Sales Tax Slice: Relying on DOR Interpretations: Damned if You Do, ‘Qui Tam’d’ if You Don’t?

Sprint could be forced to pay approximately $300 million in treble damages for disregarding the New York State Department of Taxation and Finance’s interpretation of state tax law. In a qui tam case brought under New York’s False Claims Act, the New York Court of Appeals held last Tuesday that treble damages may be imposed on the telecom company for underpaying sales tax on cellular service by approximately $100 million.  

In its defense, Sprint insisted that interstate cellular service is not taxable in New York and that the receipts on which it failed to pay tax were allocable to nontaxable interstate service. The Court disagreed and upheld the New York Department of Taxation and Finance’s longstanding position that interstate cellular service is taxable. In order to avoid treble damages, Sprint will now need to prove that its underpayment was actually based on what it reasonably believed the tax law to say. (Fraud is one of the few areas where ignorance of the law is an excuse.) 

Qui tam claims may be brought in state tax cases in a minority of states. Short for a longer Latin phrase that means something about suing on behalf of a king, “qui tam” refers in this context to claims brought by a private party, known as a “relator”, alleging underpayment of state tax liabilities. As an incentive for bringing these claims, the relator may receive a portion of the tax recovered. State false claims acts that permit these claims in tax cases typically provide for treble damages.   

Critics of qui tam claims being made available in tax cases often cite to the difficulty in complying with uncertain tax laws. In fact, relying on official guidance may not even be enough to avoid a qui tam lawsuit. In an Illinois case, the dismissal of which was affirmed earlier this year, a relator brought a qui tam claim against QVC for not charging Illinois’ retailers’ occupation (sales) tax on delivery charges. The Illinois Department of Revenue had erroneously approved QVC’s treatment of these charges in a previous audit. Like New York’s, Illinois’ False Claims Act may be used to impose treble damages.    

Taxpayers that seek to avoid qui tam claims by erring on the side of overcharging tax may find themselves defending against class action lawsuits instead. For instance, in a lawsuit currently before the U.S. District Court for the Southern District of Illinois, customers are claiming that Papa John’s improperly collected tax on pizza delivery charges. The case was brought under the Illinois Consumer Fraud Act and removed to federal court under the Class Action Fairness Act of 2005. 

In related news, Walmart recently settled a sales tax overcollection claim brought in Ohio. To claim your share of the settlement from this and other class action lawsuits, click here. As a co-worker who regularly trolls the hyperlinked website pointed out, proof of purchase is not always required to make a claim.  

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should state false claims acts apply to false tax claims? 

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