Cartoon about Microsoft's giant tax gift from Washington State

Jeff sez, "Inspired by Boing Boing post about Microsoft tax dodge, cartoonist RR Anderson takes on Washington's $100 million tax cut and tax amnesty for Microsoft." Broke-ass Washington State Set to Give Microsoft $100 Million Annual Tax Cut and Amnesty for $1 Billion in Tax Evasion (Thanks, Jeff!)

• [Anonymous]

  Monopolies are forbidden in this State by Law, why not tax M$ for that violation? M$ rakes in a Billion or more a month in profits, they can certainly afford it. Or we could just fine them for selling lousy products.

• [Ceronomus]

  Yes, taxes and economics are my field Antinous, and I’m sorry you don’t care for that. I’m also sorry that you refuse to accept the very basic logic that I spelled out in my last message.

  Rather than calling it Oratory, tell me what I just stated that you believe to be in error. See, I know what I’m talking about and rather than attacking my statements, you are attacking me for the basic statement that I know what I’m talking about.

  Really, that seems to fall more under your category of oratory.

  So please, tell me what of my explanation that you feel is in error. I made it fairly basic and easy to wrap one’s head around.

  • [Antinous / Moderator]

    You’ve stated that the post(s) on this subject are factually wrong and that you are providing factual truth. In fact, you keep saying the same things over and over. But you don’t provide any citations as proof. And when called on it, you’ve become rather hostile. You’re not making statements about economic theory. You’re making concrete and specific claims about taxes. So where’s the proof?

• [holtt]

  Dear lord Antinous, how can you talk about asking Ceronomus for more than oratory? If his intelligent posts promp you to ask him to back them up with facts, how can you justify the shrill, narrow minded and kneejerk nature of this article or the one it references?

  This isn’t “foxfox” yet, but sometimes it acts like it.

  • [Ceronomus]

    To be fair, the real problem article is the one that INSPIRED this cartoon. The cartoon and the coverage of it are simply an after product.

    Still, I can EASILY peel apart the arguments put forth by that website, it actually undermines its own arguments by failing to understand the difference between tax avoidance and tax evasion.

• [i_prefer_yeti]

  what’s it say on the plane that’s flying into the capitol building?

  I’m picking out Insane and Tea, what’s the third word?

  Didn’t realize we’ve already made it past the “too soon” threshold for the light plane kamikazes into a federal building humor. Good to know.

  • [i_prefer_yeti]

    my apologies, meant to say “government” building rather than federal.

    • [Ceronomus]

      Actually, I read his full “Manifesto” as it has been referred to in the press. The poor guy wasn’t the insane freak he’s been made out to be, but instead someone that was getting the shaft from both sides (the IRS and his own accountants) and ended up in such a deep hole that he could see no way out.

      I certainly don’t condone flying a plane into a building, but I must admit, when I first heard about this I figured he was one of the more lunatic fringe Tea Party folks. I don’t hold that belief now.

      Instead, like many other people, he was driven to suicide by his financial problems and he chose to use his own death to lash out at some of the folks he felt were responsible.

      His website letter makes for interesting, and pretty lucid, reading. You cannot help but feel sorry for him when you read it.

  • [tallpat]

    3rd word is “Posse”. Larger version here: http://comics.feedtacoma.com/img/comics/posts/lrg/tacomic-broke-ass-washington-state-set-give-microsoft.jpg

• [Ceronomus]

  Let me try to make this even more basic.

  Do corporations ever pay tax? Or is it you as the consumer that pays the tax for them by purchasing their products and services?

  Now, calling corporations merely tax collectors (as I did earlier) does oversimplify the matter a bit. That would be how sales tax is handled, which is indeed different from corporate income tax.

  However, the taxes are more similar than one might think. Again, all of a corporation’s taxes are paid for by the consumer. There are rare cases, such as when the tobacco companies were paying some of the federal taxes RATHER than passing them along to the consumer. That was the exception, not the rule. The tobacco companies were actually allowing hiked taxes cut into their profit margin.

  In normal cases, a tax hike means a price hike. Now, that price hike brings in more money to maintain a particular profit margin. In short, the price (what YOU pay) goes up to cover the increase that the corporation has to pay.

  The very reason that so many US companies have moved their HQ’s to O boxes offshore was based on tax advice. Yup, stop paying the taxes and raise your margins. Yet another point that shows that taxes are factored into the original margin.

  So tell me Antinous, who is being taxed here? Now, don’t get me wrong, if we removed corporate income taxes this very moment, prices would not go down, profit margins would simply go up. Corporations do like to have their cake and eat it to.

  Hiking corporate taxes always sounds like a good idea. It is easy to feel like it is a victory by sticking it to the big guy…but the corporation merely hikes its prices and so…the little guy ends up paying for it.

  I just cannot make this any more basic.

• [Ceronomus]

  Flat out, there is no amnesty.
  Flat out, Microsoft has not been under-reporting its income (At least in this case).
  Flat out, Microsoft does not owe a billion in back taxes.
  Flat out, the headline to this article has no basis in reality.

