so. Add in the warrants it sells on its own stock, and the company made over $5 billion off the stock market last year (fiscal year ended July 1999), tax-free. For comparison, its after-tax net income was only $7.8 billion. Microsoft may not be much in the programming department, but its accountants are impressive.
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Corporations pay taxes on their own income (generally 35%), but money they pay out in salaries to employees is deductible from the corporation's income. Since granting options to employees results in taxable income to those employees, Microsoft gets to deduct that taxable employee income from its own taxable corporate income, and that's where Microsoft got a tax-free $3.1 billion in cash in fiscal 1999: "Stock option income tax benefits."
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I guess Microsoft should maintain their own bridge then.
Nevada may have lesser public services than Washington, or higher non-corporate taxes. Either way, Microsoft and it's employees are enjoying privileges in Washington that they've skipped out of paying for, placing more burden on Washington's other residents.
If Nevada is such a great, efficient state then I see no reason why Microsoft shouldn't move their actual operation there, instead of just maintaining a front for tax evasion purposes.
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Living With a Nerd
I hate Microsoft as much as the next guy (okay, maybe not around here, but I really really hate them!), but why shouldn't they structure their corporation to reduce the tax burden? Just be glad it's Nevada and not Belize.
Large corporations exploit tax loopholes? Who would have thought?
I read the internet for the articles.
Let's do away with taxes. And, we can do away with all the things taxes pay for: the education system that trains Microsoft's employees, the roads that allow the employees to get to work, the police that help protect Microsoft from the roving bands of rabid cats, the standing militia that protects Washington from invasion by Canada. (Those bastards covet Washington, and are just *waiting* to invade.)
Corporations benefit from -- nay, depend on! -- public infrastructure. Public infrastructure costs money. It's been proven time and again that private interests cannot provide neutral, equitable infrastructure at a reasonable price. Taxes are necessary.
Now, taxing both corporations and individuals seems a bit of double-dipping, I agree. Tax the corporations, and let the individuals keep their wages. Politicians would end up with a lot more votes that way (though a lot less money through corporate sponsorship and whatnot).
Microsoft is to software what Budweiser is to beer.
is generally defined as the use of private mean of production on a free market. Regardless of one's opinion on the news, the title of the news is inaccurate, and let's say it stupid.
I for one cheer for anyone protecting money from the prying hands of the State.
\u262D = \u5350
Even the Lauffer Curve, beloved of Reagan, says that taxes lead to more productivity. While 100% is bad, 0% is also bad. The right number is in-between.
Your ad here. Ask me how!
Good for Microsoft! If I could do the same to avoid paying the portion of my taxes that go for welfare-state bullshit (which is pretty much EVERYTHING except for the Military and Law Enforcement budgets), I would. In a heartbeat.
If Washington state makes a move to try to get this income, MS should pick up and move it's entire operation to Nevada. What would Washington State do then?
Ed R.Zahurak
You know, oblivion keeps looking better every day.
Well, don't forget that Microsoft is only able to create those profits because the government granted them temporary market monopoly (copyrights)... It's a trade - something(copyrights) for something(taxes).
No, it didn't net Microsoft anything. The proper title should be "Restrictive socialism costs Microsoft competitors billions."
When I had my retail store, we moved literally 3 miles across a State line because of a sales tax differential of nearly 4%. That's significant, when many of our items were $500-$1000, meaning a savings to the consumer of $20-$40 in taxes. Even funnier, the county/state with the lower tax rate had BETTER public facilities and police attention (the store in the old State had regular robberies and theft), and my customers had a 5 minute longer hop to get there.
We've talked repeatedly about moving out of our State and leaving some customers behind if our State decides to start a labor sales tax. It's a terrible idea, as more taxes don't mean more income (and neither do less taxes necessarily) for the State. It's a VERY complicated "invisible hand" situation.
