United States: Sprint Ruling Means A $300 Million FCA Tax Fraud Suit Can Proceed

On October 20, 2015, the New York Court of Appeals issued a ruling that could prove important to corporate counsel as they provide advice on tax positions. In The People of the State of New York v. Sprint Nextel Corp., No. 127 (N.Y. October 20, 2015), New York's highest court ruled that Sprint could be held liable under New York's False Claims Act ("NY FCA") for adopting an interpretation of state tax law that was contrary to an unambiguous statutory provision and agency guidance. Additionally, the court allowed the NY FCA to be applied retroactively after concluding that retroactive application of the NY FCA to tax years before it was specifically amended to cover tax claims was not barred by the Ex Post Facto Clause of the United States Constitution. This decision should alert companies to the potential for challenges to their state tax compliance not only from state taxing authorities but also from state Attorneys General, as well as from private relators, seeking penalties in addition to unpaid tax.

The Sprint Case

Under New York law, a tax is imposed on mobile telephone providers for the sale of certain communications services. The alleged false claim in the Sprint case depends on whether New York Tax Law § 1105(b) requires providers that charge flat rates to their customers (i.e., without distinguishing between intrastate and interstate calls) to collect sales tax only on the portion of their sales that they attribute to the customers' intrastate calls or instead on both intrastate and interstate calls. Sprint argued that New York law requires it to collect sales tax only on the portion of its sales that it attributes to its customers' intrastate calling. The New York Attorney General ("AG") (who intervened in the qui tam action and filed a superseding complaint) argued that Sprint must collect sales tax for all customers' calls under flat-rate plans.

With respect to the false claims issues, the court examined whether the AG had sufficiently pleaded a cause of action under the FCA. According to the AG, Sprint violated the FCA by "knowingly" making or using a "false record or statement" that was "material to an obligation to pay or transmit money or property" to the state of New York. (State Finance Law § 189(1)(g).) The FCA provides that a defendant in a false claims case acts "knowingly" when that "defendant has 'actual knowledge' of a record's or statement's truth or falsity or 'acts in deliberate indifference' or 'reckless disregard' of its truth or falsity." (Op. at 4 (citing State Finance Law § 188(3)(a)).) Thus, the AG argued that even if Sprint did not actually know that its sales tax collection practices were incorrect, it may still be found liable under the FCA if its efforts to comply with the law were "deliberately indifferent" or its actions were taken with a "reckless disregard" as to the meaning of the tax law. In support of his contentions, the AG noted the existence of official administrative guidance on the law's interpretation from as early as 2002 (when the law was enacted) that is contrary to Sprint's position. (Op. at 6.) Furthermore, the AG cited the fact that Sprint had adopted the AG's interpretation of the tax law from 2002 to 2005. (Op. at 6.) Finally, the AG noted that the majority of the cell phone industry had followed the administrative guidance. (Op. at 7.) Sprint countered that its interpretation of the tax laws is reasonable, and, therefore, it could not be held liable for "knowingly" submitting any false claims. (Op. at 13.)

Court of Appeals Opinion States that AG Faces "High Burden"

First, the court interpreted the relevant tax statute and determined that the AG's interpretation is correct. (Op. at 8–11.) According to the court, the statute is unambiguous and the AG's interpretation of the statute gives purpose and effect to all of the statute's language. (Id.) Furthermore, the court determined that the AG's interpretation is supported by other provisions in New York tax law and a recent ruling by the New York Tax Appeals Tribunal (see Matter of Helio, LLC, 2015 WL 4192425 (July 22, 2015).) The court also dispatched arguments by Sprint that the AG's interpretation is preempted by federal law. (Op. at 12.) Thus, the court held that the law required Sprint to collect sales tax for all of its customers' calls "unless they are separately stated on a customer's bill." (Id. at 9.)

