How much income tax do Washington state’s biggest public companies pay?
As many of us labor over our tax returns (this year’s filing deadline was extended to May 17), it may be illuminating to see how much — or how little — some of our biggest corporate neighbors have reported in income taxes.
Which local corporation had the largest income tax bill last year? Based on the public filings of Washington’s 10 largest public companies by 2020 revenue, that was Redmond-based Microsoft, which reported $3.5 billion in U.S. federal income tax in fiscal year 2020. Seattle-based timber giant Weyerhaeuser had the highest percentage of its U.S. income going toward taxes: 21.2%.
Which of those companies paid the least? Nordstrom and Expedia both reported zero U.S. federal income taxes for 2020, in part due to losses incurred during the pandemic.
Corporate taxes have long been a political flashpoint, with policymakers and experts arguing over whether U.S. companies contribute too much or too little in paying for defense, Medicare, Social Security and other parts of the federal budget.
The “too much” camp got a win in 2017, when Congress passed the Tax Cuts and Jobs Act, which lowered the top statutory corporate tax rate from 35% to a flat 21%.
But in April, the Biden administration proposed raising the corporate tax rate to 28% to help cover a $2.3 trillion infrastructure plan. And many tax reform advocates want to eliminate various loopholes that let corporations sometimes pay less of their income in taxes than do individual taxpayers, who are currently taxed at a maximum rate of 37%.
In reality, corporations rarely pay the statutory tax rate. Instead, like any taxpayer, companies can use tax deductions, credits and other methods to minimize their federal income tax. They can deduct any state or foreign income taxes, for example. They also enjoy tax-related benefits that individuals don’t, such as deductions for stock-based compensation given to employees.
As a result, some companies have an “effective” tax rate — income tax as a percentage of profit — that’s less than the 21% statutory rate.
Effective rates can be useful in explaining “how much [tax] revenue goes to the federal government to fund programs,” says Crystal Finkelstein, a tax expert and associate teaching professor at the University of Washington Foster School of Business.
Effective rates are also relevant as policymakers consider deeper reforms of a corporate income tax system that has required companies to shoulder a smaller portion of the federal budget than used to be the case.
In 1952, the share of federal revenue from corporate income taxes was around 32%, according to the Tax Policy Center. As of 2019, it was 9%, according to the center.
The list of companies below, arranged from largest to smallest by their 2020 revenue, shows their reported profit, taxes and effective tax rates in 2020.
It also comes with major caveats.
First, these tax figures come from the companies’ year-end public filings with the U.S. Securities Exchange Commission. As such, they’re based on the earnings estimates that companies have calculated at the end of their fiscal year (which for most — but not all — companies ends Dec. 31).
By the time companies complete a tax return, which isn’t public, with the U.S. Treasury or other taxing authorities, the estimates may have changed, says Finkelstein.
As important, there are also critical timing differences between the way the SEC and the IRS treat taxes and other financial information.
One key difference relates to the timing of tax deductions, which allow companies to reduce their taxable income. For example, a company that plans to deduct the expense of new equipment is typically required by SEC rules to spread that “depreciation” deduction over five to seven years in their SEC filings.
But under tax law, that same company might be allowed to take the entire deduction in a single fiscal year, and thus lower the amount of cash it actually pays to the U.S. Treasury for that year, says Finkelstein.
Such timing differences can lead to big swings in the amount of taxes that companies report to the SEC from one year to the next, she says.
Over time, these two sets of tax numbers typically catch up with each other and the tax numbers in the SEC filings can offer “a reasonable approximation” of the taxes the companies actually pay over a period of years, says Thomas Gilbert, an associate professor of finance at the Foster School.
But “looking just at one year can be very misleading,” Gilbert adds. “In a given year, it may seem as though the tax liability on the [SEC filings] is minuscule or gigantic.”
Relatedly, there are several ways to measure a company’s effective tax rate.
In their SEC filings, many companies report an all-in tax rate, which includes all federal, state and foreign income taxes as a percentage of global earnings.
