Sprint Sued By New York For $300 Million; Service Provider Denies Tax Fraud

Sprint Nextel Corp., the third-largest mobile service provider in the U.S., has been sued by the state of New York for allegedly not collecting or paying millions of dollars in taxes. The lawsuit, filed by New York's Attorney General Eric Schneiderman with the New York State Supreme Court, says Sprint failed to collect more than $100 million worth of taxes from Sprint customers over the course of seven years.

By deliberately evading sales taxes, Sprint cost state and local governments over $100 million that could have been used for critical services and much-needed resources that our state and its citizens need given the challenging economic times we are in, Schneiderman said in a statement.

Sprint, however, dismisses all of these claims, saying the company has paid its taxes.

This complaint is without merit and Sprint categorically denies the complaint's allegations, Sprint said on Thursday. We have collected and paid over to New York every penny of sales taxes on mobile wireless services that we believe our customers owe under New York state law.

Schneiderman's lawsuit is the first filed under the New York False Claims Act, which allows the government to sue over tax losses stemming from fraud. Since companies or individuals found liable of defrauding the government are charged triple the damages, penalties and attorneys' fees, Sprint could end up paying more than $300 million.

The message of our office is clear - tax dodging is not acceptable and we will use every tool in our arsenal to make sure that taxpayers' money is protected, and that honest businesses and consumers are not placed at a disadvantage for collecting and paying their fair share of taxes, Schneiderman said.

The New York Tax Law, enacted in 2002, requires cell service providers to collect and pay sales taxes based on the full amount of monthly access charges for their individual calling plans. For example, if a customer pays Sprint $39.99 a month for 450 minutes of calling time, the New York Tax Law states Sprint must collect and pay sales taxes on the $39.99.

Schneiderman asserts that since 2005, Sprint has failed to collect and pay these taxes on an arbitrarily set portion of its revenue by repeatedly and knowingly submitting false reports and statements to New York's tax authorities. The Attorney General accuses Sprint of hiding this practice in an attempt to lure customers away from competitors like Verizon Wireless and AT&T.

If the Attorney General's statements are true, Sprint effectively made its service more than $4.6 million less expensive per month. Yet, Schneiderman asserts that this illegality is ongoing.

Sprint did not correct its sales tax practices when it was informed of its illegality, and it has not corrected them even today, he said. As a result of Sprint's unlawful actions, its underpayment of New York sales taxes is growing by about a $210,000 every week, over $30,000 a day.

The Attorney General's investigation of Sprint reportedly began last March, when the New York State Department of Taxation and Finance investigated and determined the extent of Sprint's illegal actions. The Attorney General hopes to connect the bills Sprint was accused of not paying, and also looks to protect Sprint's current customers to whom Sprint falsely marketed its wireless calling plans.

Sprint promised its customers that it would collect and pay the correct amount of sales taxes on their behalf, said the Attorney General's office. The Attorney General seeks to ensure that Sprint -- and not its customers -- will be liable for any back taxes, and to empower Sprint's current New York customers to terminate their Sprint contracts without having to pay termination fees.

Attorney General Schneiderman and his staff will work with Menz Bonner Komar & Koenigsberg LLP to investigate the claims and handle the matter in court.

This case shows that the New York Attorney General is putting to good use the tools provided by the robust New York False Claims Act that Attorney General Schneiderman expanded as a lawmaker, said David Koenigsberg of the law firm. We look forward to working with his office to pursue this case in court.