Creative Capatalism and Interstate Commerce

As currently being discussed on Slashdot, and as pointed out by Jeff Reifman on Crosscut, Microsoft has been taking advantage of Interstate Commerce laws to sell nearly 31% of it’s products out of an operation in Nevada instead of it’s Redmond, WA based headquarters. This has translated to Microsoft not paying the State of Washington over a half a Billion dollars in Business and Operations taxes over the past 10 years.

As a nearly lifetime resident of Washington State, employee at a state institution, and small-business owner, I have mixed feelings about this practice on Microsoft’s part. I certainly understand why Microsoft has tried to avoid nearly $50 Million in B&O taxes every year, even though I myself am not yet large enough to warrant collection of B&O taxes, I certainly am looking for ways to minimize my tax liability, both to State and Federal agencies. I’ve often heard of companies creatively taking advantage of interstate commerce to avoid heavy taxes, like airlines minimizing time spent in Washington Airspace, or Eastern-Washington companies founding Idaho-based subsidiaries to house certain business functions at a lower tax rate.

Tax Law is rife with loopholes that good Controllers are able to find, and ofter relish in finding. Law is an incredibly complex thing, which is why Lawyers are often forced to specialize on a very specific aspect of Law. Unfortunately, we also live in an age of professional legislators, people who will spend decades involved in the business of making laws, who feel that since making laws is their job, they better keep making laws. This process tends to add to an already distressing legal quagmire, which tends to open more loopholes than it closes as new laws are not always strictly checked against existing laws. It’s like in the Software world when a bug is fixed in one part of an application or library that then proceeds to break a half dozen other bits of code that happened to depend on the undocumented and usually broken behaviour of the fixed code.

However, under no circumstances do I believe that the State of Washington should try to weaken Interstate Commerce by swinging a stick at Microsoft over this half-billion dollars in tax-sheltered income. For one, Microsoft would almost certainly try to leave the state at that point, something a state with an image of being unfriendly to business cannot afford. While that image is changing, Washington is still an expensive state to do business in, even according to the Forbes article.

While I think the State is going to have to just let this situation go, I still think that there are ethical issues involved in Microsoft’s decision to sell billions of dollars worth of product through a state who doesn’t charge a corporate income tax. Microsoft employs over 35,000 workers in the Puget Sound area, on over 11 million acres of property. Certainly, they are paying a significant amount of tax money on the property they own, and many of those workers are going to be paying other taxes on any property they might own. However, part of the purpose of the B&O taxes that Microsoft is trying to weasel out of, are to help pay for services that support Microsoft and it’s employees. Reifman’s article speaks of the SR520 bridge that leads from Seattle proper to the Redmond area, that has been needing replacement but struggling for funding for years. Certainly, not all of the 170,000 people who cross the bridge daily work for Microsoft, and it’s hard to say just how many of them do, but the B&O taxes the state collects aid in these sorts of projects, and I doubt Microsoft is the only company in that area using “Creative Capitalism” to avoid paying percentages of their state taxes.

The Tax codes need to be revisited, and reexamined. Virtually all business try to find ways to minimize their tax liability, even myself. However, I think we as businesspeople need to consider the the long-term effects of our decisions. Could Microsoft have afforded the ~$45 million a year they avoided by selling bulk licenses out of Nevada? Almost certainly. The question is whether saving that money was worth the lost taxes to the state. I’m not sure I trust to state to always spend it’s money the way I think would be best, so I’m not willing to make a judgement on that directly. I do suspect though, that some projects or programs that would have directly benefited Microsft employees (and by extension, the company itself) may have been negatively impacted by this.