The court then turned to the issue of whether a cause of action existed under the FCA. Although the court affirmed the denial of the motion to dismiss based on the facts pleaded by the AG supporting its allegations of fraud, the court cautioned that, "the AG has a high burden to surmount in this case." (Op. at 14 (emphasis added).) The court noted that not every underpayment of taxes constitutes a false claim under the NY FCA. (Id.) The court stated as follows:

The FCA is certainly not to be applied in every case where taxes were not paid. Further, notice of a contrary administrative position alone is not nearly enough to prove fraud or recklessness under the FCA. There can be no doubt the AG will have to prove the allegations of fraud, that Sprint knew the AG's interpretation of the statute was proper, and that Sprint did not actually rely on a reasonable interpretation of the statute in good faith. But, given the complaint's allegations about the agency guidance and industry compliance with the AG's position, Sprint's payment of the proper amount of sales tax between 2002 and 2005, Sprint's undisclosed reversal of its practices in 2005, and the explicit warnings that Sprint received from the Tax Department, the AG has stated a cause of action for a false claim.

(Id. (emphasis added).) The court noted that the AG alleged that Sprint came up with its "reasonable interpretation" after the fact and that Sprint did not base its decision to stop paying the tax on that interpretation. (Op. at 13-14.) The court stated that, "Even assuming there could be such a reasonable interpretation in the face of this unambiguous statute, it cannot shield a defendant from liability if, as the complaint alleged here, the defendant did not in fact act on that interpretation." (Op. at 13.)

In favor of its reasonableness argument, Sprint noted that in the case decided by the NYS Tax Appeals Tribunal, the Department of Taxation and Finance imposed only the minimum interest because the audit report stated that reasonable cause existed for the taxpayer's position involving the same tax provisions as in Sprint. (Op. at 13.) The court rejected that argument, stating that "here, the AG alleges that Sprint, which is a much larger service provider, did not act in good faith and that it did not rely on what it now calls 'its reasonable interpretation of the statute' when it made its decision to alter its tax practices. Importantly, although the Tax Appeals Tribunal stated that "[the taxpayer's] position was reasonable, that case did not involve the level of deception and fraud alleged on the part of Sprint here." (Op. at 13-14.)

Finally, the court considered whether applying the FCA to tax years prior to 2010 (when the FCA was amended to include false tax claims) violates the Ex Post Facto Clause of the United States Constitution. At its essence, the court's analysis focused on whether the state intended the FCA damages to be a civil penalty or, alternatively, whether the damages are "so punitive either in purpose or effect as to negate the State's intention to deem [them] civil." (Id. at 15 (citing Smith v. Doe, 538 US 84, 92 (2003).) New York's FCA allows for a civil penalty of between $6,000 and $12,000 as well as treble damages. (Id. at 15.) After reviewing several factors and considering federal case law on the issue, the court determined that the FCA provisions were not excessively punitive and that they could be applied retroactively without running afoul of the Constitution.

Dissenting in part, Judge Stein noted that because of the procedural posture of the case, any ambiguities in the tax law should be interpreted in favor of the taxpayer (Sprint). Because Judge Stein believed the tax statute to be ambiguous, she would have held that the AG cannot establish Sprint's interpretation was false, and, therefore, Sprint could not be held liable under the FCA, as a matter of law, for "knowingly" submitting any false claims. However, because the complaint did allege that Sprint's division of charges between intrastate and interstate or international calls was essentially "arbitrary," Judge Stein affirmed the lower court's decision. (Dissent at 12-15.)

Implications and Takeaways

Using the approach taken in the Sprint case, a state could not only seek to recover the allegedly unpaid tax amount, but also treble damages, penalties, and attorneys' fees under the NY FCA (and, in Sprint's case, the amount may total more than $300 million). According to the Sprint case, the NY FCA suit may reach back further than would have been possible under the statute of limitations that applies for state tax purposes. Furthermore, private relators can also pursue what they allege to be their share. It remains to be seen whether Sprint will seek United States Supreme Court review of the decision, or how the case will develop as the parties proceed with discovery and the trial court rules on the merits, but the state's success may encourage other states and private relators to take a similar approach. Several other states have similar FCAs that allow actions to be taken based on false tax claims.

The court's opinion in Sprint is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.