  This whole issue has been started by a poorly researched article with no real grasp of the actual tax situation. Microsoft does enough crappy stuff, why focus on something that is all hype and no truth. I mean, this place isn’t Fox “News.”

  • [CANTFIGHTTHEDITE]

    The headline is definitely a misrepresentation of reality, or at least an abusive paraphrasing of the truth. Microsoft is using a legal, yet ethically dubious, method of avoiding Washington state taxes via basing its licensing subsidiary in Nevada where there are no taxes on software licenses. At least that is my understanding.

    • [Ceronomus]

      Exactly, tax AVOIDANCE (legal) versus tax EVASION (illegal). It is really disappointing to see something reported here in such an irresponsible way as to put forth total falsehood as fact.

      The Washington legislation is working on closing the loophole that allows the avoidance (which is what commonly happens on both a state and federal level). However, until such time, the method is legal. That also means that there is no back tax debt owed, and thus, no billion dollar amnesty.

      Really, this boils down to someone with no understanding of how tax laws work making a bold claim and it being picked up by Boing Boing. I cannot blame Boing Boing for the content of the original article, but I am very saddened to see them carry forward with keeping the misinformation alive with stories like this.

      This whole claim has as much merit as the “birther” nonsense and should be treated as such.

      There are legitimate reasons to complain about Microsoft…those aren’t good enough anymore that we need to complain about fictional things?

      • [Anonymous]

        “Exactly, tax AVOIDANCE (legal) versus tax EVASION (illegal). It is really disappointing to see something reported here in such an irresponsible way as to put forth total falsehood as fact.”

        Regardless, companies who can well afford the full measure of taxes should pay them; maybe then Washington (state) wouldn’t have to cut education spending by 120 Million, making your kids as ignorant as you are.

• [Ceronomus]

  Actually Antinous, with the matter of the original article being factually wrong, I have cited very simple evidence from teh website itself as well as my original objections inthe first thread that did the same thing. If what you are saying is that you’d like me to go further in depth on THAT front, my apologies, I thought you were arguing about the issue of corporate taxes being a fallacy which, I admit is off-topic. If you just want me to further explain why the original article is in error? I can do that. Heck, give me an hour and I can put together a fairly clear cut explanation for that.

  That’s the easy one.

  • [Antinous / Moderator]

    I’m not disagreeing with you or doubting you. I’m just saying that it’s not particularly useful to other readers to make claims without providing some supporting material that would provide an in-depth (or even shallow) understanding of the tax situation in this case.

• [Avram / Moderator]

  Ceronomus, did you see my earlier question at #29? The one asking whether the same logic applies to personal income taxes?

• [Ceronomus]

  Let’s start by looking at the initial allegation made by the referring website.

  “Washington to Give Microsoft a $100 Million Annual Tax Cut…and Possible Amnesty on Past Tax Evasion”

  Now, we are dealing with House Bill 3176 the purpose of which is listed as

  “Increasing state revenues to preserve funding for education, public safety, health care, and safety net services for elderly, disabled, and vulnerable people by preventing abusive tax avoidance transactions, narrowing or eliminating certain tax preferences, and providing equitable tax treatment.”

  Now, the key portion here is “preventing abusive tax AVOIDANCE transactions.” An important thing to remember is that tax avoidance is legal, tax evasion is not.

  Now, the avoidance loophole that is closed (as cited in the original article) is

  “Since 1997, Microsoft has evaded an estimated $1.27 billion in royalty taxes, interest and penalties by operating a small office in Reno, Nevada to account for royalty revenue from software licensing.”

  The problem with this accusation is that this is AVOIDANCE not EVASION. Now, one can always argue that avoidance isn’t incredibly ethical. Avoidance generally relies on the exact letter of the law versus the SPIRIT of the law. But while Microsoft’s actions go against the spirit of the law, they are legal under the letter of the law.

  The original website then goes on to further cite Washington State’s Office of Financial Management assessment of HB3176.

  “Royalty income is not apportioned in this state. Rather, royalties are allocated to the domicile of the taxpayer. Businesses that are domiciled outside of Washington, but authorize the use of their intangible property in Washington, do not pay any B&O taxes in Washington on royalties received from the use of their intangible property in this state. This has led some Washington-domiciled taxpayers to transfer their intangible assets to wholly-owned subsidiaries whose sole place of business is outside of Washington. Sometimes these subsidiaries are domiciled in states, such as Nevada, that do not tax income from the use of intangibles.”

  The author of the original article mistakenly assumes that this commentary is discussing that the avoidance technique is illegal. It isn’t. Indeed, it works on the same principle that allows companies with an online presence to not collect sales tax for states where they do not have a brick and mortar location.

  I’ll continue this message rather than risk running into a message limit.

• [therealjasonb]

  I know it’s fun to hate Microsoft, but is a global multinational not paying 100% of taxes somehow news? Do any of them? I have no idea, but I’m assuming Google and Apple and Yahoo! all have pretty sweet tax deals, too.

• [Ceronomus]

  Antinous – I apologize for our misunderstanding

  Avram – I’ll get back to that question in a minute. I’m going to first finish up my current explanation.

