People v. Sprint Nextel Corp.

OPINION OF THE COURT

We hold that: (1) the Tax Law imposes sales tax on interstate voice service sold by a mobile provider along with other services for a fixed monthly charge; (2) the statute is unambiguous; (3) the statute is not preempted by federal law; (4) the Attorney General’s (AG) complaint sufficiently pleads a cause of action under the New York False Claims Act (FCA) (State Finance Law § 187 et seq.); and (5) the damages recoverable under the FCA are not barred by the Ex Post Facto Clause of the United States Constitution.

In 1989, the United States Supreme Court held that the dormant Commerce Clause of the Federal Constitution limited the states’ authority to tax interstate telephone calls. A telephone call was taxable only if it originated or terminated within the state and was charged to an in-state billing or service address (see Goldberg v Sweet, 488 US 252, 256 n 6, 263 [1989]).

The Goldberg rule was easy to apply to landline telephones, which had fixed physical locations. But the next decade saw “an explosion of growth in the wireless telecommunications industry” (HR Rep 106-719, 106th Cong, 2d Sess at 7, reprinted in 2000 US Code Cong & Admin News at 509), and states and service providers struggled to adapt the Goldberg nexus requirement to mobile telephone calls. States developed differ*106ent methods to determine which mobile calls to tax. As a result, some mobile telephone calls were subject to taxation by multiple jurisdictions (HR Rep 106-719, 106th Cong, 2d Sess at 7-8, reprinted in 2000 US Code Cong & Admin News at 509).

A further complication was introduced as mobile carriers began to sell flat-rate voice plans that charged a fixed monthly price for access to a nationwide network, as opposed to charging calls by the minute, regardless of where the calls were placed or received. These flat-rate plans made it “virtually impossible to determine the portion of th[e] price charged for individual calls, each of which may be subject to tax by a different jurisdiction,” and thus “impossible to determine the amount of revenues to which each of the various state and local transaction taxes should be applied” (S Rep 106-326, 106th Cong, 2d Sess at 2).

Congress responded by enacting the Mobile Telecommunications Sourcing Act (MTSA) (4 USC § 116 et seq.) The MTSA establishes a uniform “sourcing” rule for state taxation of mobile telecommunications services: the only state that may impose a tax is the state of the customer’s “place of primary use” — either a residential or primary business address, as selected by the customer (4 USC §§ 117 [b]; 124 [8]).

The New York Legislature responded to the MTSA in 2002 by enacting multiple amendments to the Tax Law that clarified and amended the State’s treatment of mobile telecommunications services. Under the preexisting law that was enacted in 1965, New York did not tax any interstate or international calls. As relevant here, the 2002 amendments implemented a new set of rules — specifically, those applicable to voice services sold through flat-rate plans.

Another legislative amendment, this one from 2010, led directly to the issues posed by this litigation. The FCA provides for enforcement by both the AG (in civil enforcement actions) and private plaintiffs on behalf of the government (in “qui tarn civil actions”), and the AG has the right to intervene and file a superceding complaint in a qui tarn action (State Finance Law § 190 [1], [2], [5]). The Act provides for the imposition of treble damages and civil penalties against violators (id. § 189 [1]).

The FCA applies to any person who “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to” the government (id. § 189 [1] [g]). The statute provides that a *107defendant acts “knowingly’’ when defendant has “actual knowledge” of a record’s or statement’s truth or falsity or “acts in deliberate ignorance” or “reckless disregard” of its truth or falsity (id. § 188 [3] [a]).

As originally enacted, the New York FCA did not apply to false tax claims. But, in 2010, the legislature amended it to cover “claims, records, or statements made under the tax law” in certain circumstances (L 2010, ch 379, § 3, codified at State Finance Law § 189 [4] [a]). The amendment was designed to “provide an additional enforcement tool against those who file false claims under the Tax Law,” and thus “deter the submission of false tax claims” while also “provid[ing] additional recoveries to the State and to local governments” (Letter from St Dept of Tax & Fin, Aug. 4, 2010 at 2, Bill Jacket, L 2010, ch 379 at 13).

