Whistleblower Teams Up With the State of New York in Groundbreaking Suit Against Sprint-Nextel Corporation

On April 19, 2012, Attorney General Eric T. Schneiderman filed a groundbreaking lawsuit against Sprint-Nextel Corporation for deliberately under-collecting and underpaying millions of dollars in New York State and local sales taxes. The lawsuit was brought under the New York False Claims Act, which, unlike its federal counterpart, expressly permits cases involving tax fraud.

Although the law has been on the books since August 2010, the Sprint lawsuit is the first case to be brought under the New York False Claims Act. Since the law was passed, the chief of the Tax Protection Bureau of the Attorney General’s Office, Randy Fox, has been scouring the state for a case that would send a message to the taxpayers of New York. Mr. Fox launched an investigation of Sprint’s billing practices after reviewing the allegations in a whistleblower complaint that alleged a seven-year tax avoidance scheme by the telecommunications giant. According to the complaint, Sprint had actual knowledge that New York State imposes sales tax on the entire amount of fixed monthly charges for wireless voice services, yet it failed to collect and pay those taxes on about 25 percent of its receipts for these “flat-rate” calling plans.

Mr. Schneiderman claims that Sprint’s conduct was motivated by an effort to reduce the cost of its product and thereby gain a competitive advantage over its competitors. Moreover, it is alleged that the unlawful actions of Sprint cost the State of New York more than $100 million in sales tax revenue. Under New York law, if Sprint is found liable, it may have to pay three times its underpayment, plus penalties. Depending on the level of participation in the prosecution of this case and the value of the information provided to the Attorney General, the whistleblower may receive between 15 and 25 percent of the amount collected by New York State.

Because of the amount at issue, the Sprint case is likely to set the stage for future tax whistleblowers. And, in the meantime, the Attorney General’s Office will be looking for more inside information from whistleblowers with knowledge of significant tax avoidance schemes.

Michelle Merola is a partner in the Business Litigation Practice at Hodgson Russ LLP. You can reach her at mmerola@hodgsonruss.com.

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