  Now then, to continue we need to look at how corporations work between states. When you incorporate in a state you are bound by that state’s laws for your corporation. To do business in OTHER states, you are actually required to register as a foreign entity doing business in that state. TECHNICALLY, without doing so you have no legal write to do business in, or collect money from the residents, of that state. A foreign entity is bound to the tax laws of that particular state, but only in so far as they do business in that state.

  A prime example, a corporation doing business in New York and California is only required to pay California income tax on the corporate income derived from California.

  So, with that in mind, Microsoft moved its licensing business over to its own corporation located in Nevada. As the income for licensing was funneled through the state of Nevada, no tax was actually owed.

  (This does bring up an interesting question about ALL of these products that are “licensed” whether software movies or music)

  Now, what the state is trying to do with this bill…

  BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:
  PART I
  Minimum Nexus Standards
  NEW SECTION. Sec. 101. (1) The legislature finds that out-of-state businesses that do not have a physical presence in Washington earn significant income from Washington residents from providing services or collecting royalties on the use of intangible property in this state. The legislature further finds that these businesses receive significant benefits and opportunities provided by the state, such as: Laws providing protection of business interests or regulating consumer credit; access to courts and judicial process to enforce business rights, including debt collection and intellectual property rights; an orderly and regulated marketplace; and police and fire protection and a transportation system benefiting in-state agents and other representatives of out-of-state businesses. Therefore, the legislature intends to extend the state’s business and occupation tax to these companies to ensure that they pay their fair share of the cost of services that this state renders and the infrastructure it provides.

  Quite a mouthful at the opening, but the bill is working to extend taxes to entities that one could argue have a moral obligation to pay for the services and protections provided to them, and correcting the fact that they were not legally obligated to pay for these services.

  It is interesting to note that this bill also would serve to levy some taxes on corporations that moved their HQs overseas as a method of tax avoidance.

  (2)(a) The legislature also finds that the current cost apportionment method in RCW 82.04.460(1) for apportioning most service income has been difficult for both taxpayers and the department to apply due in large part (i) to the difficulty in assigning certain costs of doing business inside or outside of this state, and (ii) to its dissimilarity with the apportionment methods used in other states for their business activity taxes.

  So, the bill also seeks to address the difficulty of untangling the mixture of revenue streams from various states and, in many cases, countries.

  There is still no mention of any illegality involved in these past methods, because they were not illegal. Indeed, there is a reason that the bill clearly addresses tax AVOIDANCE.

• [Ceronomus]

  That said, the only person who mentions tax evasion ANYWHERE is the author of the original argument…and he’s mistaken. Let’s look at another quote from his article.

  “The Department of Revenue’s arguments to us explaining their inaction have been vague and weakly argued. Allowing Microsoft to evade the royalty tax to date appears to be an administrative decision.”

  Again, he makes the common mistake of confusing avoidance and evasion. Now, I cannot argue for or against the reasoning that the loophole had not been closed before now…his aspersions to the reasoning are really not something that I can argue for or against in any fashion based on tax code and tax laws.

  Finally there is this section…

  “Washington’s statute of limitations on unpaid tax debts is five years, longer if fraud is involved. Despite HB3176, a court challenge could still force Microsoft to pay its royalty tax bill in amounts from an estimated $370 million to the total amount including extra for interest and up to 35 percent penalties.

  However, Sec 1504 of HB3176 raises a huge red flag (p. 88) to us: “Sec. 1504 … (2) Section 201 of this act does not apply to any tax periods ending before July 1, 2010, that were included in a completed field audit conducted by the department.”

  In other words, if a field audit was conducted at Microsoft, which the company would know, then its entire billion dollar tax dodge would be shielded from collection under HB3176. In other words, an audit finding based on weaker, older administrative policies at the Department of Revenue could clear Microsoft from wrong doing despite the newer, stronger enforcement edicts in HB3176.”

  The “in other words” again, wholly misses the point. Yes, there is a five year statute of limitations, with an unlimited statute term in the case of fraud.

  That said, here is section 201. You will notice that it says no such thing. Indeed, what it DOES say is that even if the corporation set up for tax avoidance is created in a wholly legal fashion, the income will be reclassified anyways.

  PART II
  Abusive Tax Transactions
  NEW SECTION. Sec. 201. A new section is added to chapter 82.32 RCW to read as follows:
  The department must disregard, for tax purposes, abusive tax avoidance transactions. In disregarding an abusive tax avoidance transaction, the department may: (a) Recharacterize the nature of income, such as recharacterizing dividends received from a related entity as income received for providing services to that entity; (b) Disregard the form of a corporate or other entity, even when legal formalities have been observed, when the form of entity is used as part of an abusive tax avoidance transaction; (c) Treat the tax effects of the transaction, plan, or arrangement according to its underlying substance rather than its form; (d) Treat a series of formally separate steps as a single transaction; and (e) Take any other reasonable steps necessary to deny the tax benefit that would otherwise arise as a result of the abusive tax avoidance transaction.

