Undercollected From Customers
Attorney General Eric T. Schneiderman announced a major victory in his first-of-its-kind lawsuit against Sprint- Nextel Corp. for deliberately undercollecting and underpaying millions of dollars in New York State and local sales taxes on flat-rate access charges for wireless calling plans.
Brought under the New York False Claims Act, the Attorney General’s lawsuit requires Sprint to pay three times its underpayment of approximately $130 million, plus penalties, if found liable. All of Sprint’s major wireless competitors, including Verizon, AT&T, T-Mobile, and MetroPCS, have followed the law regarding these taxes.
Sprint had asked the court to dismiss the Attorney General’s lawsuit, arguing that the Attorney General had not adequately alleged that Sprint knowingly violated the tax law, and that the Attorney General’s lawsuit could not apply to conduct before 2010, when the New York False Claims Act was amended by then-State Sen. Schneiderman.
On July 1, 2013, Supreme Court Justice O. Peter Sherwood ruled against Sprint. Sprint appealed the decision to the Appellate Division, which last Thursday, Feb. 21, unanimously affirmed Justice Sherwood’s ruling.
“Today’s decision allows my office to proceed in holding Sprint accountable for deliberately evading sales taxes and costing state and local governments approximately $130 million,” said Schneiderman last Thursday. “As long as I am attorney general, I’m committed to ensuring that taxpayers’ money is protected, and that honest businesses aren’t put at a disadvantage for collecting and paying their fair share.”
Since 2002, New York Tax Law has required mobile phone companies to collect and pay sales taxes on the full amount of the monthly access charges for their calling plans. For example, when a customer pays Sprint a fixed monthly charge of $39.99 for 450 minutes of mobile calling time, the law requires Sprint to collect and pay sales taxes on the entire $39.99.
According to the attorney general’s complaint, starting in 2005, Sprint illegally failed to collect and pay New York sales taxes on an arbitrarily set portion of its revenue from these fixed monthly access charges. To carry out this plan, Sprint repeatedly and knowingly submitted false records and statements to New York State tax authorities. Sprint concealed this practice from taxing authorities, its competitors, and its customers.
Sprint did not correct its sales tax practices when it was informed of its illegality, and it has yet to correct them, Schneiderman said. As a result of Sprint’s unlawful actions, its underpayment of New York sales taxes is growing by about a $210,000 every week, more than $30,000 a day.
The decision not to collect and pay these taxes arose out of a nationwide effort by Sprint to obtain an advantage over its competitors- not by cutting its prices or offering better service, but by failing to collect and pay sales taxes that its competitors properly collected and paid. Right before deciding to underpay its taxes, Sprint concluded that this practice would position its calling plans as cheaper than competitors’ plans by $4.6 million per month, collectively, because of sales taxes not collected and paid.
The lawsuit is the first ever tax enforcement action filed under the New York False ClaimsAct. TheAct is one of the state’s most powerful civil fraud enforcement tools because it allows whistleblowers and prosecutors to take legal action against companies or individuals that defraud the government.
Fraudsters found liable under the False Claims Act must pay triple damages, penalties and attorneys’ fees. Under the False Claims Act, whistleblowers may be eligible to receive up to 25 percent of any money recovered by the government as a result of information they provide.
Twenty-nine states and the federal government have passed False Claims Acts, but only New York’s expressly covers tax fraud as a result of a landmark law authored by Schneiderman. In 2011, as one of his first acts in office, Schneiderman created a Taxpayer Protection Bureau, which is charged to work with whistleblowers and enforce the False Claims Act in tax and other government fraud cases.
The Office’s investigation of Sprint began with a whistleblower lawsuit-also called a qui tam action-filed in New York State Supreme Court in Manhattan in March 2011, just after the Taxpayer Protection Bureau was created. The Bureau, working with the New York State Department of Taxation & Finance, then conducted an extensive investigation and determined the extent of Sprint’s illegal conduct.
The attorney general has taken over the action from the whistleblower on behalf of New York’s taxpayers. If found liable, Sprint could be required to pay more than $300 million to New York state and local governments, including school districts.
The Attorney General’s complaint also seeks to protect Sprint’s current customers, to whom Sprint falsely marketed its wireless calling plans. Sprint promised its customers that it would collect and pay the correct amount of sales taxes on their behalf. The Attorney General seeks to ensure that Sprint-and not its customers- will be liable for any back taxes, and to empower Sprint’s current New York customers to terminate their contracts without having to pay termination fees.
The Attorney General’s appeal was argued by Assistant Solicitor General Brian Sutherland, Deputy Solicitor General Richard Dearing and Special Counsel to the Solicitor General Cecilia Chang are supervising the appeal. The lawsuit is being handled by Assistant Attorney General Lisa White, Acting Bureau Chief Scott Spiegelman and Former Bureau Chief Randall Fox of the Taxpayer Protection Bureau, along with Assistant Attorney General Daniel Smirlock. Gregory Krakower, Senior Advisor and Counselor to the Attorney General and Kelly Donovan, Executive Deputy Attorney General for the Division of Criminal Justice are supervising the case.
