New York Attorney General Eric Schneiderman has filed an unprecedented lawsuit against Sprint Nextel for over $300 million, accusing the wireless phone carrier of deliberately under-collecting and underpaying millions of dollars in New York state and local sales taxes on flat-rate access charges for wireless calling plans.
Schniederman brought the lawsuit under the New York False Claims Act, which increases tax fraud penalties and rewards whistleblowers. The lawsuit requires Sprint to pay three times its underpayment of over $100 million, plus penalties if the telecom giant is found liable.
Since 2002, New York tax law has required mobile phone companies to collect and pay sales taxes on the full amount of their 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.
All of Sprint’s major wireless competitors, including Verizon, AT&T, T-Mobile, and MetroPCS, have followed the law regarding these taxes, according to Schneiderman.
“By deliberately evading sales taxes, Sprint cost state and local governments over $100 million that could have been used for critical services and much needed resources that our state and its citizens need given the challenging economic times we are in,” Schneiderman said in a statement Thursday. “The message of our office is clear—tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers’ money is protected, and that honest businesses and consumers are not placed at a disadvantage for collecting and paying their fair share of taxes.”
Sprint's scheme is ongoing, according to the Attorney General's office. Sprint did not correct its sales tax practices when it was informed of its illegality, and it has not corrected them even today, according to Schneiderman. As a result of Sprint's unlawful actions, its underpayment of New York sales taxes is growing by about a $210,000 every week, over $30,000 a day.
Sprint Nextel disputed the accusations. “This complaint is without merit and Sprint categorically denies the complaint's allegations,” the company said in a statement Thursday. “We have collected and paid over to New York every penny of sales taxes on mobile wireless services that we believe our customers owe under New York state law. With this lawsuit, the Attorney General's office is claiming New York consumers, who already pay some of the highest wireless taxes in the country, should pay even more. We intend to stand up for New York consumers' rights and fight this suit."
Schneiderman’s office contends that Sprint Nextel’s decision not to collect and pay sales taxes arose from a nationwide effort by the company 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 its competitors properly collected and paid. Right before deciding to underpay its taxes, Sprint concluded that the 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 Attorney General's lawsuit is the first-ever tax enforcement action filed under the New York False Claims Act. The Act 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 Act 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 the 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. By filing the complaint Thursday, the Attorney General has taken over the action from the whistleblower on behalf of New York taxpayers. If found liable, Sprint could be required to pay over $300 million to New York state and local governments, including school districts.
The complaint also seeks to protect Sprint's current customers to whom Sprint marketed its wireless calling plans. Schneiderman argues that 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 Sprint contracts without having to pay termination fees.
David Koenigsberg of Menz Bonner Komar & Koenigsberg LLP, the attorney for the whistleblower, said the Attorney General and his staff promptly and diligently investigated his client's claims. “This case shows that the New York Attorney General is putting to good use the tools provided by the robust New York False Claims Act that Attorney General Schneiderman expanded as a lawmaker,” he said. “We look forward to working with his office to pursue this case in court.”
The advocacy organizations Consumers Union and Taxpayers Against Fraud both endorsed the lawsuit.
“We applaud Attorney General Schneiderman's action to protect consumers, businesses and governments from illegal sales tax evasion,” said Consumers Union programs director Chuck Bell. “Companies that properly collect sales taxes, and consumers that pay them, should not be put at an unfair disadvantage for following the law. Companies must be held accountable to their consumers when they promise to collect sales taxes and fail to do so.”
"Attorney General Schneiderman's action today has the potential to revolutionize tax fraud enforcement nationwide,” said Neil Getnick, chairman of Taxpayers Against Fraud, a national public interest organization dedicated to fighting fraud against federal, state, and local governments. “His office has set a new standard in fighting corporate tax fraud with what we are calling the "New York Model": enact a strong 'False Claims Act' that covers tax fraud; establish a team of dedicated prosecutors open to working with whistle-blowers; and let the facts dictate the result."
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