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Tax case challenges Clinton

Microsoft is leading a nascent rebellion among software companies against the Clinton administration, challenging IRS regulations on foreign sales taxes.

Microsoft is leading a nascent rebellion among software companies against the Clinton administration with a formal challenge to IRS regulations on foreign sales taxes.

In a petition filed last week in U.S. Tax Court, the software industry leader charged that the Internal Revenue Service is unfairly denying software companies the kind of tax benefits allowed to film and music exporters on sales of overseas products. Because its products are duplicated and distributed overseas in the same kinds of processes, Microsoft says it is entitled to the same favorable tax treatment afforded entertainment companies that produce music CDs and videotapes.

"We are leading the way in asking that the software industry receive a fair interpretation of existing law," said Mike Boyle, chief tax counsel for Microsoft, in a statement. "The software industry is following the rules that Congress established to promote U.S. exports, to encourage economic development, and to provide American jobs."

The legal filing is the strongest action taken in recent months against what many technology companies are viewing as an increasingly uncooperative Clinton administration. Many Silicon Valley executives have been angered by a recent string of administration policy decisions, ranging from a new proposal to restrict encryption exports to a presidential veto of legislation aimed at limiting lawsuits against companies over stock performance.

The latest issue involves foreign tax benefits that have been granted to entertainment companies under a 1984 law that makes 15 to 30 percent of income from overseas sales exempt from U.S. taxes. Microsoft and other companies contend that software companies clearly deserve the same benefit and have been denied it only because the regulations do not specifically cite software.

"We got a campaign promise from President Clinton that he would correct this," said Mark Nebergall, attorney for the Software Publishers Association, a Washington-based trade organization. "We are mystified. There is no opposition from any other group with a contrary view. It's just this brick wall we keep hitting."

The software industry contends that the distribution and sales of its products are exactly the same as those covered under the law, such as CDs, and that the only difference is content. "If you took the labels off both, you wouldn't be able to distinguish the differences to the naked eye," Nebergall said.

Given the other recent disputes with the administration, high-technology companies are watching the Microsoft case closely to see whether the White House will intervene to placate an industry that has been credited with helping Clinton get elected. Other software companies are expected to join Microsoft's challenge and possibly other actions if the administration does not begin to show signs of support.

A company representative said Microsoft and other software companies have approached the administration repeatedly on the tax issue and have gotten little response. A spokesman for the IRS declined to discuss the filing Friday evening, saying he could not comment on pending legal action.

"The software industry as a whole and members of those companies have all called on the government to clarify their position, and the response has been that this is their interpretation, with no explanation," said Greg Shaw, spokesman for Microsoft. "We were left with no alternative but to take legal action."