Litigation > False Claims Act/Qui Tam Defense > State FCA Resource Center > People ex rel. Empire State Ventures, LLC v. Sprint Nextel Corp.
02 May '13

People ex rel. Empire State Ventures, LLC v. Sprint Nextel Corp., No. 103917/11 (Sup. Ct. N.Y. Co.): In April 2012, the New York Attorney General filed its first tax enforcement action pursuant to the New York State False Claims Act, alleging that Sprint violated the Act.  The Attorney General acted based on a whistleblower’s information and intervened in an action the whistleblower filed in March 2011.

The Attorney General’s complaint in intervention alleges that Sprint deliberately failed to collect and pay New York state and local sales taxes to gain a competitive advantage, and submitted false records to state taxing authorities. It further alleges that Sprint defrauded its customers statewide by falsely representing to them that it would collect and pay all applicable sales taxes in connection with calling charges. According to the complaint, since 2005, Sprint has cost the State of New York $214,000.00 per week in tax revenue.

In June 2012, Sprint moved to dismiss. Sprint attacked the merits of the complaint and the retroactive application of the August 2010 amendments to the New York State False Claims Act that authorize actions based on tax fraud (2010 Amendments).

First, Sprint claimed that the New York Tax Law excludes interstate voice services from sales tax, and challenged the Attorney General’s position that a telecommunications provider which bundles non-taxable services (interstate calls) with taxable services (intrastate calls) must pay New York State sales tax on the full proceeds from those bundled services. Sprint also argued that even if the New York Tax Law requires phone companies to collect and pay taxes on interstate voice services, applicable federal law (the Mobile Telecommunications Sourcing Act [“MTSA”], 4 U.S.C. § 123), which permits a telecommunications provider to “unbundle” interstate voice services from intrastate voice services in a flat-rate calling plan, and collect sales tax only on intrastate services, would pre-empt any allegedly contrary New York state law. Moreover, even if Sprint’s interpretation of the New York Tax Law was incorrect, it lacked the requisite intent to violate the New York False Claims Act.

Second, Sprint argued that because the complaint seeks damages for practices pre-dating the August 2010 Amendments, it violates the Ex Post Facto clause. Sprint conceded that the Ex Post Facto clause only prohibits the retroactive application of penal laws, but argued that the Act is penal because it authorizes treble damages.

The Attorney General’s opposition focused on Sprint’s fixed monthly charge for “access” to its calling network, as opposed to specific calls (referencing Sprint’s own invoices), and argued that the issue is not Sprint’s “unbundling” of intrastate from interstate calls. The Attorney General cited a new provision of the New York Tax Law, § 1105 (b) (2), which requires the collection of sales tax on the full amount of receipts from fixed monthly charges for mobile voice services. The Attorney General argued that Sprint did not pay sales tax on what was, in fact, an arbitrary portion of its fixed monthly charge, deeming that portion “interstate.”  Because the issue was Sprint’s arbitrary designation of a portion of the charges as “interstate” rather than the unbundling of interstate and intrastate calls, the action did not implicate the MTSA. The Attorney General noted that Sprint did not consult the State Tax Department prior to implementing its arbitrary “interstate” designation for a portion of its fixed monthly charges to customers. Moreover, the Attorney General argued that because Sprint understood that its arbitrary classification was unsound, Sprint possessed the requisite intent.

Finally, the Attorney General argued that the retroactive application of the 2010 Amendments does not violate the Ex Post Facto clause because the Act is a civil, not criminal, statute. The Attorney General applied the seven-pronged test articulated in Hudson v. United States (522 U.S. 93 [1997]). Although one of the determinative factors – whether the law promotes goals of punishment – clearly supports Sprint’s argument, the Attorney General urged the court to find that the 2010 Amendments are not penal in nature and, do not therefore, violate the Ex Post Facto clause.

The court heard oral argument and took the matter under submission on November 13, 2012, but has not issued a ruling to date.

Notably, a related shareholder derivative action is pending in the Southern District of New York. Less than two weeks after the Attorney General intervened in the tax fraud action against Sprint, the Louisiana Municipal Police Employees’ Retirement System filed a shareholder derivative action in New York state court against Sprint’s Board of Directors and certain executive officers for breach of their fiduciary duties based on the conduct alleged in the Attorney General’s complaint. Sprint moved to dismiss the shareholder derivative action, which had been removed to the Southern District of New York, and United States District Judge Andrew Carter Jr. heard oral argument on April 23, 2013. Judge Carter stated that he expected to rule on Sprint’s motion within a few months.