sales tax returns
The New York Attorney General’s office recently won a major procedural victory in a four-year-old lawsuit accusing Sprint Nextel of filing false sales tax returns. New York’s highest court ruled state law “unambiguously” requires collection of sales tax on the full price flat-rate wireless telephone plans, even when charges for interstate calls are “unbundled” and stated as a separate item. The court’s decision may ultimately cost Sprint Nextel several hundred million dollars.
This is an unusual sales tax lawsuit. Normally a state’s revenue department assesses a delinquent taxpayer who must then seek a refund through the courts. But in this case New York’s attorney general, rather than the state’s tax department, sued Sprint Nextel. And in fact, a third party company initially sued Sprint Nextel on the state’s behalf before the attorney general later intervened. This is known as a “qui tam” action. These are basically lawsuits brought by whistleblowers who claim the defendant has defrauded the government in some way. If the government takes over the lawsuit and wins, the whistleblower usually receives a share of any monetary judgment.
Here, the attorney general alleges Sprint Nextel filed false sales tax returns. Specifically, Sprint Nextel did not collect (or report) sales tax for its flat-rate wireless plans “on the portion that it attributed to interstate and international calls.” The attorney general said this attribution was “arbitrary” and Sprint Nextel should have collected sales tax – which is 4% on mobile telecommunications services – on the full price of its plans. This is consistent with the New York Tax Department’s rules and the practice followed by Sprint Nextel’s competitors. Sprint Nextel argued the sales tax law was ambiguous on this issue and it relied on its own “reasonable interpretation” of the statute, so it should not be penalized.
A trial court denied Sprint Nextel’s motion to dismiss the case. An intermediate appeals court upheld that decision but asked the New York Court of Appeals, the state’s highest court, to review the case. On October 20, the Court of Appeals, by a 4-1 vote, agreed with the two lower courts.
Chief Judge Jonathan Lippman, writing for the majority, said New York law imposes tax on “voice services” sold for a monthly charge. The law makes no distinction between in-state and interstate (or international) calls. The statute is not ambiguous, Lippman said, nor is it preempted by federal law governing state-level taxation of mobile services. To the contrary, federal law provides “the only state that may impose [such] a tax is the state of the customer’s ‘place of primary use’.”
Lippman also said the attorney general pleaded sufficient facts to charge Sprint Nextel under New York’s False Claims Act. That said, the attorney general “has a high burden to surmount in this case,” as he must prove Sprint Nextel “knew the AG’s interpretation of the statute was proper, and that Sprint did not actually rely on a reasonable interpretation of the statute in good faith.” These will be issues for the trial court to resolve.
S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info
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