Sprint Faces $300mn Lawsuit for Not Billing Sales Tax

Taxes are one of the great certainties of life… or are they? US telco Sprint is currently engaged in a legal fight with the New York Attorney General’s office about how to interpret the law regarding NY sales taxes. If Sprint lose, they will suffer a USD300mn shellacking for having failed to collect taxes from customers for interstate mobile phone services. The Attorney General is only arguing that Sprint failed to bill USD100mn of taxes to customers, but wants treble damages per a law that punishes businesses for submitting false tax returns. So whilst Sprint may have saved customers USD100mn, it could cost the telco much more in the end.

Sprint’s disputed interpretation of NY state tax law dates back to 2005, but the case has yet to come to court after three years of legal argument already. The Attorney General’s complaint was filed in 2012, alleging that…

…Sprint knowingly violated the New York Tax Law, engaged in fraudulent or illegal acts, and submitted false documents to the State pursuant to the New York False Claims Act (FCA).

Sprint moved to dismiss the complaint, arguing the law allows an exclusion from sales tax when applying bundled charges to interstate and international calls. If the tax was excluded based on a reasonable interpretation of the tax law, there could be no valid FCA claim. However, the New York Court of Appeals recently affirmed the decision of a lower court, and rejected Sprint’s motion to dismiss. The lawsuit will now proceed.

In the opinion of the New York Court of Appeals…

…(1) the New York Tax Law imposes sales tax on interstate voice service sold by a mobile provider along with other services for a fixed monthly charge; (2) the statute is unambiguous; (3) the statute is not preempted by federal law; (4) the AG’s complaint sufficiently pleads a cause of action under the FCA; and (5) the damages recoverable under the FCA are not barred by the ex post facto clause of the United States Constitution.

In other words, the court believes the NY law is straightforward enough, it should have been followed by Sprint in this instance, and nothing in the US constitution can be used to invalidate NY law and thus save Sprint from being punished for non-compliance. Nevertheless, the NY law was not so clear that all the judges agreed. One of the five judges issued a dissenting opinion, stating that the relevant NY law is ambiguous.

In my view, Tax Law § 1105 (b) (2) is an ambiguous statute. Given the procedural course… charted here, we are required to interpret any ambiguity in favor of Sprint, as the taxpayer, for the purpose of resolving Sprint’s motion to dismiss. Because the Attorney General cannot establish that Sprint’s tax filings were actually false in light of this ambiguity, the complaint’s principal allegation — that Sprint violated the Tax Law by failing to collect sales tax due on interstate mobile voice services based upon its purportedly erroneous interpretation of the applicable statute — must fail and cannot form the basis of a cause of action pursuant to the False Claims Act, Executive Law § 63 (12) or Tax Law article 28. Therefore, I respectfully disagree with the majority…

Is the tax law ambiguous or not? It seems the judges agreed to disagree. However, these are matters of great importance to telcos and customers. USD100mn is not a trivial amount of money; I am sure customers were glad to enjoy cheaper bills. According to the Attorney General, not applying the four percent sales tax meant Sprint customers saved USD4.6mn every month.

It also seems unfair that Sprint may suffer a USD300mn penalty for wrongly interpreting a law that even a senior judge believes is ambiguous. However, the scale of the penalty highlights that telcos cannot afford to take risks with the tax they apply to bills. Some governments and lawyers can be ruthless in punishing those who disobey tax rules, and they will justify their actions by asserting the need for fair and equal treatment of rival businesses. Attorney General Eric Schneiderman pointedly said:

Sprint’s decision not to collect and pay taxes was part of a nationwide effort by the Kansas-based company to lure customers from rivals such as AT&T Inc and Verizon Wireless…

There are many interesting and peculiar aspects to this legal dispute. For example, normal practice would see the state’s tax collectors chasing the unpaid money, not the Attorney General. And the initial lawsuit was lodged by a third party, acting on the state’s behalf, before the Attorney General intervened. This kind of lawsuit is permitted where whistleblowers claim the defendant has defrauded the government in some way; the whistleblower is rewarded with a share of the monetary judgement, if the government takes over and wins.

To win treble damages, the Attorney General will now need to prove that Sprint knowingly committed fraud. In contrast, Sprint will again seek to prove that they took a reasonable interpretation of the tax law.

This case illustrates that not every aspect of a bill is within the control of a telco. Telcos have greatly improved how they manage the implementation of tariffs, and how they ensure charges have been correctly presented in every instance. However, many telcos slip up over taxes. Taxes are complicated, and a variety of skills must be brought together to ensure they have been properly applied to every bill. Furthermore, governments are not as meek as ordinary customers, and they have a unique ability to punish telcos who fail to bill taxes correctly. They also have long memories, and are prepared to fight old cases when they have sufficient motivation. They can even reward private parties who help the government to collect more tax.

No telco wants to collect more tax than they should, because that will hurt customers and make the telco less competitive. However, when so much is at stake, telcos need to apply extra diligence to the interpretation, application, and collection of tax. Assurance professionals need to be in the vanguard when scrutinizing the collection of tax. Sales taxes do not affect the bottom line, and it is not easy to devise controls to check taxes. On the contrary, assurance practitioners must give special attention to tax because of the potential harm to the telco if it is found non-compliant, and because implementing adequate controls requires the assistance of tax specialists. And there is not much point trying to get the last 0.1 percent of value out of every bill, if the business is left liable for a 4 percent tax it failed to collect, and to penalties which can treble the liability to an effective rate of 12 percent.

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.