The New York State False Claims Act Reaches Tax Violations Prior to 2010

The New York False Claims Act (NY FCA) was amended in August 2010 to expressly apply to knowing violations of the New York State Tax Law. As reported in a previous blog entry, a whistleblower filed an action against Sprint Nextel Corporation alleging that it failed to collect or pay New York State sales taxes on receipts from the sale of certain wireless telephone services. After an investigation, the attorney general for the State of New York, Eric T. Schneiderman, intervened and filed a superseding complaint adopting the FCA claims and alleging additional claims against the mobile telecommunications service provider. Among those claims were claims premised on conduct predating 2010, when the NY FCA was amended to include tax violations.

In response, Sprint argued that claims based on pre-2010 conduct violate the ex post facto clause of the U.S. Constitution. The ex post facto clause prohibits Congress and the states from enacting any law that, among other things, retroactively imposes a punishment for an act that was not punishable when it was committed. After a lengthy analysis, the court concluded that “[The statute], like its federal counterpart, is not sufficiently punitive in nature and effect as to warrant preclusive application of the ex post facto clause prior to Aug. 10, 2010, when the act was amended to expressly apply to knowing violations of the tax law.” Although the decision is likely to be appealed, for now, the ruling opens the door to FCA cases with allegations that predate the 2010 amendments.

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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