New York Attorney General Files First Tax Enforcement Complaint Under New York's Trailblazing False Claims Act Statute

On April 19, 2012, New York’s attorney general filed the first tax enforcement complaint under New York’s novel False Claims Act (“Act”), alleging that Sprint-Nextel Corp. had deliberately understated sales tax payments to New York by over $100 million since July, 2005. Under the Act, the defendant could be held liable for three times the amount of these damages, plus penalties of $6,000 to $12,000 per violation, plus attorneys’ fees.

The Act, like its counterparts in federal law and the laws of 28 other states, permits a whistleblower to bring an action for false claims against the government. In New York, whistleblowers can be paid from 15-30 percent of the proceeds recovered. In 2010, New York amended its false claims act statute to become the first state to expressly permit recovery for tax fraud.¹

In 2011, the Taxpayer Protection Bureau was created to work with whistleblowers and enforce the Act. Complaints by whistleblowers are filed under seal pending government investigation. According to a press release issued by the attorney general, the original whistleblower action was filed in March of 2011, just after the Taxpayer Protection Bureau was created. The Bureau conducted “an extensive investigation and determined the extent of Sprint’s illegal conduct.” By filing the superseding complaint on April 19, the attorney general took over that law suit.

The complaint alleges that Sprint-Nextel deliberately understated sales tax to be collected from its customers and paid to New York by arbitrarily treating part of monthly access charges to cell phone subscribers as non-taxable interstate calls rather than as taxable access charges. It further alleges that to carry out this plan false records and statements were submitted to New York tax authorities, and the practice was concealed from the taxing authorities, competitors and customers. According to the complaint, approximately 25 percent of the monthly access charges were arbitrarily designated as non-taxable, resulting in a loss to New York of more than $100 million in tax revenue.

The press release states that this produced a competitive advantage by making Sprint-Nextel’s plans “cheaper than competitors’ plans by $4.6 million per month, collectively, because of sales tax not collected and paid.” In addition to triple damages, penalties, and attorney’s fees, the complaint seeks to ensure that Sprint-Nextel’s customers are insulated from any liability for the unpaid sales tax² and seeks to prevent early termination fees from being enforced against any customers who terminate their contract before the end of the contract term.

The attorney general’s press release notes that the Act “is one of the state’s most powerful civil enforcement tools.” Indeed it is, for at least three reasons. First, the State can recover from acts reported by whistleblowers, which may otherwise be unknown to the State and undiscoverable through audit or other means. Second, New York can recover significantly more money in an action under the False Claims Act than it otherwise could using the tax statutes. Triple damages plus penalties and attorneys’ fees minus the amount paid to a whistleblower is far more than the sales tax plus 14 percent interest and the 30 percent penalty that could otherwise be recovered. Third, the filing of the complaint is public, in contrast to a tax audit, which must remain undisclosed because of taxpayer secrecy laws.

_{1 The 2010 legislation was spearheaded by Eric Schneiderman, then a state senator, who became attorney general in January, 2011.} 

_{2 If a seller does not collect sales tax from a buyer, either the seller or the buyer can be held liable for the tax.}