Why Washington state schools are #42 in education funding: Let’s start with Bill Gates

At a community forum that I attended about three years ago in the Central District, neighbors were meeting with Representative Eric Pettigrew and Representative Sharon Tomiko Santos regarding issues of concern.

There didn’t seem to be enough money for the public funded services that were needed including our schools.

One person got up and said that she was willing to pay a state income tax to begin to subsidize what was needed by the community. To my surprise, most  of the people in the audience applauded and shouted out that they would as well.

What is ironic about this is that the second wealthiest individual in the world and number one in the United States, according to Forbes, lives among us in Seattle and yet is not willing to pay his fair share of taxes to support the infrastructure that he used to create and maintain Microsoft including public education. On the other hand,  Gates is paying millions of dollars in our state to lobby for charter schools which is the privatization of a public good. He recently contributed $1M to the Charter School Initiative 1240.

There are two websites that provide detailed information on how Mr. Gates and now others in our state have dodged paying Washington State taxes just to have a few billion more in their pockets.

The first website is provided by David Spring M.Ed. and Director of  the Fair School Funding Coalition who is running against Chad Magendanz (remember him?) for state legislator.

His article is titled:

Exposing Two Microsoft Scams… The Billion Dollar Tax Avoidance Scam and the HiB Union Busting Scam

Here is an excerpt:

 Last year, Microsoft reported making a record profit of $23 billion on $70 billion in sales.  Had Microsoft paid their fair share of State taxes, they would have paid 1.5 Percent times $70 billion – or one billion dollars in State taxes. This still would have left Microsoft a record profit of $22 billion – and they could have deducted the one billion in State taxes from their federal taxes. Instead, despite $23 billion in record profits, Microsoft paid next to nothing in State taxes!

Documenting Microsoft’s Billion Dollar per year State Tax Scam

Like Boeing, Microsoft receives all kinds of hidden tax breaks – like millions in credits for equipment and property tax exemptions for their intangible property. But we will focus on the biggest State tax break, namely the Software Royalty License tax scam.

 The Washington State B&O Software Royalty Tax applies to “…every person engaging within this state in the business of receiving income from royalties…for the granting of intangible rights, such as…software licenses.” Furthermore, “Royalty income from software licenses is taxed at the ‘domicile,’ or location, of the owner of the property.” Because it is a wholesale tax, it applies to sales regardless of the location of the customer – whether in the U.S. or in another country.

 Our State’s Software Royalty License tax rate historically has been 1.5%. However in 1998, under pressure from Microsoft, the State legislature reduced this rate down to 0.5%. Nearly all of Microsoft’s revenue comes from selling software licenses.

One might assume that with $70 billion in gross sales, Microsoft would pay State sales taxes of 0.5% times $70 billion – or $350 million per year. But they don’t. According to a former Microsoft manager who has devoted an entire website to this subject (microsofttaxdodge.com), Microsoft ships about half of its licenses or $35 billion per year to Nevada where there is no corporate tax. The sole reason to do this is to evade paying $350 million per year in corporate B & O royalty taxes in Washington State.

Instead of taking Microsoft to court for tax evasion, Ross Hunter, State Rep from Bellevue and Microsoft’s head lobbyist in Olympia, passed a bill in 2010 which exempted Microsoft from having to pay this B & O Royalty tax. To add insult to injury, during the same legislative session, Ross also raised the B & O tax rate on many other businesses from 1.5% to 1.8% to make up for the fact that Microsoft was not paying their fair share. http://microsofttaxdodge.com/2010/04/microsoft-gets-nevada-royalty-tax-cut-and-tax-amnesty.html

What would Microsoft pay if this tax exemption was eliminated and the royalty rate was restored to its historic rate of 1.5%? Microsoft’s sales for the current year were $70 billion. 1.5% x $70 billion = $1 billion.  The cost to Microsoft would be even less – because they could deduct their State taxes from their federal taxes.

Can the Legislature cut $1 billion in School Funding in order to give Microsoft $1 billion in corporate welfare?

There is a serious legal question as to whether the legislature even has a legal right to exempt Microsoft from paying one billion per year in State taxes at the same time that the legislature is cutting more than one billion dollars per year in school funding. Our State Constitution makes it quite clear that the Paramount Duty of our State legislature is funding public schools – not handing out one billion in corporate tax breaks to Microsoft. Microsoft is sitting on over $40 billion in cash. There is no significant benefit to Microsoft in their tax scam. But there is a real harm to our State’s one million school children in continuing with this sham. Because of Microsoft’s huge tax break, our schools are 47th in the nation in school funding and our kids are subjected to among the highest class sizes in the nation.

To read this particle in full and it is highly recommended to do so, go to:

Welcome to the REAL Washington State Budget!

The other website is Microsoft Tax Dodge.

Here is an excerpt from that website regarding Gates and his own special tax system:

Dummies Guide to Microsoft’s Nevada Tax Dodge

Update: Thx Slashdot, GeekWire & Macsurfer for linking. This blog has received a big jump in traffic since the New York Times’ story on Apple’s Nevada tax dodge. Here’s a simple summary for Seattleites learning about this for the first time:

In 1997, Microsoft et al. lobbied to reduce Washington State’s Royalty Tax from 1.5% to .5%, a threefold reduction. This wasn’t low enough. The company decided to open a small Reno, Nevada office to dodge the tax completely.