I appreciate when companies find loopholes, because it gives me hope that I can use them, too. I hate W2s, as 1099s offer many more tax benefits. I've seen many friends give up their stable W2 jobs to move into 1099 contracting, and see their income double, but their tax share not move up as much. When I heard Haliburton was moving offshore, I investigated it and found that there are tons of savings to do so, even if your primary business is still in the States. It makes sense.
Yeah, Microsoft will take heat for this, but the reality is that small and medium sized business owners should do everything in their power to find the least-regulated economies to operate out of. I love seeing companies move out of California, employees and all, and hitting States that so far have not shut down the engine of business, thinking that the State can help the poor when in fact it is jobs, not entitlements, that help the poor.
This is what you get when a bunch of hippies convince small-minded people that corporations have more power and are more evil than the government.
It is your beloved cure-all government that is the source of the problem. Microsoft cannot imprison you. The government can.
Corporations only have the power to buy government that you socialist sheeple demand.
See, we can both play this clever game of calling people 'sheeple'. It's almost as clever as calling Microsoft M$.
Even the Lauffer Curve, beloved of Reagan, says that taxes lead to more productivity. While 100% is bad, 0% is also bad. The right number is in-between
The problem is that a lot of leading political figures on the left believe that 50% is the right mark, and we Reaganites believe that's a bit too high!
0% being useful assumes investment in useful things like roads and bridges that actually improve the business climate. If it doesn't improve business, which does actually include quality of life and nationalistic branding stuff, then, it shouldn't be there. That would automatically chop a lot out of the budget, for sure.
Question I have is, why do rates need to go up at all? Population is increasing, GDP is increasing.. shouldn't government spending increases be constrained, at least, to GDP? Unfortunately Bush has been absolutely terrible on this one, but no President will do actually the right thing here either. I mean, why should Medicare ever go up more than GDP?
This is my sig.
The other major business of Washington state - Boeing - flies their 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. Should we complain about them too?
I didn't realize that the education I got from the government, for which my parents paid by taxes, made me the property of that government (since I cannot be parted from that education without killing me). It's only a short logical jump from saying that the employee's education obligates the employer to saying that it obligated the employees themselves and therefore they may not leave the jurisdiction that paid to have them educated. I seem to recall the USSR, may it rest in pieces, used that argument.
The fact is that having a well educated workforce does benefit the state of Washington. It means a workforce that makes more money (= state income tax), spends more money (= sales tax), and gets more expensive houses (= property taxes). This is true, and pays the state of Washington for the costs of educating the children who grew up to work in Microsoft, regardless of how Microsoft runs its business.
-- Support a free market in the field of government
It is not like Washington isn't getting a cut out of MS. With 11.2 Million square feet or real estate, think of the property taxes? With 35,000+ employees, think of the payroll taxes?
Seriously, please don't tell me everybody on Slashdot is naive enough to think that companies like Red Hat, SUSE and Ubuntu aren't working the tax system either! Companies from a one man show to an MNC use this system to pay the least amount of tax they can. Nevada and Delaware have long maintained favorable tax treatment of corporations exactly for this purpose. If Washington wants in on this action, they can offer the same incentives to encourage MS to claim those profit in WA.
There is no valid contract for you to pay for your food when you go into a restaurant, yet few people dine and dash. No one would assume the restaurant is just giving you the food for free. What there is is an implied contract. You eat the food, you pay the bill. With government services, there is the same implied contract. If you don't want to pay the bill, don't make use of the services. If you don't agree to pay taxes, go live somewhere else, you have no right to live here.
- None can love freedom heartily, but good men; the rest love not freedom, but license. -- John Milton
That Microsoft's behavior isn't unique in any way, shape or form. That what microsoft does is standard operating procedure for all mega-corporations.
Paying taxes in the state with the lowest corporate tax rate and forming corporations in Delaware is done for the same reason. It's the best deal.
If this is outrageous to the submitter, then I hope he never discovers how most electronics firms with an office in the U.S. work.
