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Judge Denies Sprint’s Motion to Dismiss False Claims Act Case Based on Alleged Tax Fraud in New York

Marketing White BoardOn June 27, a judge denied Sprint-Nextel Corporation’s (“Sprint”) motion to dismiss claims brought against it under the New York state False Claims Act and concluded that the complaint sufficiently alleged that Sprint had failed to both collect and pay more than $100 million in state sales tax since July of 2005 in a bid to gain an advantage over competitors such as AT&T and Verizon Wireless by making its services less expensive.

Originally filed by whistleblower Empire State Ventures LLC in March 2011 under the qui tam provision of the statute, New York Attorney General Eric Schneiderman intervened in the case in April 2012 following an investigation. According to the superseding complaint, Sprint allegedly knowingly failed to collect and pay the state sales tax on approximately 25% of its revenue from flat-rate plans and then concealed its failure to do so despite the fact that New York imposes a sales tax on the full amount of any flat-rate charge for wireless service. In addition to misleading the government, the complaint alleges that Sprint’s conduct misled millions of New York consumers who purchased the flat-rate plans by indicating in its contracts and on its website that it would collect and pay all requisite sales tax. As a result, the complaint alleges that these customers entered into their contracts with Sprint under false pretenses. In accordance with the statutory provisions, the lawsuit seeks three times the amount of underpaid taxes plus penalties and the release of effected Sprint customers from their contracts with the company without early termination fees.

Most states with False Claims Acts have modeled their statutes after the federal False Claims Act, incorporating qui tam provisions allowing the participation of whistleblowers.  Under the statutes, those with knowledge of fraud who step forward may recover a percentage of any final judgment or settlement. While the federal False Claims Act does not extend to evasion of tax liabilities, § 189.4(a) of the New York False Claims Act does allow whistleblower actions involving tax fraud provided that certain conditions are met. People ex rel. Empire State Ventures, LLC v. Sprint Nextel Corp. is significant as it is the first case prosecuted under the provision allowing qui tam tax fraud claims. If liable, Sprint could face over $300 million in damages.