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Sprint Nextel must face suit over tax fraud

Staff writer |
New York Attorney General Eric T. Schneiderman scored big against Sprint-Nextel: Manhattan Supreme Court Justice O. Peter Sherwood denied Sprint-Nextel's attempt to dismiss a tax fraud lawsuit.

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Sprint-Nextel Corporation tried to dismiss a tax fraud lawsuit seeking to recoup three times the more than $100 million dollars in taxes owed to New York state and local governments since 2005, plus penalties.

Manhattan Supreme Court Justice O. Peter Sherwood ruled that Sprint's sales tax practices were inconsistent with New York Tax Law and that the Attorney General had presented enough evidence of fraud for the case to go forward.

According to Attorney General Schneiderman's 2012 complaint, starting in 2005, the telecommunications giant knowingly failed to collect and pay to New York taxing authorities sales taxes on about one quarter of its receipts for its flat-rate charges for wireless calling plans. Sprint continues to avoid those taxes and under New York law faces up to triple damages.

"On behalf of responsible taxpayers, local governments and businesses in New York State, I am very pleased with today's decision, which clears the way for my office to hold Sprint accountable for its avoidance of over a hundred million dollars in taxes it knowingly evaded. As the very first tax case prosecuted under the False Claims Act - which rewards and protects whistleblowers - this ruling sends a message that tax dodgers will be exposed and prosecuted to the fullest extent of the law," said Mr. Schneiderman.

In April 2012, Attorney General Schneiderman filed this first-of-its-kind lawsuit against Sprint under New York's False Claims Act for knowingly violating New York Tax Law. As a New York senator, Eric Schneiderman authored the amendments that allowed tax fraud claims to be brought under the False Claims Act, making the act the state's most powerful law to address fraud against the government. Companies that violate the False Claims Act are subjected to triple damages plus mandatory civil penalties.

More importantly, the False Claims Act allows whistleblowers to bring suit on behalf of the government, and rewards them with a percentage of the proceeds. The Sprint case began as a whistleblower (also known as a "qui tam" suit), in which the Attorney General intervened.

In rejecting Sprint's motion, the Court ruled that the Attorney General was correct that the New York tax law requires that wireless carriers like Sprint collect and pay to the government sales taxes on the full amount of their flat-rate charges for cell phone service. Unlike Sprint, all the other major wireless carriers have collected and paid sales taxes in exactly that way, putting them at a competitive disadvantage.

Sprint, however, had argued that it was entitled to consider part of its flat-rate plan as non-taxable and then it did not collect or pay sales taxes on that part. The Court ruled that the law does not permit that approach.

The Court also rejected Sprint's arguments that the Attorney General's complaint failed to allege that Sprint had knowledge of its violation of the law. Instead, it found that the complaint "specifically alleges at length that Sprint realized that their approach to unbundling [the flat-rate charge] was aggressive and risky, and that their decision to unbundle was motivated by a desire to gain a competitive advantage over other wireless carriers."

It also rejected Sprint's argument that the Attorney General could not seek to establish Sprint's liability going back to when Sprint began its program of avoiding sales taxes in 2005. Specifically, it ruled that use of the New York False Claims Act, which was amended in 2010 to add tax law violations through legislation authored by A.G. Schneiderman when he was a state senator, applies retroactively to earlier tax violations.

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