The all-in rate can include other tax-related factors as well, such as updates to previous estimates, resolutions of earlier tax disputes and the effects of new tax laws, as well as deferred income taxes — that is, tax that gets reported in SEC filings but isn’t actually paid until later years.
The average all-in effective income tax rate for U.S. corporations in 2019 was 24.6%, according to a study by the Organisation for Economic Co-operation and Development.
Some tax policy experts prefer a narrower, U.S.-only effective tax rate — that is, U.S. income taxes as a percentage of a company’s U.S.-generated income — which is often lower than the all-in rate. In 2018, the U.S.-only effective tax rate averaged 11.3%, according to an analysis of 379 profitable U.S. corporations by the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP), which scrutinizes the tax filings of America’s biggest companies.
According to Matt Gardner, a tax expert and senior ITEP fellow, a U.S.-only effective rate allows for a comparison of a company’s tax bill and the 21% statutory corporate rate.
In the list below, the U.S.-only effective tax rate is calculated using ITEP’s formula, which divides a company’s publicly reported U.S. pre-tax income (minus its reported current state income tax, which is deductible) into its reported current U.S. income tax.
Although the Seattle-based retail and cloud-computing services giant is famous for its aggressive tax-reducing strategies — it reported no federal income tax in 2017 and 2018, despite billions of dollars in profits for both years — the company reported a relatively large 2020 tax bill, thanks in part to a large pandemic-related increase in profit over 2019.
In 2020, Amazon reported $1.8 billion in federal income taxes (and around $600 million in state income taxes) on $20.2 billion in U.S. income.
Using the ITEP formula, Amazon’s effective U.S. income tax rate for 2020 was 9.4%.
Amazon’s all-in effective tax rate for 2020 was 11.8%, based on figures in its SEC filings.
Like all corporate taxpayers, Amazon benefits from an assortment of tax deductions. An important one for Amazon and other tech firms lets them deduct some of the value of “restricted stock units,” or company shares, that are included as part of employee compensation — much as companies can deduct the expense of regular salaries. (Employees receiving restricted stock units pay income tax on them.)
“Amazon’s taxes, which are publicly reported, reflect our continued investments, employee compensation, and current U.S. tax laws,” a spokesperson said in a statement.
Costco sales and profit also jumped last year, and that shows in its taxes for its fiscal 2020 (which ended Aug. 30): The Issaquah-based retailer reported $616 million in federal income taxes on around $4.2 billion in U.S. income.
That resulted in an effective U.S. income tax rate of 15.5%.
Costco’s all-in effective income tax rate for 2020 was 24.4%. That partly reflects the company’s relatively large state and foreign tax liabilities and large amount of deferred income taxes.
“Costco pays taxes in every country in which it operates and is conservative in its tax positions,” a Costco spokesperson said.
In its 2020 fiscal year, which ended June 30, the tech firm reported federal income taxes of $3.5 billion on U.S. income of $24.1 billion, for an effective U.S.-only tax rate of 15.1%.
The company’s all-in effective tax rate in 2020 was 16.5% — and reflected a reported total tax bill of $8.8 billion on worldwide earnings of $53 billion.
In 2020, Microsoft reported nearly $1.2 billion in tax savings from deducting stock-based compensation.
And like other manufacturers of “intangible” products, such as software and other intellectual property, which can be easily manufactured in multiple locations, Microsoft has also reportedly enjoyed tax savings by shifting some income-generating operations to countries with lower corporate tax rates, including Ireland and Puerto Rico.
Some of Microsoft’s tax strategies reportedly have been questioned by the Internal Revenue Service.
Microsoft confirmed the Times’ characterization of its public tax data, but declined to offer additional comment.
In 2020, Bellevue-based T-Mobile, the nation’s second-largest cellular service provider after Verizon, reported $17 million in federal income taxes on $3.5 billion in U.S. earnings, for a U.S. effective tax rate of 0.5%.
