Today, the U.S. Supreme Court denied certiorari in a challenge by Sprint Nextel Corp. (“Sprint”) to a False Claims Act (“FCA”) lawsuit by New York state against it for sales taxes not collected and remitted on telecommunications services. The Court’s denial of Sprint’s petition for certiorari comes on the heels of the telecommunication giant’s loss at the New York State Court of Appeals, where it sought to have the state’s case thrown out on a motion to dismiss. Sprint will now need to defend the FCA lawsuit in New York’s state courts.
Background Sprint, a mobile telecommunications service provider, sold wireless calling plans to New York customers that included voice services in exchange for fixed periodic charges. Under these flat-rate calling plans, Sprint’s customers were permitted to use Sprint’s wireless network for a set number of minutes or for an unlimited number of minutes, and could use those minutes to make phone calls to people or phones within New York or to people or phones in other states. Based on its reading of the New York Tax Law, Sprint determined that it was not required to collect sales tax from its New York customers on the portion of its fixed periodic charges that were attributable to interstate voice services, which are specifically exempt from sales tax under Tax Law section 1105(b)(1).
The FCA case against Sprint dates back to March 2011, when Empire State Ventures LLC filed a qui tam action alleging that Sprint knowingly violated the FCA by not collecting and remitting New York sales tax on the full amount of its receipts from flat-rate calling plans sold to New York customers. Subsequently, the New York state attorney general intervened and filed a superseding complaint making similar claims under the FCA, as well as claims related to allegations that Sprint violated the Tax Law and Executive Law by knowingly filing false sales tax returns. The attorney general is seeking more than $300 million in damages from Sprint.
Procedural History Sprint filed a motion to dismiss in New York State Supreme Court, New York County, arguing that: (1) the attorney general’s complaint failed to state a cause of action under state law; and (2) New York’s attempt to impose sales tax on interstate and international calls that were bundled with intrastate calls is prohibited by federal law, specifically the Mobile Telecommunications Sourcing Act (“MTSA”).1 As discussed above, Sprint argued that under New York’s Tax Law, it was permitted to exclude from sales tax the portion of its flat-rate calling plans that were attributable to interstate and international voice services, even when those services were bundled with intrastate voice services. The attorney general disagreed with Sprint’s interpretation of the Tax Law. In response, Sprint argued that the attorney general’s contrary interpretation of the statute (i.e., that taxpayers are not permitted to “unbundle” the tax exempt components of such voice services) is in direct contrast with, and thus preempted by, the MTSA.
The relevant provision of the MTSA, section 123(b), provides that:
[i]f a taxing jurisdiction does not otherwise subject charges for mobile telecommunications service to taxation and if these charges are aggregated with and not separately stated from charges that are subject to taxation, then the charges for nontaxable mobile telecommunications services may be subject to taxation unless the home service provider can reasonably identify charges not subject to such tax, charge, or fee from its books and records that are kept in the regular course of business.2
The trial court denied Sprint’s motion to dismiss, as did the Supreme Court, Appellate Division and the New York State Court of Appeals. Sprint subsequently filed a petition for writ of certiorari with the U.S. Supreme Court.
Today’s Decision With the denial of Sprint’s certiorari petition, Sprint must continue to fight the state’s lawsuit in state court. Unless Sprint is willing and able to reach a settlement with the attorney general, this will undoubtedly mean the continuation of extensive discovery and possibly a trial on the merits. The prospect of a public trial regarding intimate details of Sprint’s business operations and tax compliance decisions should concern every taxpayer in New York. Individuals and businesses should not be pressured by the government into making large payments of taxes, penalties and interest that may not be owed or that relate to honest disagreements as to how the Tax Law should be interpreted.
We will monitor developments and provide updates as Sprint continues its fight against the attorney general. In the meantime, taxpayers should continue to reassess their past and current tax compliance decisions in light of the new risk environment posed by New York’s FCA and the attorney general’s willingness to bring aggressive enforcement actions under the law. Indeed, the decision of the Court of Appeals in denying Sprint’s motion to dismiss suggests that heightened internal due diligence, obtaining advice from outside counsel, and engaging the state for advice on contested tax matters, may work to provide a defense or mitigation to damages under the FCA.