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Sprint/Nextel Accused of Massive New York Sales Tax Fraud

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Last summer, in an action affirmed in late February 2014 by the Appellate Court, State Supreme Court Justice O. Peter Sherwood issued his Decision and Order in People v. Sprint Nextel Corp. (Case No. 103917/2011, Supreme Court of New York, New York County, 41 Misc. 3d 511) (Sprint), ruling on a decisive Motion to Dismiss the massive lawsuit submitted by defendants Sprint Nextel Corp., Sprint Spectrum L.P., Nextel of New York, Inc., and Nextel Partners of Upstate New York, Inc. (collectively, “Sprint”). Justice Sherwood dropped two (of four) Causes of Action alleged against the wireless carrier and reduced another, but permitted remaining charges to stand; the case will thus continue to trial, where its extremely serious accusations will sound.

In bringing Sprint, NY Attorney General Eric Schneiderman looks to prove that upper-level Sprint management concocted and effected a subtle, highly sophisticated, utterly illegal, and virtually undetectable tax-avoidance scheme, which undercut its competition while depriving New York of over a hundred million dollars in tax revenue.

This civil matter already carried a substantial procedural history by dint of being a qui tam (or “whistleblower”) lawsuit – brought by a private individual to call attention to malfeasance harming the public (and specifically alleging fraud against the government) which the authorities have not prosecuted. After inception by the qui tam plaintiff, the suit is taken over by the state, which engages its superior resources. Plaintiffs divide any money recovered.

The Superseding Complaint avers that in 2005, Sprint devised a ploy to undersell other providers by applying less sales tax to service plans that included a “fixed monthly access charge for wireless voice service” than did other telcos (who obeyed the law), netting a lower total cost for its customers. As alleged, Sprint impermissibly itemized charges in its plans that provide a pool of minutes for local, intrastate, interstate, and international calls, arbitrarily denominating a portion as being for “per-minute interstate usage” – which New York doesn’t tax.

By excluding these sales from taxability (13.7%, 15%, 22.5%, or 28.5% of consumers’ bills, depending on the plan) – fully aware that the reclassification had no connection to actual usage and was clearly prohibited, since “fixed monthly access charges for wireless voice” are taxed completely differently than is per-minute usage – Sprint avoided at least $100 million in New York sales tax since 2005. The alleged malfeasance continues even today.

Sprint seeks the taxes that should have been paid to the state but weren’t, plus interest (at 14½% per year!) for the nine years the scheme has been running. Additionally, because fraud offending the New York False Claims Act is charged, the action can recover not only the money Sprint should have gathered from its users but failed to, but TRIPLE DAMAGES on top! A claim for $400 million is BIG bucks even for a giant like Sprint with millions of “cash-cow” clients.

The Superseding Complaint, after state takeover from the original qui tam plaintiff, articulated four Causes of Action. Sprint is accused of: Violating Finance Law § 189(1)(g) (New York’s False Claims Act), for “knowingly making or using a false record or statement to avoid an obligation to pay or transmit money or property to the state” (each tax return being a “false record”); breaking New York State Finance Law § 189(1)(c), prohibiting conspiracy to violate the False Claims Act; transgressing New York Executive Law § 63(12), against “Persistent Fraud or Illegality”; and breaching Article 28 of the Tax Law, for failure to collect and remit sales tax properly owed the state.

Sprint countered with a Motion to Dismiss, attacking the Complaint for failing “to state a cause of action” (that is, deeming the case legally insufficient), and seeking “to dismiss as time-barred so much of the third and fourth causes of action as assert claims concerning statements made prior to March 31, 2008,” since they involve transactions exceeding the applicable Statute of Limitations.

The Supreme Court declared that the “Complaint alleges in great detail how Sprint implemented a nationwide program” of deliberate manipulation designed to create an appearance of reduced taxability. Even though “Sprint also argues that in any event, its interpretation of the Tax Law is reasonable and, thus, not punishable … the statutory construction urged by Sprint is inconsistent with the plain language used.”

