Sprint Communications Inc. Asks the U.S. Supreme Court to Hear Bundling Issue

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On February 18, 2016, Sprint Communications Inc. filed a petition for a writ of certiorari asking the United States Supreme Court to review the New York Court of Appeals’ denial of Sprint’s attempt to dismiss the approximately $400 million sales tax case brought against it under New York’s False Claims Act (“FCA”). In its October 20, 2015, denial, the Court of Appeals held that: (1) the attorney general’s complaint sufficiently pleaded a cause of action under the state FCA that Sprint knowingly filed false tax records with the state, (2) New York tax law unambiguously imposes sales tax on interstate voice services sold by a mobile provider along with other services for a fixed monthly charge, and (3) the state tax law is not preempted by the federal Mobile Telecommunications Sourcing Act (“MTSA”). Through its petition for cert, Sprint has asked the Court to intervene to review the Court of Appeals’ interpretation of the MTSA on the basis that the federal provisions preempt state tax law.

Summary of Litigation and Parties’ Positions

In the ongoing litigation, which began in 2011, the New York Attorney General alleges that Sprint implemented a nationwide program of unbundling its wireless package offerings and treating its fixed monthly access charges for wireless voice communications as if they were per-minute interstate charges, even though its monthly invoices continued to identify the charges as fixed monthly recurring access charges. The Attorney General alleges that through its unbundling program, Sprint knowingly undercollected $130 million in New York sales tax on flat-rate access charges and filed false tax returns. Because the FCA provides for treble damages, Sprint could ultimately be liable for total damages in excess of $400 million, including interest and other penalties.

Although the litigation was brought under an FCA claim, the underlying substantive issue is whether Sprint violated New York’s sales tax statutes and whether the interpretation of those statutes is preempted by the federal MTSA. New York Tax Law (“Tax Law”) taxes all fixed monthly charges for telecommunications services but authorizes separately stated interstate and international calls to be tax exempt and includes the MTSA’s provision to tax bundled services.

Sprint argues that Tax Law section 1105(b)(1)(B) excludes all interstate communication from taxation and that, accordingly, interstate mobile voice services are not taxable if they are sold separately. Sprint also argues that even if the Attorney General’s interpretation of the Tax Law were correct, it would violate the MTSA because New Yorkers would be required to pay sales tax on unbundled interstate mobile telephone calls.

The Attorney General’s position, on the other hand, is that although Tax Law section 1105(b)(1)(B) exempts interstate communication from taxation, there is no provision under the Tax Law that allows Sprint to exclude as nontaxable a portion of its flat rate mobile voice plans. Moreover, even if Sprint’s interpretation of the Tax Law were correct, the Attorney General argues that Sprint’s invocation of the purported nontaxable status of interstate calls bears no relationship to the reality of its billing, bookkeeping, or business practices. Specifically, the amount of Sprint’s receipts for services purported to be for interstate calls was calculated on a fixed percentage of its calls and bore no connection to actual interstate communications. Regarding the MTSA’s preemptive effect, the Attorney General asserts that even if the MTSA’s bundling provision has some preemptive effect, it only applies if a provider can reasonably identify nontaxable mobile charges from its books and records, which Sprint is not capable of doing.

Request for Cert and Comment

In response to the adverse decision from the New York Court of Appeals, Sprint is asking the U.S. Supreme Court to determine whether the Attorney General’s application of the Tax Law conflicts with the MTSA and is therefore preempted. Sprint has urged the Court that if it does not grant cert, service providers will be forced to either collect hundreds of millions of dollars of taxes from their customers or break out charges for interstate mobile voice service on their customers’ bills, in contravention of Congress’s goal in the MTSA. Moreover, given the availability of treble damages in New York, Sprint argues that if the Court denies cert, it is unlikely that Sprint or another telecommunications provider will litigate the validity of the Tax Law—meaning that by using the vehicle of the FCA to address the issue (rather than a tax assessment), the Attorney General is effectively denying Sprint (and other providers) the opportunity to receive due process with respect to the substantive tax issue.

Given the rarity with which the Supreme Court accepts state tax cases, Sprint likely knows that its chances of being granted cert are slim; however, the Court sometimes accepts a case in recognition of the egregious conduct of a party and the need to remedy an injustice. Here, the state’s action represents an early example of a very troubling multi-state trend toward the use of the FCA with respect to technical legal issues over which there is a legitimate dispute. We are hopeful that the federal preemption issue, combined with the egregious nature of the state action, is sufficient to get the Court’s attention.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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