Tech News : Friday, October 30, 1998
Tech tax break hurts Redmond
by Keith Ervin
Seattle Times Eastside business reporter
When it comes to taxes, anyone can make a
mistake.
Even Microsoft, a corporation with annual sales of
$15 billion.
When it recently overpaid its sales-tax bill,
perhaps by as much as $12 million, the company
wasn't even aware of it.
But the city of Redmond, which relies on sales-tax
revenues for about one-third of its general-fund
budget, sat up and took notice.
Now the state is conducting an audit, and Redmond
has set up a $1.6 million reserve fund to cover the
amount it must refund.
The snarl demonstrates the irony that a corporate
tax break, designed to keep Washington's economy
competitive, has helped its biggest beneficiary -
Microsoft - far less than it has hurt the company's
hometown.
"Devastating" is the word Redmond City Council
President Richard Cole uses to describe the effect
the tax break has on Redmond's budget. Because of
Microsoft's size and its explosive growth,
Redmond has been harder hit by the high-tech tax
break than have Washington's 278 other cities
combined.
Of the 19 Redmond companies that have applied
for the tax exemptions, Microsoft accounts for
more than 95 percent of the dollar amount.
Moreover, between January 1995 and June 1998,
Microsoft represented 55 percent of the dollar
amount of all high-tech exemptions in the state.
The loss of revenue has hurt Redmond's ability to
keep up with its growth, especially to improve
roads in Overlake, where Redmond and Bellevue
say they need $100 million to reduce traffic near
the Microsoft campus. Combined with a slump in
retail sales taxes, Redmond now faces a budget
crunch that the mayor proposes to solve by raising
the property-tax rate.
Redmond, which unsuccessfully lobbied the
Legislature to restore the city's share of the
high-tech sales-tax break, had been bracing for the
blow when the tax exemption (originally a
deferral) took effect three years ago.
But by the end of 1996, tax payments had not
dropped by the amount anticipated, and staffers in
the Finance Department wondered why. They
looked closer and found that some Microsoft
contractors were paying more tax than ever.
"Putting two and two together wasn't difficult,"
said Redmond Finance Director Lenda Crawford.
It turned out that Microsoft inadvertently paid taxes
on some construction projects in 1995 and 1996
and unnecessarily paid taxes on new computers as
recently as 1997 - all the result of what the
company calls "a paperwork mix-up."
Crawford said Microsoft obtained exemption
certificates from the state but failed to give copies
to some of its vendors, who billed for sales tax.
No one knows how much Microsoft overpaid; the
state Department of Revenue is conducting an audit
to find out.
If Redmond's estimate is correct, Microsoft's total
overpayment may top $12 million.
That doesn't mean Microsoft hasn't benefited from
the tax breaks. The overpayment represents just
part of the $63 million in exemptions the company
has sought on $758 million worth of new buildings
and equipment since 1995.
Those exemptions represent a revenue loss of $7
million for Redmond.
The high-tech tax break goes back to 1994, when
then-Gov. Mike Lowry persuaded the Legislature
to defer taxes for high-tech companies investing in
new facilities for research and development.
Much of the original focus was on the
biotechnology industry, where hundreds of millions
of dollars are needed to develop a product. But the
tax deferral on construction and new equipment
was extended to advanced computing, advanced
materials, electronic devices and environmental
technology.
In 1995, the tax deferral was converted to a full
exemption as part of a larger package of corporate
tax breaks. Microsoft didn't lobby for the
exemption.
"Many of these big players don't even have to say
anything," said Redmond Mayor Rosemarie Ives.
"The elected officials are so focused - their
mindset is to please them - that they don't even
have to do anything."
Microsoft's expansion may be a mixed blessing for
Redmond, but it's a blessing most cities would
eagerly embrace. Microsoft has brought the city
new tax-paying residents, and the company itself
has become the city's leading payer of property
taxes and of a $65-per-employee head tax imposed
last year.
"We're willing to pay our reasonable share of the
cost associated with our success," said Microsoft
spokesman Dan Leach. "That's what we're working
to do. We're happy and pleased to be able to do
that."
Leach said Microsoft did not oppose the head tax
that helped to offset the loss of the sales tax.
But the tax exemption has forced Redmond to find
creative ways of balancing its budget.
Issaquah may face a similar situation if Microsoft
exercises its option to buy land in the Issaquah
Highlands development for a 3 million-square-foot
campus.
Based on Redmond's experience, the high-tech tax
exemption could save Microsoft about $69 million
- and cost King County and Issaquah $8 million.