As an FYI, they are set up as subsidiaries that "buy" their product from the most attractive exporting/manufacturing office from some other part of the world of the same corporation. The U.S. office then operates at a perpetual loss (paying less tax) by hiding the income generated as the cost paid to "buy" the goods from some other part of the world.
Minimize tax, maximize profit!
Got Trader Joe's? friendwich.com RSS feeds work now!
Ignore this story - Washington is taxing itself into oblivion. Boeing moved their corporate headquarters - and most of their taxable profit - to Chicago over the taxation and treatment of business in this State. The ONLY things that is keeping Washington alive right now are:
1. Agriculture. Hard to move a farm, so they're stuck. Of course, our State wants to breach all the dams and eliminate the irrigation systems, which would kill these businesses.
2. Boeing. Already moved their corp headquarters, and unfortunately for Boeing, the physical assets here - buildings, equipment, and people - are so huge that you can't afford to move them. But more and more work is shifted outside the State...
3. Microsoft. Faces the similar situation with Boeing, because of the size of the campus and people. Stuck for now, but does more and more outside the State.
Washington is screwed. It has the highest gas tax in the nation, and still hasn't repaired road damage from the 2001 Nisqually Earthquake. The legislature and governor raised the State budget by 33% in 3 years, and now projects deficits left and right, yet it's also decreased MANDATORY funding of the State employee's pension fund. And now it wants to put the screws to Microsoft...
Washington is dead, it just doesn't know it yet...
Browsing at +1 - no ACs, I ignore their posts. So refreshing!
as others have pointed out - this is about corporate taxes
calling it "creative accounting" might be valid but misses the point
accountants set the "rules" through generally accepted accounting principles http://en.wikipedia.org/wiki/GAAP - which appears to be what the article is complaining about
Microsoft has a history of being big and mean, but apparently GAAP allows Microsoft to do whatever it is they are doing (or the SEC/FTC/acronym of your choice would be jumping down their throat even more)
maybe the rules should be changed, but it might simply lead to companies moving out of that state. i.e. If it is unprofitable to do business in a specific area, then companies won't do business there very long
the recent hot button examples (sure to get me called an capitalist/fascist/idiot by someone) are Michigan and Ireland. Michigan has "increased tax regulation" and also seen a lot of industry leave for more "business friendly" areas (the "1 state recession" we kept hearing about during the Michigan primary). Ireland on the other hand has "rewritten their tax codes" (read "cut taxes") and seen an economic turnaround (maybe it is unrelated ...lol)
in my little part of the world it is also common practice to give corporations all kinds of tax breaks - the underlying idea being to keep/create jobs in the area (from which the local municipalities collect income tax)
It ain't what they call you. It's what you answer to. http://mylyceum.us/
So, in other words, only workers should have to pay taxes.
Shop as usual. And avoid panic buying.
If Nevada is such a great, efficient state then I see no reason why Microsoft shouldn't move their actual operation there, instead of just maintaining a front for tax evasion purposes.
And, as you file your own tax returns this year, I'll bet you carefully record each internet transaction from out of state, ensuring that you pay full taxes even though it would have been easy to avoid it? Of course, your charitable deductions will be paid at the lower rate you really know your junk was worth rather than the higher "standard rate" you know you can get away with? Similarly, when you realize your itemized receipts don't add up to as much as the standard deduction, you'll still take the lower amount you know you really deserve? You'll also stop using lower rate credit cards issued out of Delaware in favor of higher rate ones from your own state?
Sure, you could be saving money on your own taxes. But won't anybody think of the children in your own state who are in cramped classes because there aren't enough tax dollars. Thank God for people like you who make a point of paying every dollar they can, rather than looking for the best possible savings.
When an individual figures out ways to avoid paying taxes - or paying as little as possible - it's considered frugal. When a corporation does it, it's evil?
