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Post date: July 2 2013

A.G. Schneiderman Announces Court Decision Upholding $300 Million Tax Case Against Sprint-Nextel Corporation

Judge Determines That Sprint’s Sales Tax Practices Run Afoul Of New York Law And Fraud Charge Can Go Forward

Schneiderman: Ruling Sends Message That Tax Dodgers Will Be Held Accountable In New York

NEW YORK ­– Attorney General Eric T. Schneiderman today announced a court decision denying Sprint-Nextel Corporation’s attempt to dismiss a tax fraud lawsuit seeking to recoup three times the more than $100 million dollars in taxes owed to New York state and local governments since 2005, plus penalties. Manhattan Supreme Court Justice O. Peter Sherwood ruled that Sprint’s sales tax practices were inconsistent with New York Tax Law and that the Attorney General had presented enough evidence of fraud for the case to go forward. According to Attorney General Schneiderman’s 2012 complaint, starting in 2005, the telecommunications giant knowingly failed to collect and pay to New York taxing authorities sales taxes on about one quarter of its receipts for its flat-rate charges for wireless calling plans. Sprint continues to avoid those taxes and under New York law faces up to triple damages.

“On behalf of responsible taxpayers, local governments and businesses in New York State, I am very pleased with today’s decision, which clears the way for my office to hold Sprint accountable for its avoidance of over a hundred million dollars in taxes it knowingly evaded,” said Attorney General Schneiderman. “As the very first tax case prosecuted under the False Claims Act – which rewards and protects whistleblowers – this ruling sends a message that tax dodgers will be exposed and prosecuted to the fullest extent of the law.”

In April 2012, Attorney General Schneiderman filed this first-of-its-kind lawsuit against Sprint under New York’s False Claims Act for knowingly violating New York Tax Law. As a New York senator, Eric Schneiderman authored the amendments that allowed tax fraud claims to be brought under the False Claims Act, making the act the state’s most powerful law to address fraud against the government. Companies that violate the False Claims Act are subjected to triple damages plus mandatory civil penalties. More importantly, the False Claims Act allows whistleblowers to bring suit on behalf of the government, and rewards them with a percentage of the proceeds. The Sprint case began as a whistleblower (also known as a “qui tam” suit), in which the Attorney General intervened.

In rejecting Sprint’s motion, the Court ruled that the Attorney General was correct that the New York tax law requires that wireless carriers like Sprint collect and pay to the government sales taxes on the full amount of their flat-rate charges for cell phone service. Unlike Sprint, all the other major wireless carriers have collected and paid sales taxes in exactly that way, putting them at a competitive disadvantage. Sprint, however, had argued that it was entitled to consider part of its flat-rate plan as non-taxable and then it did not collect or pay sales taxes on that part. The Court ruled that the law does not permit that approach.

The Court also rejected Sprint’s arguments that the Attorney General’s complaint failed to allege that Sprint had knowledge of its violation of the law. Instead, it found that the complaint “specifically alleges at length that Sprint realized that their approach to unbundling [the flat-rate charge] was aggressive and risky, and that their decision to unbundle was motivated by a desire to gain a competitive advantage over other wireless carriers.” It also rejected Sprint’s argument that the Attorney General could not seek to establish Sprint’s liability going back to when Sprint began its program of avoiding sales taxes in 2005. Specifically, it ruled that use of the New York False Claims Act, which was amended in 2010 to add tax law violations through legislation authored by A.G. Schneiderman when he was a state senator, applies retroactively to earlier tax violations.

Russ Haven, Legislative Counsel of the New York Public Interest Research Group, said, “Attorney General Schneiderman has cleared a big first hurdle in making the case that Sprint avoided paying some $100 million in taxes. New Yorkers cynical that corporations skate by on paying their taxes will applaud the Attorney General's use of the whistle blower law he sponsored to make sure big business play by the rules.”

David Koenigsberg, attorney for the whistleblower in this case, said, “I applaud the Attorney General for quickly and aggressively pursuing the facts about Sprint’s tax scheme that our client brought to light, and for fighting to uphold the law for the benefit of the New York taxpayers and fairness in general.”

Patrick Burns, co-Director of the national nonprofit organization that supports and promotes whistleblower laws, Taxpayers Against Fraud, said, “New York has shown that tax cases can be moved quickly, and that where there is a will there is a way. The New York example shows that governments all around the country can benefit from having citizens blow the whistle on tax fraud.”

Attorney General Schneiderman expresses his thanks and appreciation to the New York Department of Taxation & Finance for assisting with pursuing this lawsuit.

The Attorney General's lawsuit is being handled by Assistant Attorney General Lisa White and Bureau Chief Randall Fox of the Taxpayer Protection Bureau, along with Senior Counsel Emily Bradford and Assistant Attorney General Daniel Smirlock. Gregory Krakower, Senior Advisor and Counselor to the Attorney General and Kelly Donovan, Executive Deputy Attorney General for the Division of Criminal Justice are supervising the case.

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