Sprint is a wireless telecommunications service provider that does business in New York, and it sells wireless “flat-rate” plans that include a certain number of minutes of talk time for a fixed monthly charge. After the Tax Law amendments were enacted in 2002, Sprint paid sales tax on all of its receipts from its flat-rate plans.

In 2005, however, Sprint began a nationwide program of “unbundling” charges within these flat-rate monthly plans. Specifically, Sprint unbundled the portion of the fixed monthly charge that it attributed to intrastate mobile voice services, and did not collect taxes on the portion that it attributed to interstate and international calls. For the tax years at issue, the percentage of the fixed monthly charge on which Sprint collected sales tax ranged from 71.5% to 86.3%. Sprint did not separately state on customers’ bills the charges for interstate and international voice services included in the flat-rate plan.

On March 31, 2011, Empire State Ventures, LLC, filed suit against Sprint under the New York FCA. On April 19, 2012, the AG filed a superceding complaint, which converted the relator’s action into a civil enforcement action by the AG.

The AG’s complaint, as relevant here, alleges that section 1105 (b) (2) of the Tax Law “requires the payment of sales taxes on the full amount of fixed periodic charges for wireless voice services sold by companies like Sprint to New York customers.” It further alleges that section 1111 (l) permits wireless providers to “treat separately for sales tax purposes certain components of a bundled charge for mobile telecommunication *108services, so long as the charges are not for voice services.” The complaint asserts that Sprint violated the Tax Law by failing to collect sales tax on the portion of its flat-rate charge that was attributable to interstate and international voice services. It further alleges that Sprint’s decision to unbundle its plans sold for a fixed monthly charge “was driven by its desire to gain an advantage over its competitors by reducing the amount of sales taxes it collected from its customers and, thereby, appearing to be a low-cost carrier.” According to the AG, the percentages of the flat-rate charges that Sprint allocated to interstate and international calls were completely arbitrary.

In support of its allegations that Sprint knowingly submitted false tax statements, the AG cites a Tax Department guidance memorandum published before the 2002 amendments became effective, which states that the sales tax is to be applied in the manner that the AG now advocates. The AG points out that Sprint adhered to this guidance until July 2005, when it changed its tax practices. Interestingly, Sprint did not seek a tax refund for the 2002-2005 tax years in which it paid those taxes.

The AG further alleges that Sprint also disregarded the statements of a Tax Department field auditor and enforcement official advising Sprint in 2009 and 2011, respectively, that its sales tax practice was illegal, and that it disregarded the fact that the other major wireless carriers, unlike Sprint, did not break their fixed monthly charges for voice services into intrastate and interstate subparts for sales tax purposes, but instead collected and paid sales tax on the full fixed periodic charge for voice services.

As relevant to this appeal, the complaint’s causes of action are all based on the same underlying contention that Sprint knowingly violated the Tax Law, engaged in fraudulent or illegal acts pursuant to Executive Law § 63 (12), and submitted false documents to the State pursuant to the FCA. The AG requests civil penalties and treble damages for each of the false tax documents submitted to the State.

Sprint moved to dismiss the complaint for failure to state a cause of action under CPLR 3211. As relevant here, Supreme Court denied the motion, holding that the Tax Law unambiguously imposes a tax on receipts from every sale of mobile telecommunications services that are voice services sold for a fixed periodic charge (see People v Sprint Nextel Corp., 41 Misc *1093d 511 [Sup Ct, NY County 2013]). Moreover, even if the Tax Law permitted Sprint to exclude from taxable receipts a portion of its fixed monthly mobile voice charge to account for interstate and international calls, the Tax Law also required Sprint to use an objective, reasonable, and verifiable standard for identifying the nontaxable components of the charge — but the complaint alleges that Sprint failed to comply with this requirement by using “arbitrary” figures that were “not related to any customer’s actual usage” {id. at 515). The court also concluded that the complaint “alleges in great detail” how Sprint knowingly submitted false tax statements to the Tax Department, in violation of the FCA {id. at 516). Supreme Court further held that New York’s Tax Law does not conflict with the federal MTS A, and rejected Sprint’s assertion that the Ex Post Facto Clause of the United States Constitution bars retroactive application of the FCA penalties and damages.

