Microsoft has lost an interesting court case, involving $16 million in back taxes and associated interest, that will have huge ramifications for other companies in the PC industry. In a decision against Microsoft, the U.S. Tax Court ruled that the company misused a benefit that allows corporations to exempt 15 percent of their income from international sales, a practice that is common with high tech companies and heavy industries. Microsoft was seeking a $16 million refund for taxes it paid in 1990 and 1991, taxes related to the sale of software in international markets. The U.S. Tax Court, however, says that software products do not fall under this exemption.
"During 1990 and 1991, \[Microsoft\] engaged its wholly own subsidiary, a foreign sales corporation, to act as its agent for the international sales of \[its software\]," the ruling reads. "The software products were copyrighted articles sold without a right to reproduce abroad. The software masters were licensed to related foreign subsidiaries with a right to reproduce abroad. \[Microsoft\] allowed the deductions for the foreign sales corporation commissions attributable to the standardized software products but denied them with respect to the export of software masters. The issue is whether the software masters constitute 'export property' \[according to IRS regulations."
The affected products include MS-DOS, Windows, LAN Manager, XENIX (a UNIX variant that Microsoft was still producing at the time), GW BASIC, OS/2, Word, Excel, PowerPoint, Flight Simulator, and more. Essentially, the Court found that Microsoft's software qualified as an export product, but that the disk masters used to make the international versions of its software did not. Thus, Microsoft must pay the taxes it owes on sales to foreign markets, as it did not directly export those products directly. Even Microsoft competitors such as Oracle are rising to Microsoft's defense, as this decision affects all U.S. software companies that export products overseas. For smaller companies, especially, the tax liability could be debilitating.
You can read the decision against Microsoft--which is fairly dense--on the U.S. Tax Court Web site