  (2) For purposes of this section, “abusive tax avoidance
  transaction” means the avoidance of any tax collected by the department under the provisions of this chapter by means of a transaction, plan, or arrangement that lacks economic substance.

  (3)(a) A transaction, plan, or arrangement will be considered as having economic substance only if: (i) The transaction, plan, or arrangement changes in a meaningful
  way, apart from its tax effects, the taxpayer’s economic position; (ii) The taxpayer has a substantial nontax purpose for entering into the transaction, plan, or arrangement; and (iii) The transaction, plan, or arrangement is an objectively reasonable means of accomplishing the substantial nontax purpose. (b) A transaction, plan, or arrangement that carries some risk of loss and profit potential may nevertheless be found to lack economic substance if the economic risks and profit potential are so insignificant when compared to the tax benefits that a reasonable person would conclude that the taxpayer would not have engaged in the transaction, plan, or arrangement absent its tax effects.

  (c) An objective of achieving favorable financial accounting benefits arising from tax savings is not deemed to be a substantial nontax purpose for entering into a transaction, plan, or arrangement. (d)(i) Except as provided in (d)(ii) of this subsection (3) the burden is on the department to establish that a transaction, plan, or arrangement lacks economic substance. (ii) If the taxpayer fails to produce records requested by the department that are relevant in determining whether a transaction, plan, or arrangement has economic substance, the burden is on the taxpayer to establish that the transaction, plan, or arrangement has
  economic substance. (4) The provisions of this section are cumulative and nonexclusive and do not affect any other remedies provided to the department under statutory or common law.

  (5) The department must by rule, and as resources allow, provide guidance on what it considers to be an abusive tax avoidance transaction. The adoption of a rule as required under this subsection is not a condition precedent for the department to use the authority provided in this section to disregard abusive tax avoidance transactions. The rule adopted under this section must include examples of abusive tax avoidance transactions.

  I could go on further, but I’ll stop here and ask if I really need to.

• [Ceronomus]

  Okay, one last post to answer Avram’s question.

  “Can’t the same thing be said of personal income taxes? If the government taxes away a chunk of my income, that’s less money I have to buy stuff with, and therefore less revenue for some bunch of corporations.”

  Indeed, any tax means that you have less to pay for goods and services. However, those tax dollars benefit both the individual and corporations.

  Yes, you having less money means that you have mean less potential income for corporations. Any increase in personal income taxes needs to really be looked at to see the effects that it will have, the same for any tax cut.

  President Reagan dropped the top income tax bracket for the wealthy from 70% to 50%. Now, both of those numbers sound awfully high at first glance, but it is important to remember that this is 50-70% of all unprotected income…what is LEFT to be taxed and not sheltered. Certainly, one can argue that, all things being the same, nobody should pay 70 out of every 100 when someone else is paying 10 out of every 100.

  But things aren’t the same. Even today, Warren Buffett has gone on record to the effect that he pays less in income taxes than his secretary. Now, OBVIOUSLY, the secretary is not making more money than Warren Buffett. Warren Buffett is merely afforded many more tax breaks and credits because of the opportunities that his wealth gives him.

  When that top bracket was reduced so heavily, it shifted a larger portion of the tax burden onto the middle class. Tax cut after tax cut has been made to a point where many wealthy individuals pay little to no tax at all….LEGALLY.

  I think I answered your question and then went off into something related but different. Anyhow, hope these posts clear a few things up.

  • [Avram / Moderator]

    Indeed, any tax means that you have less to pay for goods and services. However, those tax dollars benefit both the individual and corporations.

    I still don’t see how your complaint about corporate income tax fails to apply to personal income tax. Money taxed from personal income pays for things that (theoretically) benefit both individuals and corporations, as you say — but that’s also true of money taxes from corporate income, isn’t it?

    Is your point that corporate taxes are less effective because corporations have greater access to tricky accounting?

    • [Ceronomus]

      I still don’t see how your complaint about corporate income tax fails to apply to personal income tax. Money taxed from personal income pays for things that (theoretically) benefit both individuals and corporations, as you say — but that’s also true of money taxes from corporate income, isn’t it?

      Is your point that corporate taxes are less effective because corporations have greater access to tricky accounting?

      - First, I’m not actually trying to complain about corporate taxes, just explain the reality of them.I’m not for eliminating all taxes on corporations, or individuals. Instead, I’m just trying to get people to understand the truth about corporate taxes and where the money REALLY comes from. In the end, ALL taxes come from the consumer.

      That said, your question about “tricky accounting” really gets to the heart of the flaw in the US tax system (I presume elsewhere also, but I have very little knowledge of the tax systems of other nations – certainly not enough to speak with any authority on the matter). In the US there are entire tax law firms dedicated to the most complicated of tax avoidance schemes. The avoidance scheme used by Microsoft was incredibly simple to understand, so much so that some folks mistook it for evasion as opposed to avoidance.

      Most folks working at the top levels of tax avoidance are bringing in $400-$500/hr MINIMUM, so that does lock those with lower incomes right out. These folks spend all of their time studying the code and how various portions of it interact. The government often creates unintentional loopholes that folks jump on for as long as they can.