The Court was further tasked with deciding a tangential question: Whether pursuing charges under amendments to the False Claims Act (as the Complaint does) violates the Ex Post Facto Clause of the U.S. Constitution against retroactive invocation of criminal-type laws, which proves a close call. Wrestling with seven relevant “factors,” Justice Sherwood concluded that this law “is not sufficiently punitive in nature and effect as to warrant preclusive application of the Ex Post Facto Clause to Sprint’s alleged conduct,” and thus is not effectively prohibited here.

Next, even though certain Counts of the Complaint “sufficiently allege” their illegal behavior, they are, as Sprint correctly observes, simply brought too late. The pleadings do not “contain any factual allegations to sustain the timeliness of any of the transactions completed more than three years prior to the commencement of this action. Thus, the third and fourth causes of action must be dismissed as time-barred to the extent that they apply to periods before March 31, 2008” (citation omitted).

Then, further flexing legal logic, Justice Sherwood deleted the Second Count (Conspiracy), which “must be dismissed,” he cogently reasoned, because “Sprint cannot conspire with its own subsidiaries.” Since no second party is implicated in the wrongdoing, the allegation fails: The Court realized that you cannot, in effect, “conspire” with yourself!

Summarizing, the Supreme Court’s Order denies Sprint’s Motion requesting complete dismissal of the case and permits it to advance, albeit on reduced terms. What remains is still huge ($400 million at stake!), and we will closely monitor this groundbreaking prosecution.

About the Author: Marc Palmer Kram is a Senior Tax Analyst at Wolters Kluwer Tax & Accounting US, where he performs quality control and troubleshooting on the vast taxability database supporting its best-in-class CCH tax-compliance software, and then sometimes writes about what he finds. Learn more about him by visiting his author bio page. Learn more about Wolters Kluwer at and

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3 Responses to Sprint/Nextel Accused of Massive New York Sales Tax Fraud

  • Posted by Sprint on June 25, 2014 7:43am:

    [...] In People v. Sprint Nextel Corp. (Case No. 103917/2011, Supreme Court of New York County, 2013 N.Y. Misc. LEXIS 2860) (“Sprint”), NY’s Attorney General accuses the giant telco of grand-scale tax fraud. Now, two business-cum-political players are urging Sprint’s dismissal. The Complaint alleges that in 2005 Sprint management implemented a devious tax-avoidance scheme, undercutting its competitors and denying New York over a hundred million dollars in tax revenue; anti-fraud statutes allow the state to recover triple damages upon conviction.(For additional details regarding case, please see previous post; Sprint/Nextel Accused of Massive New York Sales Tax Fraud) [...]

  • Posted by Bob on May 16, 2014 5:39am:

    Wow Marc,
    Since this issue ONLY speaks to NY, is it not safe to say that this could potentially be just the "tip of the iceberg" for Sprint? Or did they only concoct this scheme in NY?
    I worked as Tax Manager for 2 paging companies over a 5 year period, & I have to believe that if Sprint concocted this tax avoidance scheme, they did it NATION-WIDE!!
    Extending the logic furhter, I have to believe that any/all other states that tax telecom similiar to NY are now MOST INTERESTED in auditing Sprint in the very near future.
    $100 Million exposed in NY, how many more $100 Millions in other states??

    • Posted by Author photo of Marc Palmer KramMarc Palmer Kram on May 19, 2014 6:11am:

      Dear Bob Parker:
      Thanx so much for your enthusiastic and insightful reply!
      To answer your question as best I can (having no special knowledge of Sprint's actions in New York or elsewhere), it's still hard to say: New York's Complaint alleges that Sprint took advantage of a particular wrinkle in state sales tax law -- "wiggle room" most likely not replicated exactly in the statutes of any other state. This is not to say that there might not be other ways to play this game and engineer a similar type of tax dodge somewhere else, but I venture no such guess. You, of course, are free to speculate!
      Nobody's been convicted of anything yet, but, yes: "how many more" might there be, indeed?


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