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.

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?

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.

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

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?

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.

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.

Make. It. Stop.

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.

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.

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.”

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.

That’s the easy one.

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.

“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.

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.

“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.

“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.

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?

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.

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).