In a ruling dated June 27, a New York Supreme Court denied Sprint’s motion to dismiss the New York Attorney’s lawsuit alleging that Sprint violated the New York False Claims Act (NY FCA or Act) by deliberately failing to collect and pay sales tax on calling plan monthly access charges. Sprint had moved to dismiss the lawsuit, attacking the merits of the complaint and the retroactive application of the August 2010 amendments to the NY FCA that authorized actions based on tax fraud. A detailed discussion of the Attorney General’s allegations and Sprint’s motion to dismiss is available here.
In a much anticipated opinion, the court first rejected Sprint’s argument that the retroactive application of the Act violates the Ex Post Facto clause. The court concluded that the Act is not penal in nature, noting that “[i]f the intention of the Legislature was to impose punishments, that ends the inquiry.”
The court then found that the Attorney General sufficiently alleged that Sprint “repeatedly engaged in fraudulent and illegal acts” by failing to collect and pay sales tax and by submitting false sales tax filings to the New York Department of Taxation and Finance. However, with respect to the claims brought under the Tax Law which appear to have been co-extensive with the claims under the NY FCA, the court restricted the Attorney General’s claims to acts occurring after March 31, 2008. Noting that a three-year statute of limitations applies, the court found that: “The submissions do not include . . . tolling agreements. Nor do the pleadings contain any factual allegations to sustain the timeliness of any of the transactions completed more than three years prior to the commencement of the action” (citation omitted).
Finally, the court dismissed the second cause of action for conspiracy to violate the Act, finding that “Sprint cannot conspire with its own subsidiaries to violate the False Claims Act” (citation omitted).
The court’s decision allowing this “first of its kind” lawsuit to move forward is likely to spawn more tax fraud enforcement actions under the Act. Following the ruling, the Attorney General stated: “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.” The Attorney General’s press release on the court’s ruling is available here.