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State sues Sprint over not paying sales tax; $100 million went uncollected, suit says

Sprint Nextel Corp. shortchanged New York State by more than $200,000 per week in taxes as part of a "deliberate" plan to make its service more price competitive to consumers, the state's top lawyer charged on Thursday.

Attorney General Eric Schneiderman said Sprint, unlike its major cellphone competitors, failed to collect and then pay more than $100 million in state sales taxes dating to 2005.

The state is seeking, with damages, more than $300 million in payments from Sprint.

"The message from 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 in a statement.

In addition, Schneiderman said local governments were also affected during the seven-year period. Based on Sprint's estimates, Erie County lost out on about $2 million in sales tax money Sprint should have paid, he said.

The lawsuit is without merit, according to Sprint spokesman John Taylor, who said that the company has collected "every penny that we believe our customers owe under New York State law."

"With this lawsuit, the Attorney General's Office is claiming New York consumers, who already pay some of the highest wireless taxes in the country, should pay even more. We intend to stand up for New York consumers' rights and fight this suit," Taylor said.

But the 30-page complaint filed Thursday morning in State Supreme Court in Manhattan alleges Sprint intentionally avoided paying New York obligations on about 25 percent of its receipts for its unlimited calling plans in which consumers are charged a fixed, monthly rate. Sprint did not, for instance, collect the full sales tax amount owed on one of its monthly plans charging customers $39.99.

"Sprint's decision to not collect and pay the required sales taxes in New York arose out of a nationwide scheme to gain an advantage over its competitor wireless carriers, not by cutting its prices or offering better service, but by failing to collect and pay sales taxes, thereby reducing the cost of its products to its customers. The consequence of this scheme was that Sprint knowingly deprived state and local governments of the tax revenues that provide necessary services to citizens," the complaint states.

The attorney general charged that Sprint knowingly submitted sales tax filings with the state that were "substantially" below its actual tax obligations.

Sprint continued the practice, the lawsuit alleges, even after state tax officials told the company its actions were illegal.

The complaint charges that Sprint has put its customers at financial risk.

"Sprint exposed these customers to the risk of having to pay the unpaid taxes, for they are also liable under the law if Sprint fails to pay," the complaint states.

Besides seeking to force Sprint to repay the owed sales taxes, the attorney general is also asking that Sprint customers locked into fixed rate plans -- for which the company failed to collect enough taxes -- be permitted to break their contracts without early-cancellation penalties.

The lawsuit alleges Sprint made a corporate decision to avoid paying the taxes after concluding that it would make its calling plans cheaper than its competitors' plans by a collective $4.6 billion per month.

The action is the first brought under New York's False Claims Act, which permits whistle-blowers to bring complaints against companies or individuals suspected of defrauding the government. In this case, a lawsuit was filed last year by Empire State Ventures under the false claims law. The law allows the government to collect up to three times the damages, and whistle-blowers can be eligible for up to 25 percent of those proceeds collected by the government.

The case by Schneiderman effectively substitutes the state as the plaintiff in the earlier private action. The case was brought against Sprint by Schneiderman's newly created Taxpayer Protection Bureau.

"This case represents the new era in tax fraud prosecutions," Schneiderman said.