      Case in point, President Bush wanted to end both the Estate Tax and the Gift Tax. On the surface, that really doesn’t seem like such a bad idea, not taxing the passing of items to one’s family. He stopped pushing for it when the ramifications of such a thing were explained to him.

      Let’s say you had purchased Microsoft stock at the IPO price of $21/share. Since that time its split and is sitting at $28/share. You’ve done pretty well on that stock purchase and, so long as you don’t sell it, you don’t have to pay the capital gains tax.

      If Bush’s plan had gone through, you would’ve had a decent way to avoid paying your capital gains tax. Find a friend or family member who has one foot in the grave and gift them the stock, with the understanding that it gets willed back to you. Even easier, if you are feeling really unscrupulous would be to gift it to a family member who is already in a dementia ward or the like.

      The gift is a tax free exchange.

      When that relative dies and the stock passes back to you, your basis (what you are considered to have invested in the stock, in this case for figuring capital gains) becomes the fair market value of the stock. So instead of $21/share pre-split, you are now treated as having paid $28.33/share (at the moment of writing this) post split.

      In other words, you have ZERO profit on the stock should you sell it at that moment.

      Now, the removal of the estate tax wouldn’t factor in to this equation for the majority of Americans. Since it generally doesn’t kick in until well over a million dollars (it has not been a fixed amount recently, changing each year).

      This year btw, the estate tax is zero. No estate tax paid no matter how much money the deceased’s estate is worth. In the tax industry the morbid joke has been that this is the “push grampa off a bridge” year.

      So, getting back to my point, if you are holding 100 shares of Microsoft, the estate tax combination doesn’t really matter. You’ve avoided $1783 in capital gains and the estate tax isn’t going to touch you. However, if you really invested in Microsoft in the beginning, and are holding say… 200000 shares of Microsoft (AFTER split) you have just walked away with over 3.5 million in untaxed capital gains.

      That is a fairly simple example of how various taxes in the code work together. It is certainly not a $400-500/hr tax avoidance scheme…but you get the idea.

      Had this passed, the average person on the street probably would not have known to take advantage of it AND would not really have had the large investment to heavily benefit from it in the first place.

      Yes, our tax system does favor the wealthy. There are taxpayers out there who bring in 7 figures a year who end up legally receiving Earned Income Credit too.

      If you are a straight W-2 wage earner, the majority of the tax code will never be used by you and you will never take advantage of the majority of things that it offers. The more money you have, the more able you are to use the system.

      Again, Warren Buffett pays less in taxes than his secretary…yet we keep dropping the tax percentage on the highest brackets because it is constantly reinforced how “Unfair” it is without understanding how little money is left to actually be taxed.

      Part of the fault in this lies with the American people. Since the vast majority have no understanding of the code (which is really quite reasonable and not their fault) they allow themselves to get worked up by commentators who are most likely working with an agenda. Not understanding how the code works, it is easy to get angry hearing that someone is paying taxes in a 70% bracket…not realizing that they are only paying that tax on a fraction of their income.

      Folks get worked up and start calling their Congressman. Their Congressman is in a perpetual re-election cycle and so bows to the public pressure… despite the fact that it does not serve the public good (this also happens in many other fields including general economics and climate change).

• [Ceronomus]

  As a follow up, to the people in the other thread who spoke of how Microsoft would never leave Washington because of their infrastructure investment?

  Microsoft can LEGALLY move their “HQ” to a post office box in Bermuda while making no real changes other than filing a piece of paper. A large number of US Firms have done just that. That Microsoft has NOT done that, and instead pays both Federal and State taxes should be viewed as a good thing.

• [strangefriend]

  Ceronomus, corporate income taxes are paid on net income, or profits. So you’re assertion that corporate taxes are passed on to the consumer is bunk.

  • [Ceronomus]

    No, it comes from an actual understanding of taxes.

    Let me REALLY simplify this for you.

    Where do the profits come from? That money comes from you, the consumer.

    When corporate taxes get increased, costs go up. Why is that? It is because corporations use their prices to maintain their bottom line.

    It isn’t bunk, it is the most widely acknowledged and understood principles among economists and corporate tax practitioners. Just because you don’t have the background to grasp the concept doesn’t mean that it is bunk… it just means that you don’t get it.

    That’s ok, it isn’t a slam. I don’t really understand most matters involving physics…but I also don’t tell physicists that they have no idea of what they are talking about either.

    ALL taxes are paid by the individual. Corporations are merely another collection avenue. Corporations pay property tax, but again, their overhead is built into their price point. WE pay their property taxes, we pay their income taxes….

    Corporate taxes are merely an illusion. I don’t say this as some wacko tax protester… I say this as someone who makes his living preparing taxes and knows what’s what.

    • [Antinous / Moderator]

      Ceronomus,

      Cite the tax codes to prove your point. Otherwise, it’s just oratory.

• [Witchrayc]

  I find it interesting that Microsoft spends billions for welfare projects in other countries, while people in this country are being laid-off, our economy is in the toilet and people who worked their collective butts off all their lives never get to retire. If Washington state is so afraid of loosing Microsoft that they are giving this company “any” money or tax breaks to keep them, they should put a clause in their contract with this company that says that any money provided by the state as incentives to retain that business in that state should be recovered if the company chooses to leave the state for “greener” pastures.