By contrast, T-Mobile’s all-in effective income tax rate for 2020 was 22.3%, in part because of hefty state income taxes.
T-Mobile’s low federal income tax liability in 2020 reflected several factors, including deductions for stock-based compensation and for investing in expanding its cellular network and tax credits for research and development, the company said. T-Mobile also got tax savings from large net operating losses associated with its 2020 merger with rival Sprint.
T-Mobile confirmed the Times’ characterization of its tax data.
The Seattle-based coffee giant was hit hard by the pandemic: Profit in its 2020 fiscal year (which ended Sept. 27) was down 74% over 2019.
In its fiscal 2020, Starbucks reported $49.9 million in U.S. income tax on around $905 million in U.S. profit, for a U.S. effective tax rate of 5.8%.
Starbucks officials emphasized that SEC tax figures do not represent actual tax payments.
In a statement, the company noted that for fiscal year 2020, it actually paid more than $1.7 billion dollars in global income taxes, “the majority of which was for U.S. federal income taxes.”
By way of comparison, Starbucks’ U.S.-only effective tax rate for 2019 was 46.1%. Starbucks’ all-in effective income tax rate for fiscal year 2020 was 20.6%.
The Bellevue-based maker of medium- and heavy-duty trucks reported $182.5 million in federal incomes taxes on $1.1 billion in U.S. income for a U.S.-only effective tax rate of 16.9%.
Paccar’s all-in effective income tax rate for 2020 was 21.7%, which reflected reported payments of state and foreign income taxes, according to SEC filings.
“PACCAR takes pride in being an outstanding corporate citizen that believes in paying its full tax liability under the law,” the company said in a statement, adding that it benefits from tax credits for research and development.
The Seattle-based retailer saw its earnings turn negative during the pandemic, and that’s reflected in its income taxes.
In its 2020 fiscal year, which ended Jan. 30, Nordstrom reported a federal income tax “benefit” of $501 million on a U.S. loss of $1.21 billion, for a U.S.-only effective tax rate of 41.4%, according to figures from its 2020 SEC filings. (Tax benefits aren’t necessarily refunds; some are used to offset a company’s final tax bill.)
Nordstrom’s all-in effective income tax rate for 2020 was 43.8%, representing a $538 million tax benefit on a $1.23 billion global loss, according to its 2020 SEC filings. (A company reporting a tax benefit on a loss uses a positive percentage for its effective tax rate.)
One factor in Nordstrom’s tax benefit: a provision under federal pandemic legislation, known as the CARES Act, lets companies “carry back” their 2020 losses to prior years and use them as a credit against income taxes paid at the earlier, higher corporate tax rate of 35%.
“We have aligned our policies and procedures to ensure we’re in compliance with all applicable tax laws and regulations,” a Nordstrom spokesperson said in an email.
The Seattle-based logistics and freight-forwarding company reported $37.6 million in federal income tax on $325 million in U.S. income for a U.S. effective tax rate of 12.2%.
Expeditors’ 2020 all-in effective tax rate was much higher — 27% — which was likely due in part to roughly two-thirds of its income being generated and taxed outside the United States. (The company did not respond to questions about its taxes.)
The timber company reported $147 million in U.S. income taxes on $723 million in U.S. income for a U.S. effective tax rate of 21.2%.
Weyerhaeuser’s global rate was 18.8%, which partly reflected the inclusion of deferred taxes.
Weyerhaeuser confirmed the Times’ characterization of its tax data.
The Seattle-based online travel company was hammered during the pandemic along with the rest of the travel industry, and its tax bill appears to show the effects.
In 2020, Expedia reported a U.S. income tax benefit of $31 million on a loss of $2.4 billion in its U.S. operations, for a U.S. effective tax rate of 1.3%.
Expedia’s global effective tax rate was 13.4%, representing a $423 million tax benefit on a $3.2 billion global loss, according to calculations of data in its SEC filings. Expedia declined to comment on its taxes.