Between 1997 – 2011, the company used its Nevada office to avoid $1.51 billion in Washington state taxes, interest and penalties. If you include impacts from the company’s lobbying and calculate its savings at the original 1.5% rate, it’s saved $4.37 billion.

Since 2008, Washington State has cut $4 billion from K-12 and Higher Education. We rank 31st in K-12 spending. 18% of University of Washington freshman are now foreigners (because they pay more) up from 2% six years ago. We rank 47th nationally in 18-24 year old college enrollment and 48th in K-12 class size

In 2010, after we raised these issues to the legislature, Democratic State Representative Ross Hunter, Chair of the Finance Committee and a former Microsoft executive, led the Legislature to change the state’s Royalty Tax from a tax on sales to worldwide customers to just a tiny tax on sales to Washington State customers. This reduced Microsoft’s effective Nevada tax dodge by about 99%. He also included language that gave Microsoft amnesty on its back taxes.

Shortly after, Democratic Gov. Gregoire appointed another Microsoft Executive, Suzan Delbene, to run the Washington State’s tax department. Delbene is married to Microsoft President Kurt Delbene.

Gregoire regularly praises Microsoft for its $5 million annual scholarship fund for technical graduates at the UW saying it helps mitigates all the unfortunate cuts to higher education – while failing to mention Microsoft’s been saving $100 million annually through its Nevada tax office and the changes Hunter made to the law.

To find out more information, all of the details and relationships go to:

Microsoft Tax Dodge

There is absolutely no reason why our schools should not be adequately funded under our state constitution and it’s time to demand that happen.


Post Script:

I changed the ranking in the title of this post from #47 to #42 because after looking up various rankings, there are several, I chose to go with Washington Educator’s Association’s (WEA) numbers.

According to WEA:

Washington has lost more than 4,500 K-12 public school employees due to state budget cuts while student enrollment continues to increase.

Washington state ranks 48th in class size out of 50 states and Washington, D.C.

Other states have increased school spending at a faster rate than Washington.

Revenues for Washington’s K-12 public schools are lower than those for other states.

Washington ranks 42nd in the nation for per-pupil spending (2009).

Also, check out the National Education Association’s (NEA) report:

The Cost of Corporate Tax Avoidance


  1. Great article. Unlike the previous commenter, I disagree that the Gates Foundation does admirable work. Rather, as Gates et al defund (& thus degrade) public education through their corporate arm, they push education privatization through their foundation arm. It’s a one-two punch.

  2. Bill Gates’ business dichotomy
    Published 10:00 p.m., Sunday, April 24, 2005
    In a recent speech before the National Education Summit on High Schools, Bill Gates spoke of the dismal state of U.S. public schools. He called for action: “We’d better do something about these kids not getting an education, because it is hurting us” and ” … because it is hurting them.” He was speaking as co-chairman of the Bill & Melinda Gates Foundation, where high moral purpose is combined with analytical skill to accomplish crucial work in world health and U.S. education.

    As chairman of Microsoft, however, Gates is responsible for a business policy that actively harms public schools. Microsoft maintains a small office in Reno, Nev. — a state with no corporate income tax. Sixty billion dollars in licensing fees for Windows and Office software has passed through that office, and an estimated $300 million in taxes has been lost to Washington for the sale of products produced in Washington.

    Interestingly, the Gates Foundation funded a study not long ago that documents the decline of Washington public schools. Per-student funding is falling. Our class sizes are the fourth-largest in the country. Our teachers have the lowest salaries on the West Coast. An initiative to reduce class size passed overwhelmingly but remains unfunded. Class sizes continue to grow. And now Seattle Public Schools has a budget crisis.

    What do we make of this contradiction between Gates the philanthropist and Gates the corporate officer? A smart and generous man works to change the world for the better and yet runs a corporation at which the sensible obligation to pursue “the best interests of the corporation” is sometimes interpreted to mean “seek every possible financial advantage” — even if that advantage comes at the expense of the community to which the corporation belongs.

    It is not that Microsoft should become magnanimous — that is the proper (and admirably accomplished) role of the Gates Foundation. But Microsoft, and Gates, should understand that it is not in their best long-term interest to distort the honest relationship that can exist between a community and a corporation. This relationship is not always easy to assess; sometimes there will be honest disagreement about what community and corporation owe each other. But there will be other times when distortion is crystal clear. We can use the duck test: If it walks like a duck and quacks like a duck, it is a duck. The office in Reno walks like a tax evasion; it quacks like a tax evasion; it is a tax evasion.

    Microsoft’s familiar advertising slogan, “Your potential, our passion” is undercut by every transaction made in that Reno office. With every transaction, and with every unpaid tax dollar, Microsoft’s (business) passion reduces children’s potential, by making it harder to adequately fund our schools.

    Microsoft should do two things:
    Close the Reno licensing office, give up the tax shelter and henceforth pay its fair share of taxes.
    Repay the tax money it owes to the state of Washington.
    Gates has twice had a powerful effect on the world, once with Microsoft software and, more recently, along with his wife, in the work of the Gates Foundation. I ask Gates to be visionary one more time. I ask that he chart a new course for Microsoft and, by example, chart a new course for corporations everywhere. I ask that he adopt business strategies that accomplish his corporation’s best interests and show responsibility toward our communities and schools. Close the Reno office, refund the lost tax revenue, pay taxes honestly: These steps will make an excellent start.

    Read more: http://www.seattlepi.com/local/opinion/article/Bill-Gates-business-dichotomy-1171657.php#ixzz24rxJEhkm

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