Tax Analysts Blog

Taxes and Whistleblower Suits

Posted on Jul 3, 2013

Sprint-Nextel Corp. recently received some bad news from a New York supreme court. In a ruling dated June 27, New York Supreme Court Judge O. Peter Sherwood denied Sprint’s motion to dismiss a case that alleges the company deliberately failed to collect and remit sales tax. Sprint will now have to defend itself in court. Lawyers for both sides were ordered to appear at a hearing on July 24.

The case stems from a whistleblower (or qui tam) lawsuit brought in 2011. Last year, Attorney General Eric Schneiderman took over the lawsuit (as is generally permitted by law). The crux of the suit is that Sprint failed to collect and remit sales taxes on flat-rate access charges for wireless calling plans.

According to the ruling, wireless carriers that sell plans with a set amount of allowable minutes per month are required to collect and pay sales tax on the entire charge. Sprint allegedly did not do that, but instead treated a portion of the monthly charge as nontaxable. Its failure to collect tax on the entire charge is alleged to have cost state and local governments more than $100 million in tax revenue. The cost to Sprint will be three times that amount, as treble damages are permitted under New York’s False Claims Act. Sprint has expressed disappointment over the court’s decision and has indicated it intends to file an appeal.

This case is being followed closely in the tax community as it is the first case prosecuted under a new provision in New York law that allows tax fraud claims to be brought under the state’s whistleblower law. States have increased their use of qui tam actions to enforce state tax laws. The New York attorney general’s office has previously indicated it intends to bring more cases against corporate taxpayers.

In Sprint’s case, when the case was unsealed by the New York AG’s office, a press release was issued alleging Sprint under-collected sales taxes to gain a competitive advantage over other telecommunications companies. Sprint responded with a release of its own saying that it had properly collected taxes. Sprint argued the AG had not properly interpreted the state’s sales tax exemption for interstate voice services or the provisions of the Mobile Telecommunications Sourcing Act that allow companies to unbundle wireless services in order to separate taxable and nontaxable charges.

Regardless of who is ultimately right, sophisticated legal and tax issues will be litigated. Are these the types of issues that should be brought via a whistleblower suit? Should the government, as part of a qui tam action, be able to litigate these issues in public and potentially damage a corporate taxpayer’s reputation by accusing them of fraud?

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