The difference between an in-state call from Brooklyn to Albany, and a call from Brooklyn to Kansas City or Cleveland or Los Angeles, has created a $100 million tax dispute between Sprint Nextel Corp. and the state of New York.
Sprint contends that it needed to collect sales taxes only on the first,intra state, type of long-distance calls. New York’s attorney general challenged that in a lawsuit filed Thursday, arguing that Sprint hurt tax coffers in the state and gained an unfair advantage on competitors by not also collecting surcharges for the second, inter state
, type of phone call.
New York Attorney General Eric Schneiderman said he would seek triple damages in the case, dinging Sprint for $300 million.
“That’s a meaningful amount,” said Roger Entner, who tracks the industry at Recon Analytics. “It’s a painful hit.”
It’s unclear what a Sprint loss in the New York case would mean for the company, or its customers, in other states. Sprint customers in many states apparently already pay taxes on out-of-state calls, making a change to their bills unlikely. States with laws more similar to New York’s, however, might be inclined to check Sprint’s methods in pursuit of added state revenues.
“It would be almost a foregone conclusion that other states would try the same thing,” Entner said.
Years could easily pass before the dispute is settled, but the money-losing Overland Park-based carrier is in a poor position to foot such a cost. The No. 3 wireless carrier is still struggling to attract and retain customers even as it plows ahead with a $9 billion overhaul of its wireless network.
The potential $300 million-plus total in the New York lawsuit roughly equals the amount of working cash Sprint was able to generate in the last three months of 2011. Sprint’s “free cash flow,” money that isn’t promised to suppliers and the like, in that quarter totaled $257 million.
Sprint’s stock closed down 12 cents a share Thursday to $2.40, or a drop of 4.76 percent.
Discussions between Sprint and the attorney general’s office over the tax fight had been ongoing. They culminated Thursday with the filing of the lawsuit under a statute that lets the government sue for losses from tax fraud.
“Tax dodging is not acceptable,” Schneiderman said inannouncing
He also said he would go after Sprint, not its customers, for the money. Schneiderman said his office would try to make it possible for Sprint customers in New York — whose future bills could now be taxed more heavily than they have been for several years — to ditch their contracts without paying hefty termination fees.
A press release announcing the lawsuit contended that Sprint “illegally failed to collect and pay New York sales taxes” — Sprint is not accused of pocketing tax money — “on an arbitrarily set portion of its revenue from fixed monthly access charges.”
Sprint quickly denounced the attorney general’s move.
“This complaint is without merit, and Sprint categorically denies the complaint’s allegations,” the companysaid in a statement
. “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.”
The carrier portrayed itself as protecting its customers against paying more taxes than they are legally required.
New York law has required since 2002 that wireless carriers collect and pay sales taxes on the entire amount they charge for monthly access calling fees. The attorney general’s lawsuit alleges that since 2005 Sprint shorted the state by about 25 percent on those sales taxes and submitted false records.
That’s about the same time Sprint altered its bookkeeping to break out the portion of calls that were instate, and liable to New York sales taxes, and those that were between states and not subject to the surcharge. The other major carriers — Verizon Wireless, AT and T-Mobile USA — keep their records differently. Consequently, they collect sales taxes based on the full cost of the plans that bundle the different types of calls.
Even to Sprint consumers, the different types of calls are invisible. In fact, the pricing on most cellphone plans now makes consumers indifferent to whether their calls are local or long-distance, intrastate or interstate. But Sprint’s internal records mark the distinctions and form the basis of how the company thinks it was able to collect less sales tax money for New York. In its lawsuit, the state deems Sprint’s unique accounting arbitrary.
“New York tax law is clear. Companies must pay sales tax on the entire monthly charge,” Schneiderman said.
The state sales tax is 4 percent, while most counties add another 4 percent.
The lawsuit said the amount kept growing since Sprint had not changed its practices. It requested more than $300 million and supersedes a lawsuit filed last year by whistleblower Empire State Ventures LLC, a company that Schneiderman said conducts investigations.
In 2010 New York redrafted its law allowing the government to sue contractors and others over losses from fraud to include tax fraud. That was aimed at making the state more attractive to false-claims lawyers, said Schneiderman, a former state senator who pushed for the measure.
The lawsuit also suggests some internal discomfort at Sprint on its approach to collecting the taxes. The lawsuit cites internal company emails exchanged when Sprint was considering asking for rebates for a period before it stopped collecting the disputed taxes.
Sprint’s senior tax lawyer at one point wrote that the company “is already taking some risk with unbundling. Our risks are exponentially increased if we try to pursue refunds when we didn’t jump through the hoops on unbundling” — a reference to the precise bookkeeping method on which Sprint based its choice not to collect the sales taxes.
According to court papers, Sprint has about 55 million customers, including about 1.8 million wireless customers, in New York. It sells wireless plans in New York through subsidiaries Sprint Spectrum, Nextel of New York and Nextel Partners of Upstate New York.
New York has the country’s third-highest tax rate at 17.8 percent on wireless services, according to a study by State Tax Notes. Missouri ranks seventh, at 14.2 percent, and Kansas stands at ninth at 13.3 percent. But Kansas, for instance, does specifically tax interstate phone calls, ruling out a dispute like Sprint has with New York. Likewise, Missouri law does not appear to distinguish between in-state and out-of-state long-distance taxes.
The lawsuit came out the same day that Verizon issued its latest earnings report showing the nation’s largest carrier making further gains in both keeping and attracting customers. At No. 3 in the market, Sprint had hoped that its addition late last year of the popular iPhone to its stable of devices could make it more competitive.
“The Verizon news casts doubt about how much traction Sprint is getting with the iPhone,” said Donna Jaegers, a telecommunications analyst at D.A. Davidson Co.The Star’s Mark Davis and The Associated Press contributed to this report.