  The International community have a choice of Microsoft or Macintosh OS with Microsoft being buggier than hell and Macintosh being way too expensive. The free OS Ubuntu can’t seem to make it, which makes one wonder why? I was always told that if a business or a person didn’t do a good job, you should not support them. Where is the consumers choice here?

  • [Cheqyr]

    “Losing.” Not “loosing.” One ‘o’. For the love of God.

    Make. It. Stop.

• [Ceronomus]

  But don’t take my word for it, actually take the time to research it. Look in the right places and you’ll have your eyes opened pretty quickly.

  I can also go on, at length, on the dangers of a National sales tax or flat tax system….

• [Anonymous]

  @#13 – Bill and Melinda Gates Foundation =/= Microsoft

• [Anonymous]

  If you want to get rid of tax problem, them you have to get rid of state taxes and increase federal taxes. However being a federal government as we all, there is no way the state want to give their power.

• [Tynam]

  Seeing as nobody’s taken space to say it yet: thanks Ceronomus for a detailed explanation of an insanely complicated subject.

  I know just enough price theory myself to understand that tax policy is one of the (many) economic areas prone to huge unintended consequences.

  Frankly, economics is one of those areas where there’s just no substitute for basic mathematical knowledge.
  (Of course, the MPs/Senators/whatever who actually pass tax laws have studied no such thing. As with most areas of the law, this doesn’t help.)

  (To anyone interested in learning some basic price theory: try Friedman’s book.)

  Avram: In general that’s certainly part of the problem. Large corporations (and for that matter, extremely wealthy individuals) have much greater access to dubious-but-completely-legal tax avoidance schemes like Microsoft’s.

  (After all, I can’t get out of my income tax by moving to a place that doesn’t tax income from intangible goods. A pity; most of my income is from creating software sold outside my country…)

  • [Ceronomus]

    Sure thing Tynam, you are most welcome. Taxes and tax theory is my living and I’m pretty passionate about it. Knowing the ins and outs allows me to steer my clients so that, with some serious tax planning, they can learn to take advantage of some of the tax breaks normally reserved for more wealthy individuals. It also allows me to protect them better in audit.

    Most individuals audited are in the low income areas. Schedule C returns (P&L from self employment) are the most commonly audited and entertainers are the most commonly audited among those.

    I’d love to see our system get simplified, but I’ve heard ZERO in the way of good suggestions. Both the flat tax and the Federal Sales tax would be catastrophic in replacing the income tax. They do serve to remind us though, if it looks like an easy fix in the tax system, it isn’t.

    Overall though, the code is brilliant. It covers so many potential events that it boggles the mind sometime. For example, the basic 1040 personal tax book actually has a small section on claiming a child for tax purposes if they have been kidnapped. Somewhere along the line, that question was raised and so now the answer is built into the code. It is a GRIM example, but still a fascinating one that demonstrates the amazing scope and complexity of the Internal Revenue Code.

• [Ceronomus]

  Anon, Microsoft isn’t being given any tax breaks (at least not in reference to this story). It is all a fallacy created by poor reporting. Of course RAISING their taxes will merely raise their prices, since corporate taxes are an illusion. We the consumer pay them in the first place, corporations merely collect and report them.

  And yes Anon 14, you are correct. However Microsoft itself is involved in a large number of green and charitable projects as well.

  Like I aid, there is plenty of stuff to scream at Microsoft over, but not a non-issue caused by sloppy reporting with no real fact checking.

• [Fifth]

  “It is all a fallacy created by poor reporting. Of course RAISING their taxes will merely raise their prices, since corporate taxes are an illusion. We the consumer pay them in the first place, corporations merely collect and report them.”

  Wrong.

  • [Ceronomus]

    No, quite correct actually. All corporate taxes are paid based on their income in the first place. While the taxes are actually levied on the corporation’s numbers, those numbers come from teh money that we, the consumers, pay. Increase in taxes lead to increases in prices.

    Study tax theory and tax law for a while and this becomes VERY clear.

    To be fair, I keep the Internal Revenue Code as my bathroom reading, your basis for understanding may vary.

  • [Ceronomus]

    Really, a layperson doesn’t have a great chance of understanding everything involved in this story to begin with. I am assuming that is why the person who originally started all this believes what he does…and I do think that he honestly BELIEVES what he is saying. It is just that he is totally off-base and wrong.

    Taxes and tax law is how I make my living. I don’t expect people to just take my word for it based on those statements, but I expect that people should understand that they need to look a LOT further to even wrap their brains around it.

    People who don’t study economics generally get upset at the suggestions of economists…because they don’t understand them. Same with taxes.

    So yes, corporate taxes are an illusion, they are merely another tax on the consumer…

    Believe it. If you don’t? Study the way taxes work for about a decade or so and you’ll grasp it pretty easily.

