The New York Court of Appeals handed the state’s Attorney General a big victory in 2015 in a case involving tax fraud under the state’s False Claims Act. New York’s highest court ruled that the Attorney General may proceed with a lawsuit against Sprint for knowingly defying a state tax law that requires telecom companies to collect sales tax on the entirety of flat-rate contracts with its mobile customers.
The lawsuit alleges that Sprint initially complied with the law, which was enacted in 2002, but abruptly changed course in 2005. From that point forward, Sprint allegedly engaged in a process of “unbundling” the cost of flat-rate contracts and charged customers sales tax only on intrastate mobile calls, but not interstate or international calls. By doing so, Sprint was able to gain a competitive advantage over other mobile carriers in New York, which collected sales tax on the entirety of the flat-rate contracts, in compliance with the law.
New York’s False Claims Act is modeled on the federal statute, which was first enacted in 1865 and strengthened several times through amendments. These laws provide that a person or company that knowingly submits a false claim to the government is liable for monetary damages at three times the amount of the false claim. “Knowingly” is defined as (1) with actual knowledge; (2) with deliberate ignorance of the truth; or (3) reckless disregard for the truth.
But New York goes further than the federal law, because it permits False Claims Act cases to proceed based on false tax returns. The federal False Claims Act, by contrast, explicitly excludes tax filings from the kinds of government-related claims that can give rise to a lawsuit. Six other states also permit False Claims Act charges to rest on knowingly false tax filings: Delaware, Florida, Nevada, New Hampshire, Washington and Wisconsin. Three other states — Illinois, Indiana and Rhode Island — permit actions under their False Claims Acts based on any tax filing other than an income tax return.
Sprint asked the trial court to dismiss the False Claims Act charge, arguing that its interpretation of the tax law was reasonable, even if wrong, which would negate the claim that Sprint “knowingly” filed a false tax return in New York. The trial court rejected that argument. The appellate court affirmed that decision as did the Court of Appeals.
If Sprint’s view of New York’s False Claims Act was adopted, the Court said, a person or company could submit a claim, knowing it was false, but escape liability by successfully arguing that its claim reflected a ‘reasonable interpretation’ of the law. Instead, the Court noted, Sprint would have to show at trial that it not only reasonably believed its interpretation of the tax law was correct, but that it relied on that interpretation in changing its practices in 2005.
The Court of Appeals decision was just the latest victory for New York’s Attorney General under the false tax filing provision of the state’s False Claims Act. In 2013, the Attorney General gained a guilty plea and a $5.5 million settlement with a custom tailor who had falsified his company’s tax filings for more than ten years. The tax fraud was originally discovered by a whistleblower who used the qui tam provisions of the False Claims Act to file a lawsuit against the tailor in the name of the government. After conducting an initial investigation, the Attorney General intervened in the whistleblower’s case, as provided for under the statute. When the Attorney General announced the guilty plea and civil settlement, he noted that the whistleblower had been the first to raise objections about the tailor’s massive tax fraud.
The state Attorney General’s demonstrated willingness to enforce its False Claims Act law in tax cases means every business subject to New York’s jurisdiction should expect increased scrutiny of its tax filings. As a center of international commerce for scores of businesses with potentially billions in tax liability to the state, this could lead to millions of dollars in recoveries for the State of New York.