This is a textbook case of high taxation modifying the behavior of the taxed. If Washington's tax rates weren't punitive for these sales, there wouldn't be any incentive for the company to be incorporated in Nevada. This is a common corporate practice, and demonstrates the necessity of small laboratories of democracy, aka, states. Washington is seeing how Nevada's tax code is modifying the behavior of Microsoft, and Washington has the choice to modify their tax code or continue pursuing their own version of it. It's not Microsoft's fault for playing by the rules to maximize profit.
Government's view of the economy: If it moves, tax it. If it keeps moving,regulate it. If it stops moving, subsidize it.
That's not what the Laffer Curve says. It says that tax revenues are optimized at a certain point. Taxes always* have a negative effect on productivity, and that has to be considered against the potential increase in tax revenue that an increase in the tax rate would otherwise bring.
* Specific uses for tax dollars can increase productivity, but that increase is usually not as much as the productivity that a firm could gain by just spending the money itself.
Remember that statement next time you drive along a road. Where TF did that road come from?
Engineering is the art of compromise.
Visual IRC: Fast. Powerful. Free.
I for one will not stand for good paying jobs in the USA. Any candidate that encourages more tech jobs to move to India has my vote!
Add up the actual amounts involved and account for the dilution in share value and you'll realize that no one is cheating anyone else.
Employees exercising stock options pay taxes on the value of the benefit they receive just as if it were income through wages. The employer deducts the value of the benefit just as if it were income through wages and the net value of the corporation is reduced by the same amount just as if it were income through wages. Stock options allow you to tie that income to the stock performance but apart from that there is no difference taxwise between providing the income as stock options as opposed to wages. The article is either written by someone who is completely ignorant of basic accounting or is preying on an audience he expects to be ignorant of it.
Consider a hypothetical company with 1 million outstanding shares valued at $100 each. Now consider an employee exercising a 1000 shares with a strike price of $10. The employee receives a benefit of $90,000. The employee pays the company $10,000 for the options. The company now has two options:
Option A: Buy back an equivalent amount of stock to provide the employee. This would cost $100,000. Subtract the $10,000 the employee paid and you see the company is faced with a cash outlay of $90,000 - exactly as if the amount were provided as wages.
Option B: Don't buy the stock back. The total number of outstanding shares are now 1,001,000. Maintain the market cap of $100 million as before and the value of the 1 million shares held by the previous stockholders is now $100 million minus $90,000.
There is a real loss of $90,000 that the company experiences and a real profit of $90,000 that the employee experiences. The employee pays income tax on the $90,000 and the employer gets to deduct the $90,000.
Mmmm.. Donuts
The fact is that it's a myth that corporations are pulling one over on the government
They're not pulling one over on the government- they're pulling one over on us.
In the 1950's, the corporate share of taxes was about 50%. Citizens paid half, corporations paid half.
Now? it is about 2%. And why is that?
Corporate lobbying. Corporate lobbying pays for all the toys and the re-election campaigns.
Please help metamoderate.
Most jurisidictions' tax codes have rules which are designed to prevent this (most commonly by requiring goods to be sold between subsidiaries in different jurisdictions on arm's legnth terms and by assessing tax on the arm's legnth price if this was not charged). I'm surprised that Washington state doesn't have anything like this (or, possibly, it does and MS' tax counsel have figured out a way to avoid the rules applying to IP).
Defense accounts for 21% of the federal budget. Social Security, Medicare, "Safety Net" Programs account for 49% of the federal budget. 9% is interest on debt and 21% is "everything else." (According to cbpp.org) DoJ is likely in that "everything else" category, and accounts for .7% of the federal budget. (According to DOJ press release of today.)
21.7% is _not_ the majority of the federal budget by any stretch. Even if you don't sort out the entitlements from the "everything else" category, Social Security and Medicare are a hefty enough chunk of the budget.
Ed R.Zahurak
You know, oblivion keeps looking better every day.
Amusingly enough, MS has paid a fair bit into King County municipal infrastructure issues. They bought a bigger fire truck (in exchange for being allowed to build a building taller than 4 stories). They built a bus transit center. I beleive they've had a part in paying to get bridges widened and other traffic improvements near the MSFT campus.
