New York’s Highest Court Allows Attorney General to Pursue New York Tax Claim Under State’s False Claims Act

New York’s Highest Court Allows Attorney General to Pursue New York Tax Claim Under State’s False Claims Act
Riker Danzig Tax, Trusts & Estates UPDATE February 2016

In a case of first impression, the New York Court of Appeals has allowed the New York Attorney General (the “AG”) to pursue a state tax claim under the New York False Claims Act (the “Act”) in People ex rel. Schneiderman v. Sprint Nextel Corp., 26 N.Y.3d 98, 42 N.E.3d 655 (2015).  The Act generally applies to any person who (i) knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; (ii) knowingly has possession, custody or control over money or property used, or to be used, by the state or local government and knowingly delivers, or causes to be delivered, less than all of the property or money; (iii) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or local government; or (iv) conspires to do any of the foregoing.  A person acts “knowingly” when the person has actual knowledge of the information, or acts in deliberate ignorance or reckless disregard of whether the information is true or false.  The Act provides for treble damages against violators.  The Act did not apply initially to false tax claims, but it was amended in 2010 to explicitly apply to such claims.  The Act shall apply to claims, records or statements made under the tax law only if (i) the net income or sales of the person against whom an action is brought is at least $1,000,000 for any taxable year subject to any action brought under the Act; and (ii) the damages pleaded in such action exceed $350,000.  

In Sprint, the AG maintained that starting in 2002 the New York tax law clearly provides that sales tax must be collected and remitted on the full amount of fixed charges for flat-rate wireless voice services sold to New York customers.  Starting in 2002, Sprint paid New York sales tax on all of its receipts from flat-rate wireless voices services sold to New York customers.  However, starting in 2005, and without specific disclosure, Sprint began to collect and remit sales tax on the portion of the charge that it attributed to intrastate calls.  No sales tax was collected and remitted on interstate or international calls.  Sprint did not separately state the charges for intrastate, interstate and international calls.  The AG maintained that Sprint’s allocation of the charges between intrastate, interstate and international calls was completely arbitrary.  The AG pointed out that there was 2002 guidance indicating that the sales tax for such flat-rate plans sold to New York customers should have been collected and remitted on the entire charge.  Sprint did not seek a tax refund for sales taxes remitted before changing its approach in 2005.  Unlike Sprint, the other major wireless carriers collected and remitted sales tax on the full charge for flat-rate wireless voice services sold to New York customers.

The Court noted that the AG has a high burden of proof to overcome in cases under the Act and the Act is certainly not to be applied in every situation where taxes are underpaid.  However, based on the above facts and the lack of ambiguity in the statute imposing sales tax on flat-rate wireless voice services sold to New York customers, the Court held that the AG stated a cause of action under the Act and can continue to bring the claim.  The Court indicated that the AG will have to prove that at the time Sprint acted, it knew the AG’s interpretation of the applicable statute was proper and it did not rely on a reasonable interpretation of the statute in good faith.

Taxpayers and tax preparers (who may also have liability under the Act) should pay close attention to this case and the application of the Act to tax false claims.  Stay tuned.