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Microsoft Escapes Death, Taxes

By Tim McDonald
Oct 12, 2000 12:00 AM PT

Here's a brief trivia quiz for would-be corporate accountants. How much federal income tax did Microsoft (Nasdaq: MSFT), the supreme ruler of the known software universe, and Cisco Systems (Nasdaq: CSCO), second only to General Electric as the most valuable company in the U.S., pay this past year?

Microsoft Escapes Death, Taxes

Combined or separately, the answer is zilch, nada and not a cent.

What a revelation. Now I know why Bill Gates is the world's wealthiest working stiff, with some $60 billion (US$) and change at his disposal. But hey, by my hurried, extraordinarily inaccurate calculations, even I could build myself a home bowling alley if I didn't have to send half my income to the Feds.

Stock Option Weasels

So, how do Microsoft and Cisco weasel out of paying taxes? Why, with the popular new high-tech salary-substitute -- stock options.

Microsoft reported $4.74 million in federal and state tax liabilities, but reaped a $5.5 billion tax benefit by deducting the profits its employees made from stock options. Cisco wrote off a $1.8 million tax liability by doing the same thing.

Even stodgy, conservative, pro-business, anti-tax groups have criticized a system that could allow such obscenely profitable corporations to slither out of paying their fair share.

"The average American, when they see big corporations not paying their fair share, they're outraged," Taxpayers for Common Sense spokesman Keith Ashdown told the E-Commerce Times. "When they hear about corporations welching off the system, they go berserk."

Are Printing Costs Deductible?

That's only where the insult starts. In effect, Microsoft never actually had to spend a dime to provide the options, even though it deducted them. The only expense the company incurred was the cost of printing out the stock certificates.

"Because they're giving stock options, no one outside their company benefits," Ashdown said. "It's insulting."

Microsoft even received a little cash via the payroll deductions employees used to exercise their options. Meanwhile, the employees get taxed when they exercise their options and pay that tax out of their own cash wages.

Add in the "warrants" Microsoft sells on its own stock to mutual fund managers, combined with the money it saved through stock option loopholes and income from its own employees, and Microsoft made $5 billion in the stock market its last fiscal year.

Oh, yeah. That's tax-free.

Taking Advantage

Pardon me if you think I'm treading a well-worn partisan path, once again ranting about the inequality of yet another in a seemingly endless series of infuriating corporate tax loopholes. But this one simply isn't right.

I don't mean it's incorrect, inaccurate or illegal. I mean it's slimy and vaguely grotesque, even if the new economy is the driving force behind this fabulous, fat-cat-rich, best-of-all-possible Americas we're living in like Arabian knights of yore.

I can already hear the reactions: "Look, Mr. Naysayer, Microsoft and Cisco didn't write the tax codes." No, they didn't. Not literally. But all the money they saved from not paying taxes -- literally, billions of good, American dollars -- was available to pay the right high-powered lobbyists to target the right people in Washington, who in turn oversee the tax loopholes -- excuse me, tax laws.

Mind Games

Microsoft and Cisco are doing more than raiding the system and dodging their fiscal responsibility. They're setting a bad example, and others are following it.

"The big problem now for the IRS is more and more people avoiding paying taxes, perpetrating tax fraud," Ashdown said. "This is the reason why they do it. They see something like this."

Microsoft and Cisco are exploiting New Economy fever. They have us all hoodwinked into believing that if we're insane enough to place any kind of tax anywhere near anything remotely connected to this incredibly lucrative but fragile phenomenon called e-commerce -- get that tax away from that laptop, quick! -- the whole system will come crashing down and we'll be back to manual typewriters, ball-point pens and working for a living.

Where's that groundswell of uproar and protest when you need it?

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What should be done about UFOs?
World governments should cooperate to address a potential planetary threat.
The DoD should investigate -- they could signal a hostile nation's tech advances.
The government should reveal what it already knows.
The government probably has good reasons for secrecy and should be trusted on this.
Wealthy corporate space-age visionaries should take the lead.
Nothing. Studying UFOs is a waste of resources.
Keep the stories coming. People love conspiracy theories, and it's fun to speculate.