Discovery Continues in Sprint Whistleblower Litigation

Here’s a note on an interesting development in the ongoing litigation between the Tax Department and Sprint. For background, Sprint has been embroiled in the false claims action brought by New York State as a result of allegations that Sprint knowingly under-collected sales tax on bundled charges to New York cellular customers. When the case was brought several years ago, it was the first big false claims case brought by the State under the new False Claims regime that included tax violations under its realm. Sprint unsuccessfully tried to dismiss the lawsuit altogether, but a couple of years ago New York’s Court of Appeals held that the action could continue.

In recent discovery demands, Sprint requested a couple things, including asking the attorney general of New York, Eric Schneiderman, to produce all communications with any provider of mobile telecommunications voice services regarding payment -- or lack thereof -- of New York State sales tax for interstate mobile telecommunications voice services. It also asked for all documents within the Department of Taxation and Finance concerning New York sales tax on interstate mobile telecommunications services. Moreover, they asked for all the documents about whether New York’s taxation of interstate mobile telecommunications voice services, when sold as part of a bundle or fixed-rate service, may comply with the MTSA.

One major point made by the State against Sprint was that Sprint had developed a methodology for under-collecting sales tax that it knew was wrong, and that no one else in the industry had been doing. As part of its defense, therefore, Sprint obviously thought it necessary to find out what these other competitors were doing. And in that regard, it made discovery demands against New York State as part of the ongoing litigation for all responsive documents withheld under a claim of “tax secrecy” other than tax returns or reports filed with the tax commission and any particulars set forth or disclosed in any such return or report, i.e. confidential financial information whose only source is a filed tax return or report.

In a recent decision issued by the First Department Appellate Division in New York, the Court upheld the lower court’s denial of Sprint’s requests for documents showing who paid sales taxes on mobile telecom services, in the basis that disclosure would violate taxpayer secrecy laws. However, the Court allowed Sprint’s request for copies of Tax Department or taxpayer opinions about how the tax rules worked. Thus, Sprint will be able to get copies of these documents to defend itself in the false claims action. Indeed, if Sprint is able to find evidence that other taxpayers were taking the same position, then this could seriously undermine the Government’s claim that Sprint was a lone wolf, taking tax positions that no one else was taking.

We have often tried to get copies of similar types of records through the Freedom of Information Act in the context of normal civil tax appeals. In past years, we have had success, but it has been spotty. This case at least suggests that the provision of such materials would not violate any taxpayer secrecy provisions, so taxpayers who want to make future requests for Tax Department opinions or other materials in connection with an appeal should take note.

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