The MSFT employee base does a hell of a lot more for King County than the other way around.
WA politics are horribly corrupt and stupid.
Former Redmond resident, Current MS employee (in Fargo, ND, where the local government is much less stupid)
As an MS employee and shareholder, I hope we continue to diversify away from the Redmond campus. It is extremely expensive and the business climate in WA is unstable and increasingly hostile. The overwhelming majority of MS employees are transplants from elsewhere.
The nice thing about markets is that socio-economic conditions are a market also, and as US cities get stupider and stupider, they'll lose business and "lose" in the market place. Hopefully corrections occur before there is too much uncomfortable displacement for all parties.
My opinions are my own, and do not necessarily represent those of my employer.
But you do have a sales tax. 8% if I am not correct. And those employees buy stuff, they pay property taxes, gas taxes and I bet they are even allowed to vote. I would bet these are high paying jobs who's money trickles down to the retail sector and pays for those jobs there as well.
So they pay corporate taxes in Nevada, where there are no corporate taxes, and they pay their employees in Washington, where there is no income tax?
It would be fun if everyone started parasitising like that...
I suffer from attention surplus disorder.
I guess in the end, corporations play the game they bought.
There, fixed the sentence for you.
Contracts require three elements: offer, acceptance of offer, and consideration. All three are in-place when you go to a restaurant:
Offer: The restaurant provides you with a menu, which includes prices
Acceptance: You reviewed the menu and placed an order for specific items.
Consideration: The restaurant provided you with food, expecting you to exchange cash.
Don't gimme any of this fictitious "implied contract" or "social contract" crapola.
Actually, I live in Canada, Alberta to be exact, and when I order things from out of the country I DO pay taxes on them. Every single item. When I buy items outside the province I often have to pay other province's sales taxes as well, even though technically I'm exempt.
I can assure you that if I managed to somehow creatively avoid declaring a third of my taxable income and the government found out about it I would at the least be assessed some massive fines. If I'd done it for ten years I expect I'd just be thrown in jail.
When an individual avoids paying a large chunk of his or her taxes it's considered a crime (unless you're rich, but then you're probably a corporation anyway). When a corporation does it's considered "creative capitalism."
And with government crippled, how do you expect to actually hold them responsible?
Dan Aris
Fun. Free. Online. RPG. BattleMaster.
It is true, however, that any production that goes into government finances can't go anywhere else at the same time. That doesn't mean it's necessarily a bad thing to have taxes, it's just that the government has to use the money for something worthwhile.
I am officially gone from
Hogwash. The corporations aren't paying any more in salaries than they have to. It's their customers who pay their taxes, not their employees. Did you get a raise the last time your employer got a tax cut?
And they're going to charge their customers as much as they possibly can as well.
We do NOT have the highest taxes. Have you seen what they're paying for gasoline in Europe? That's mostly tax.
As to "paying more than 100%, well gee, I thouhgt I was bad at math! A 100% tax rate would mean that all gross reciepts would go to the tax man.
I know, it's Monday. Me too.
mcgrew's razor: Never attribute to stupidity that which can be explained by greedy self-interest
Small Government People know that you can not have small government with corporations. Corporations are not natural entities but protected entities created by government regulations. A small government would eliminate the corporation. Not the business, just the protected status. Corporations only enjoy their protected status by the largess of government.
Look at your city, your county, your state. Almost all corporations.
People like you need to realize that it isn't the "big business" mentality, it is the fact that government provides special immunities and benefits to corporations through the use of the corporate charter itself. Step one in effecting positive change in big business practices is the elimination of corporate charters. Period. You can even start by using it as a punishment for braking the law: revoke the charter.
If the companies lacked the protections afforded by the corporate charter much of people's gripes about them would be actionable.
My Suburban burns less gasoline than your Prius.