• [Larry_B]

  FWIW, not only does MS run all of its commercial licensing through Nevada, they also manufacture all of their packaged products in Puerto Rico for tax reasons, although I’m not 100% sure how that works.

  For what it’s worth, giving MS a tax break is probably a good deal considering that, through its employees, it pumps a HUGE amount of money into the local economy. Without MS and the businesses it spins off or its former employees create, Bellevue would probably dry up and blow away, and Seattle would take a beating too.

  • [Ceronomus]

    Well, once you wrap your head around the fact that Microsoft doesn’t owe any back taxes, it becomes very clear that the new reductions aren’t a tax break for Microsoft so much as a tax break for other companies BECAUSE folks like Microsoft will be adding to the pool, and those contributions will be massive…in theory.
    But yes, having Microsoft in their backyard is of HUGE benefit to Washington. I think that the original article was inspired by a misunderstanding of the law coupled with the unbounded hatred of all things Microsoft that some people have.

    As I’ve said, there are plenty of reasons to scream about Microsoft, this just doesn’t happen to be one of them.

    Honestly, looking over the bill I’m wondering if there will be some serious legal challenges to it on the grounds that it interferes with cross-state commerce. The scope of the law is a bit broad and it should be interesting to see how it plays out.

    But yes, Bellevue losing Microsoft would be like Las Vegas losing gambling.

• [Ceronomus]

  It isn’t a matter of tax code Antinous, the tax code does indeed (as I have agreed) levy an income tax upon net profits. That does not change the basic economic *reality* that corporations factor in all of their overhead, including taxes into their prices. This is a basic business principle, you account for all of your costs in your price point. This is something that all businesses do. If your costs go up, your prices go up. Corporate taxes are simply another cost of doing business.

  Again, this is a recognized principle in economics and in the tax industry. You don’t have to like it, but it is so. Raise corporate taxes, prices go up. If this was not the case, prices would NOT go up, profits would simply shrink. The very fact that this is NOT what happens, reinforces the point. That is about as basic an explanation that I can make.

  Now, it is easy to cite law that shows that all this hoopla about Microsoft getting 1 billion dollars in tax forgiveness is BS, one only needs to actually read the law cited on the web-page making the claim.

  HB 3176 – 2009-10 is pretty clear. That said, the website itself cites reviews without even really understanding them.

  One need look no further for a description of Microsoft’s Nevada tax dodge than the state’s own Office of Financial Management assessment of HB3176 (pg. 3):

  “Royalty income is not apportioned in this state. Rather, royalties are allocated to the domicile of the taxpayer. Businesses that are domiciled outside of Washington, but authorize the use of their intangible property in Washington, do not pay any B&O taxes in Washington on royalties received from the use of their intangible property in this state. This has led some Washington-domiciled taxpayers to transfer their intangible assets to wholly-owned subsidiaries whose sole place of business is outside of Washington. Sometimes these subsidiaries are domiciled in states, such as Nevada, that do not tax income from the use of intangibles.”

  This action is wholly legal, and yet is the foundation of the argument used AGAINST the bill in the first place. The bill works to close the above mentioned loophole, but the reason it needs to be closed is BECAUSE it is legal.

  You might call it oratory Antinous, but the fact is that a great number of folks don’t have a deep understanding of economics. Much of this isn’t something that is really easy to explain, but I have tried to make it easy for a layperson to understand.

  As it stands though, my original point still stands.

  Flat out, there is no amnesty.
  Flat out, Microsoft has not been under-reporting its income (At least in this case).
  Flat out, Microsoft does not owe a billion in back taxes.
  Flat out, the headline to this article has no basis in reality.

  • [Antinous / Moderator]

    You might call it oratory Antinous, but the fact is that a great number of folks don’t have a deep understanding of economics.

    Yeah, but if you keep saying that you’re right because you’re an extra-special expert who knows special things that nobody else knows, but you neglect to provide any proof, it’s just oratory.

  • [Avram / Moderator]

    Ceronomus, I’ve heard this thing about corporate income and prices before, and here’s something I’ve wondered: Can’t the same thing be said of personal income taxes? If the government taxes away a chunk of my income, that’s less money I have to buy stuff with, and therefore less revenue for some bunch of corporations.

    Now, there are some people who argue that all taxes should be done away with. If you’re an anarcho-capitalist, then fine, at least you’re being consistent. But I hear the anti-corporate argument from people who aren’t anarcho-capitalists, all the time. What’s up with that?

    • [holtt]

      Followup – good post. Encourages dialog and learning. I withdraw some of the stink (esp last sentence) from last post :)

    • [Ceronomus]

      Sorry Avram, I missed your first post.

      I’m not actually arguing AGAINST the collection of corporate income taxes. I’m not saying that they are evil, I’m merely pointing out how they actually work.

      Ceronomus, I’ve heard this thing about corporate income and prices before, and here’s something I’ve wondered: Can’t the same thing be said of personal income taxes? If the government taxes away a chunk of my income, that’s less money I have to buy stuff with, and therefore less revenue for some bunch of corporations.

