The New York Court of Appeal ruled on Tuesday, October 20, 2015 that Sprint must face a $390 million tax fraud suit brought by New York Attorney General (AG) Eric Schneiderman, finding that the state’s tax law applies to interstate phone services, and the AG’s complaint stated a claim under the New York False Claims Act (FCA).

According to the AG’s complaint, Sprint violated the NY FCA by deliberately failing to bill customers for taxes on its wireless services during a seven-year period to gain a competitive advantage. Sprint had moved to dismiss the complaint and appealed to New York’s highest court after losing the motion. A more detailed discussion of Sprint’s motion to dismiss and the trial and appellate courts’ rulings are available here

In a 4-1 decision, the court stated that New York’s Tax Law “unambiguously” imposes sales tax on interstate voice-over-services sold by a mobile provider along with other services for a fixed monthly charge, and rejected Sprint’s argument that the federal Mobile Telecommunications Sourcing Act preempted the state’s law.  

Addressing Sprint’s argument that it reasonably interpreted the tax law to exempt interstate and international calls from taxation, and thus could not have “knowingly” made a false statement or filed a false record, the court stated that “this is not the stuff a dismissal is made of.” The court also noted 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 alleges here, the defendant did not in fact act on that interpretation.”

Although the court stated that the AG has a high burden to surmount in this case, and cautioned that the FCA is “not to be applied in every case where taxes are not paid[,]” it found that the AG’s allegations sufficed to state a cause of action for a false claim. The court cited the complaint’s allegations that Sprint received guidance from the tax department, the industry complied with the AG’s position, Sprint paid the proper amount of taxes between 2002 and 2005 before it reversed course and Sprint received explicit warnings from the tax department.

Finally, the court rejected Sprint’s argument that it was unconstitutional to apply the FCA retroactively to conduct that took place before the law was amended in 2010 to permit tax-based claims. The court held that the Ex Post Facto Clause does not bar retroactive application of the FCA because it is not punitive in nature.  

The case, which had been stayed pending the appeal, will now proceed.

Scheiderman applauded the decision. “Today’s ruling is an important victory that clears the way for our office to seek nearly $400 million in back taxes and penalties from Sprint,” Schneiderman said. “There has to be one set of rules for everyone, no matter how rich or how powerful, and that includes the biggest corporations paying their fair share of taxes.”

The case is People of the State of New York et al. v. Sprint Nextel Corp. et al., case number 127, in the New York Court of Appeals. A copy of the opinion is available here.