Sprint filed a motion to dismiss the Attorney General’s action but the court disallowed this and ordered that both parties appear for a preliminary hearing on July 24.
"Sprint is disappointed in the court’s decision and we intend to file an appeal shortly,” said Sprint spokesman, John Taylor.
“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. As we have in the past, we will continue to stand up for New York consumers' rights and fight this suit,” Taylor added.
Sprint whistleblower
The Attorney General said Sprint knowingly filed false tax returns and underpaid New York sales taxes on its mobile telecommunications offerings to gain an advantage over its competitors.
The Attorney General said Sprint has failed to collect more than $100 million in New York sales taxes on receipts from its sale of wireless telephone services since July 2005.
The case was initially brought by a whistleblower under the New York False Claims Act and if Sprint loses, it will be required to pay three times the alleged underpayment, totalling more than $300 million.
This is the first time the New York Attorney General has joined a tax enforcement action from a whistleblower.
The whistleblower in the case is listed as Empire State Ventures, though this is a corporate identity set up to maintain anonymity.
David Koenigsberg, of Menz Bonner Komar & Koenigsberg, who represented the whistleblower in the Sprint lawsuit, said large taxpayers should take note of the Attorney General’s decision to pursue this case as it shows the New York whistleblower scheme is effective.
The dispute
New York’s tax law section 1105(b)(2) imposes a 4% tax on “receipts from every sale of mobile telecommunications service provided by a home service provider, other than sales for resale, that are voice services, or any other services that are taxable under subparagraph (B) of paragraph one of this subdivision, sold for a fixed periodic charge (not separately stated), whether or not sold with other services”.
The Attorney General claims that Sprint implemented a nationwide programme of unbundling its mobile telecommunications offerings, treating part of its fixed monthly access charges for wireless voice services as if they were charges for interstate calls charged on a per-minute basis, failing to collect or pay New York sales tax on the interstate calls, and submitting monthly tax statements only for the taxes collected for intrastate calls.
Sprint argues that a literal interpretation of the tax law allows it to exclude the portion of its fixed monthly recurring access charges, which is attributable to interstate voice services, from sales tax, even when such services are bundled with intrastate services.
Sprint has been ordered to serve an answer to the superseding complaint by July 24 and to appear for a preliminary hearing on the same date.
Although the outcome of the case may yet fall in Sprint’s favour, Koenigsberg said taxpayers should learn from the fact the company’s predicament was initiated by a whistleblower.
“The way to try to avoid becoming a defendant in a qui tam False Claims Act case is to develop and encourage a serious corporate compliance programme. This entails educating employees about the need to comply with the laws and regulations that govern the particular business and to earn the trust of employees so they will take the risk of reporting possible wrongdoing internally,” said Koenigsberg.
“This means corporate managers have to take whistleblowers seriously and accord reports of alleged wrongdoing seriously. Moreover, management level employees must be made to understand that it is unacceptable to retaliate against anyone who speaks up against possible wrongdoing,” Koenigsberg added.