      - Taxes themselves are a necessary evil to support the programs that the government provides, police, fire dept, parks…. the list goes on, I’m not against the collection of taxes. I just wish people would be honest with themselves when looking at taxes and where they come from.

      Now, there are some people who argue that all taxes should be done away with. If you’re an anarcho-capitalist, then fine, at least you’re being consistent. But I hear the anti-corporate argument from people who aren’t anarcho-capitalists, all the time. What’s up with that?

      That one is a bit harder for me to answer, as I’ve said, I’m not for the elimination of taxes. I am for a simpler system, and I wish that Congress would stop thinking that the ability to write tax code means that they understand what they are doing. Generally any time we have major tax code revisions (such as the close to 800 pages added to the code with the mortgage bailout bill) it takes YEARS at minimum to work out all of the new interrelations with how the new code works with the old.

      Of course, all of this does get more than a little off topic, but I’m more than happy to continue to try to answer your questions about taxes here or off-chan.

  • [Avram / Moderator]

    A few more questions for Ceronomus:

    You’ve been using the word “illusion” to describe corporate taxes. But your argument seems to be based on the idea that the people benefitting from the taxation are the same group paying the higher prices. But that’s not necessarily so. Couldn’t corporate taxation be thought of as a form of sales tax? (OK, you don’t like sales taxes either.)

    In the particular case under discussion — Microsoft and Washington State — the taxes benefit people in Washington State, but any increase in prices can be spread out over the entire worldwide software-buying community. Doesn’t that change matters?

    Doesn’t the federal government allow corporations to deduct state taxes from their federal taxable income? One billion in state taxes doesn’t necessarily amount to one billion in lost profits for Microsoft.

    Haven’t corporate taxes declined dramatically over the past decade? Why haven’t prices also declined for most goods?

    • [Ceronomus]

      Ok, some good questions. Let me answer them one at a time.

      You’ve been using the word “illusion” to describe corporate taxes. But your argument seems to be based on the idea that the people benefitting from the taxation are the same group paying the higher prices. But that’s not necessarily so. Couldn’t corporate taxation be thought of as a form of sales tax? (OK, you don’t like sales taxes either.)

      - Actually, it isn’t that I dislike corporate or sales tax, only that the “Corporate” moniker is an illusion. I don’t like the idea of a Federal sales tax to replace the income tax because it would shift even more of the tax burden to the middle and lower classes. That said, YES, corporate tax can very easily be viewed as a form of sales tax, it is merely the manner of collection that differs between the two. Sales tax is not paid by retailers, merely collected by them.

      In the particular case under discussion — Microsoft and Washington State — the taxes benefit people in Washington State, but any increase in prices can be spread out over the entire worldwide software-buying community. Doesn’t that change matters?

      - I’m not arguing against the tax change in Washington. I’m pointing out that Washington State is working to close a loophole that has allowed Microsoft to legally avoid paying a Washington state tax. Now, the problem with what Washington State is trying to do, and a few people have noticed it, is that they are essentially passing on a Washington state tax on to folks outside the state by the way they are wording portions of the bill. That has some interesting ramifications and it will be interesting to see what, if any, legal challenges might spring up.

      Doesn’t the federal government allow corporations to deduct state taxes from their federal taxable income? One billion in state taxes doesn’t necessarily amount to one billion in lost profits for Microsoft.

      - First, there was no 1 billion in State taxes that Microsoft owes in back taxes. They used a legal tax avoidance method. Now, if the bill is passed and Microsoft continued to try to use the same technique, they would indeed build up a tax issue.

      Haven’t corporate taxes declined dramatically over the past decade? Why haven’t prices also declined for most goods?

      - That is indeed my favorite question, and the point where we, the consumers, get the shaft. The perfect example is the corporations who moved to Bermuda to avoid paying ANY US taxes. Did they lower their prices? No. Instead they used the ability to legally avoid paying taxes int eh US to raise their profit margin. One can easily make the argument that ethically they should lower their prices but instead, they already have a price level that the consumer is used to paying and so they instead increase their profitability without needing to visibly raise their prices.

      Sadly, corporate greed (one of the things that Boing Boing often rails against) is a very real thing. As corporate taxes have come down, stockholders want more money. Thus, prices don’t come down AND, when taxes go up, prices are raised to continue meeting the new and improved profit margins.

      Thanks for the questions.

• [frankieboy]

  is that a Mel Gibson reference?

• [JeffF]

  Microsoft started in Seattle because Bill Gates and Paul Allen happened to grow up there.

  It was able to grow there because of the University of Washington.

  Tax cuts for Microsoft + financial squeeze on the universities = a future where companies like Microsoft don’t stay in the state.

  The headquarters will move wherever the CEO wants to live, like how Boeing moved despite massive tax breaks.

  Same is true for tech companies in California.

• [NineInchNachos]

  Mel Gibson a fitting personification of corporate personhood eh?

• [braininavat]

  hahaha – I bet the Microsoft corporate person/legal-entity is crying all the way to the bank.

• [Adam Gurri]

  What I like is the subtlety of the humor

• [benher]

  Has anyone ever seen an actual bag with a dollar sign written on the side? Where does that iconography come from?