Wolf Richter www.testosteronepit.com [7] www.amazon.com/author/wolfrichter [8]
Last year, the government extracted $1.1 trillion in taxes from us more or less hardworking individual taxpayers. But now it will pay, along with the states, $429 million of our taxes to the coolest Silicon-Valley beauty queen: Facebook. In net tax refunds! Part of a vast package of juicy corporate welfare programs. Facebook isn’t just hogging our data; it’s gobbling up our money.
Timing was a bit inconvenient, however. The “sequester,” as the automatic spending cuts by the federal government have been elegantly named, is scheduled to kick in on March 1. A national disaster, according to the New York Times [9]. It would threaten everything from national security to preschool programs for low-income kids. It would cause hundreds of thousands of jobs to evaporate, or whatever. Clearly, trying to live within one’s means, or at least a modest step closer to it, is never a healthy idea.
So, as the drama with all its lurid theatrics was playing out in Washington, Facebook filed its first 10-K annual report [10] with the SEC, containing its financial statements for 2012 along with a host of small-print footnotes which presumably no one would ever look at. But the recalcitrant nonpartisan research and advocacy group, Citizens for Tax Justice, combed through it anyway [11].
And it found “an amazing admission”: despite $1.1 billion in pre-tax profits from its US operations in 2012, Facebook didn’t pay any federal or state income taxes in the US—in fact it will collect net tax refunds totaling $429 million.
Facebook is relying on a single tax break in our glorious corporate tax-dodge code to obtain its negative tax rate: the deductibility of executive and employee stock options. It cut Facebook’s federal and state income taxes by $1.03 billion last year—but that was just part of it. As Facebook said in its footnote under “Share-based Compensation,” on page 68 of the 10-K: “during the years ended December 31, 2012, 2011, and 2010, we realized tax benefits from share-based award activity of $1.03 billion, $433 million, and $115 million respectively.”
Another $2.17 billion of this US tax break is carried forward. To rub it in, COO Sheryl Sandberg giddily pointed out during the earnings call [12] that the company “ended the year with a total of $5.8 billion in NOL tax loss carry forwards created by stock compensation”—to be used in future years.
Given Facebook’s anemic “profits” in the US, it’s unlikely that it will have to pay federal or state income taxes anytime soon. Instead, taxpayers will have to continue showering tax refunds on what has become the cutest, coolest welfare queen of them all [but it does have its share of not-so-real-world issues, like this one: Is The “Self-Promotion-And-Envy Spiral” Taking Down Facebook? [13]].
On its financial statements, Facebook claimed that it had a federal tax liability in 2012 of $559 million, that it would somehow pay $559 million in taxes in the coming year. But the number was wiped out by its infamous footnote on page 68 of the 10-K. And suddenly, that “federal tax liability” of $559 million had, like so many things on financial statements, no graspable relationship to reality.
Facebook isn’t the only one sucking on the big government teat. The tax break is available to all companies where stock-based compensation plays a big role. And innumerable other tax breaks are available as well. In its Corporate Tax Dodgers [14] report of November 2011, the CTJ found that 30 of the 280 most “profitable” companies for the tax years 2008-2010 paid no income taxes but instead collected net tax refunds on their combined pre-tax profits of $160 billion! And 78 of them had at least one year when they didn’t pay taxes. At the same time, other companies in the study were getting whacked by huge tax bills. Hence the inherent unfairness of the corporate tax-dodge code.
So, CEO Mark Zuckerberg was raving about the limitless opportunities of mobile during the earnings call. “We have more engagements from the people who we reach, and I think we’ll also be able to make more money for each minute people spend with us on their mobile devices,” he said. But it just won’t contribute to the convoluted and painful process of reducing the US budget deficit.
Meanwhile, corporate insiders rotate in and out of various government agencies that are supposed to regulate them. Perhaps the most egregious example is the SEC, where Wall Street culture and personalities have come to dominate. Regulation and enforcement have become a joke. A principle so common that it has a name: “Regulatory Capture.” Read.... Wall Street Takes Over Its Regulator [15]