The U.S.-based online video chat platform Zoom has seen its profits skyrocket by 4000% during the Covid-19 pandemic thanks to the growing reliance on remote work and schooling, but an analysis by the Institute on Taxation and Economic Policy finds that the company didn't pay a dime in federal corporate income taxes on its 2020 windfall.
"Zoom's success in using stock options to avoid taxes is neither surprising nor (currently) illegal."
The reason, according to ITEP senior fellow Matthew Gardner, lies mainly in Zoom's "lavish use of executive stock options," a common tactic of big corporations looking to skirt their federal tax obligations.
"Companies that compensate their leadership with stock options can write off, for tax purposes, huge expenses that far exceed their actual cost," Gardner explained. "This is a strategy that has been leveraged effectively by virtually every tech giant in the last decade, from Apple to Facebook to Microsoft. Zoom's success in using stock options to avoid taxes is neither surprising nor (currently) illegal."
Zoom reported $660 million in pre-tax profits in 2020, a massive leap from its 2019 pre-tax profits of $16 million. Eric Yuan, Zoom's founder and CEO, accurately described 2020 an as "unprecedented year" for the nine-year-old company in its latest earnings report.
2020 pre-tax profits: $660 million 2020 federal corporate income taxes: 0. We've seen this corporate tax avoidance strategy before. https://t.co/C0J38NznwA — Good Jobs First (@GoodJobsFirst) March 19, 2021
Gardner noted that use of the executive stock option loophole is not the only way Zoom managed to pay no federal corporate income tax on its pandemic profits.
"It's time to end a rigged tax code that benefits the wealthy and powerful."
"The company appears to have enjoyed tax benefits from accelerated depreciation and research and development tax credits," he wrote. "Notably, the combination of three tax breaks appears to be the recipe that Amazon and Netflix have used with such success to reduce their federal tax bills during the Trump corporate tax era so far. Zoom's corporate tax avoidance has helped create a short-term cash bonanza for the company: Zoom ended the fourth quarter of 2020 with $4.2 billion in cash and equivalents."
Sen. Bernie Sanders (I-Vt.), chairman of the Senate Budget Committee, took aim at the company's tax avoidance on Twitter, pointing out that "if you paid $14.99 a month for a Zoom Pro membership, you paid more to Zoom than it paid in federal income taxes even as it made $660 million in profits last year—a 4,000 percent increase since 2019."
"Yes," Sanders said. "It's time to end a rigged tax code that benefits the wealthy and powerful."
On Monday morning, Sanders announced he will be presiding over a Senate Budget Committee hearing Thursday titled, "Ending a Rigged Tax Code: The Need to Make the Wealthiest People and Largest Corporations Pay Their Fair Share of Taxes."
"From a moral, economic, and political perspective, our nation will not thrive when so few have so much and so many have so little," the Vermont senator said. "We need a tax system which asks the billionaire class to pay its fair share of taxes and which reduces the obscene level of wealth inequality in America."
ultralame on March 22nd, 2021 at 18:32 UTC »
They essentially took most of their operating profit and are using it to pay their employees/executives compensation (via stock options) at some undetermined point in the future. Those employees will pay taxes on it when they exercise the options, most likely more than Zoom would have if it did not do this.
EDIT: For anyone who doesn't understand this (there's already been one comment that was deleted)...
Companies only pay taxes on profit. This means that if Zoom takes in $1B in revenue but pays out $400M in salaries, rent, insurance, utilities, etc, they only pay taxes on the $600M profit. (I know there are people who don't agree that this is how it should be done, but that's not the argument here; this is an over-simplified explanation of how it actually works, and how most businesses are taxed).
So, let's say that on Dec 31 the execs at Zoom looked and saw they made $600M in profit- and they decided to pay all of that to their employees as a bonus.
According to our tax laws, Zoom has no taxable income for the year. Even though they made $600M! But the fact is that compensation- even bonus compensation- is an expense, and expenses by definition are subtracted from revenue to determine taxable income.
OK. So is the USA cheated out of taxes? Absolutely not. Because all that money is paid to employees who will have to pay income taxes on it. And depending on who got what and how much, it's very likely that MORE taxes will be paid by all those employees than would have been paid by the company if they just kept the money in the bank (This is again, another area for discussion... corporate tax rates. But right now, companies have a lower top bracket than people who make over... what... $225K or so? I forget.)
(Now, did Zoom pay this to all the employees? Are the janitors and admins getting obscene stock options like the CEO and CFO? Probably not. Again, another convo for another thread).
But the point is that taxes are paid. If Zoom kept the money, they would pay taxes. If they pay it out, the people who are paid pay the taxes. This is not an inherently bad system.
There are other tax schemes that do evade taxes- mostly offshoring (essentially hiding the money overseas so that it doesn't trigger the IRS). But I don't think that's what is happening here.
Snoo74401 on March 22nd, 2021 at 17:05 UTC »
Probably carrying over losses from a previous year to offset profits. Just a guess.
Wolfgang_Abendroth on March 22nd, 2021 at 16:16 UTC »
Corporate minimum tax