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May 31 — The U.S. Supreme Court denied Sprint's petition for review of a closely watched tax case from New York, marking the second big legal defeat for the company in the past eight months ( Sprint Nextel Corp. v. New York, U.S., No. 15-1041, cert. denied 5/31/16 ).
Sprint petitioned for certiorari in February, asking the high court to overturn a New York decision that allowed the state to proceed with a False Claims Act case against the company for its failure to collect and pay sales taxes on flat-rate calling plans (93 DTR K-1, 5/13/16).
The company's primary argument on appeal was that New York's sales tax on interstate mobile voice services was preempted by the federal Mobile Telecommunications Sourcing Act.
Sprint's first major setback came in October 2015, when the New York State Court of Appeals said the state could proceed with its case and remanded the case to a trial court.
Sprint could be liable for $400 million in back taxes and treble damages in the case, which now shifts to a trial court in New York that is hearing the case on remand from the New York State Court of Appeals. The case is in the pre-trial stages (89 DTR K-2, 5/9/16).
In a statement, Sprint downplayed the May 31 Supreme Court denial as “a procedural step in the process.”
“The Supreme Court declined to hear an interim appeal on the interplay between a federal statute and the state statute,” the company said. “It’s important to note that the merits of the case have not yet been heard.”
Two leading corporate tax attorneys who oppose the use of the False Claims Act in tax cases offered advice for taxpayers.
“Because the Court of Appeals held that the reasonableness of the taxpayer’s position is not a defense, it will be necessary for corporations and, for that matter, individuals that take positions that contradict positions of the State Department of Taxation and Finance to document the legal basis for their position before filing their tax returns,” Peter L. Faber, a partner at McDermott Will & Emery LLP, told Bloomberg BNA in an e-mail.
He said the denial of certiorari will have limited significance beyond the narrow issue presented in the case involving the Mobile Telecommunications Sourcing Act. “The real action in this case is yet to come,” he said, referring to the trial court.
Jack Trachtenberg, counsel at Reed Smith LLP, told Bloomberg BNA that “the prospect of a public trial regarding intimate details of Sprint’s business operations and tax compliance decisions should concern every taxpayer in New York.”
“The courts do not seem willing to put the brakes on tax matters being enforced through FCA actions in New York,” he said in an e-mail. “Taxpayers need to be proactive and reassess their past and current tax compliance decisions in light of the new risk environment posed by New York’s FCA and the Attorney General’s willingness to bring aggressive enforcement actions under the law.”
Nick Benson, a spokesman for Attorney General Eric T. Schneiderman (D), told Bloomberg BNA that the attorney general was pleased by the high court's decision and “looks forward to a complete victory in this ongoing case against Sprint over alleged tax violations.”
Erika A. Kelton, whose practice includes representing whistle-blowers at the firm Phillips & Cohen LLP, said Sprint can now either reach a settlement or go to trial.
“Settlement ultimately will be less costly for the company and will permit it to move on,” she told Bloomberg BNA in an e-mail.
Randall M. Fox, an attorney with Kirby McInerney LLP, told Bloomberg BNA that the main issue to be decided at trial now appears to be whether Sprint violated the state's False Claims Act “by acting with knowledge when it did not pay the tax.”
“Sprint could not overcome the high hurdle of getting the Supreme Court to agree to hear a non-dispositive appeal based on an argument that has already been unanimously rejected by three courts in New York,” said Fox, who was the bureau chief in the attorney general’s Taxpayer Protection Bureau when the Sprint case was taken on.
“The upshot of the Supreme Court's decision is that, after about four years of failed attacks on the Attorney General's pleadings, Sprint now must address the claims against it,” Fox said.
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Additional information is available in Bloomberg BNA's Supreme Court Docket Watch: 2015-2016 Term Tax Law Cases.
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