N.Y. AG sues Sprint-Nextel for more than $300 million in taxes

Jessica M. Karmasek Apr. 19, 2012, 11:15am


MANHATTAN, N.Y. (Legal Newsline) - New York Attorney General Eric Schneiderman on Thursday filed a lawsuit against Sprint-Nextel Corp. for "deliberately" under-collecting and underpaying millions of dollars in New York state and local sales taxes.

The taxes were on flat-rate access charges for wireless calling plans, Schneiderman's office said.

The attorney general's lawsuit, filed in New York State Supreme Court in Manhattan, requires Sprint to pay three times its underpayment of more than $100 million, plus penalties if found liable.

Schneiderman noted that all of Sprint's competitors, including Verizon, AT&T, T-Mobile and MetroPCS, have followed the letter of the law regarding the taxes.

"By deliberately evading sales taxes, Sprint cost state and local governments over $100 million that could have been used for critical services and much needed resources that our state and its citizens need given the challenging economic times we are in," he said in a statement.

"The message of our office is clear -- tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers' money is protected, and that honest businesses and consumers are not placed at a disadvantage for collecting and paying their fair share of taxes."

New York tax law has required -- since 2002 -- that mobile phone companies like Sprint collect and pay sales taxes on the full amount of their monthly access charges for their calling plans.

For example, when a customer pays Sprint a fixed monthly charge of $39.99 for 450 minutes of mobile calling time, the law requires the company to collect and pay sales taxes on the entire $39.99.

According to Schneiderman's 30-page complaint, Sprint illegally failed, starting in 2005, to collect and pay taxes on an arbitrarily set portion of its revenue from these fixed monthly access charges.

In order to do so, the attorney general argues that the company "repeatedly and knowingly" submitted false records and statements to state tax authorities.

As a result of the company's decision not to collect and pay the taxes -- which Schneiderman contends Sprint did to obtain an advantage over competitors -- its underpayment is growing by about $210,000 every week, more than $30,000 a day, according to his office.

The attorney general's complaint also seeks to protect Sprint's current customers, of whom the company "falsely marketed" its wireless calling plans, he said.

Sprint, Schneiderman explained, promised its customers that it would collect and pay the correct amount of sales taxes on their behalf.

According to the Attorney General's Office, the lawsuit is the first ever tax enforcement action filed under the New York False Claims Act.

The act is considered one of the state's most powerful civil fraud enforcement tools because it allows whistleblowers and prosecutors to take legal action against companies or individuals that defraud the government.

Fraudsters found liable under the act must pay triple damages, penalties and attorneys' fees.

Twenty-nine states and the federal government have passed False Claims acts, but only New York's expressly covers tax fraud.

According to Schneiderman's office, its investigation of Sprint started with a whistleblower lawsuit, or qui tam action, filed in the state Supreme Court in March last year.

By filing his complaint Thursday, the attorney general has taken over the action from the whistleblower on behalf of the state's taxpayers.

Sprint told The Associated Press that Schneiderman's lawsuit is "without merit."

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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