The Appellate Division unanimously affirmed the denial of Sprint’s motion to dismiss (114 AD3d 622 [1st Dept 2014]). The Court held that the AG’s complaint adequately alleges that Sprint violated the FCA, Executive Law § 63 (12), and the Tax Law “by knowingly making false statements material to an obligation to pay sales tax pursuant to Tax Law § 1105 (b) (2)” {id. at 622). In addition, the Court rejected Sprint’s claim that the Tax Law is preempted by the MTSA, and its claim that retroactive application of the FCA would be unconstitutional. The Appellate Division then certified the following question to this Court: “Was the order of the Supreme Court, as affirmed by . . . this Court, properly made?”

In Matter of Helio, LLC (2015 WL 4192425, 2015 NY City Tax LEXIS 8 [NY St Div of Tax Appeals DTA No. 825010, July 2, 2015]), the New York Tax Appeals Tribunal held that the language of Tax Law § 1105 (b) is unambiguous, and imposes sales tax on interstate voice service sold by a mobile provider along with other services for a fixed monthly charge. We agree.

Section 1105 (b) of the Tax Law provides that tax should be paid on:

“(1) [t]he receipts from every sale, other than sales for resale, of the following: . . . (B) telephony and telegraphy and telephone and telegraph service of whatever nature except interstate and international telephony and telegraphy and telephone and telegraph service and except any telecommunica*110tions service the receipts from the sale of which are subject to tax under paragraph two of this subdivision . . .

“(2) The receipts from every sale of mobile telecommunications service provided by a home service provider, other than sales for resale, that are voice services, or any other services that are taxable under subparagraph (B) of paragraph one of this subdivision, sold for a fixed periodic charge (not separately stated), whether or not sold with other services.”

The subject of the present dispute is the meaning of the phrase “or any other services that are taxable under subparagraph (B) of paragraph one of this subdivision” (Tax Law § 1105 [b] [2]). Sprint contends that this language excepts from sales tax its bundled charges from interstate and international calls. The AG, on the other hand, asserts that all mobile calls are subject to tax under subdivision (b) (2), unless they are separately stated on the customer’s bill.

First, subdivision (b) (1) does not affect the taxability of all mobile voice services under subdivision (b) (2) because (b) (2) is a specific provision under section 1105 which applies only to the sale of mobile telecommunications, whereas (b) (1) applies to telephony and telegraphy generally. “Whenever there is a general and a particular provision in the same statute, the general does not overrule the particular but applies only where the particular enactment is inapplicable” (McKinney’s Cons Laws of NY, Book 1, Statutes § 238).

Here, the plain language of the statute subjects to tax all “voice services” that are “sold for a fixed periodic charge” (Tax Law § 1105 [b] [2]). Sprint does not contest that the services at issue are such services. No part of subdivision (b) (2) differentiates between intrastate or interstate and international voice service. The statute also taxes “any other services . . . taxable under subparagraph (B)” (id.). Sprint’s interpretation of the statute would make superfluous the words “voice services, or any other” in subdivision (b) (2) (see Leader v Maroney, Ponzini & Spencer, 97 NY2d 95, 104 [2001] [“meaning and effect should be given to every word of a statute”]). The phrase “any other services that are taxable under subparagraph (B)” must refer to services other than “voice services.” Accordingly, it is unambiguous that Tax Law § 1105 (b) (2) imposes taxation on *111all voice services sold for a fixed periodic charge, including the interstate and international calls at issue here.

This interpretation of the statute is bolstered by Tax Law § 1111 (Z) (2), which provides special rules for computing receipts from the sale of mobile telecommunications. This section allows for the separate accounting of bundled services which are non-taxable, if the provider can provide “an objective, reasonable and verifiable standard for identifying each of the components of the charge” — but specifically applies only if it is “not a voice service” (Tax Law § 1111 [Z] [2] [emphasis added]).

Next, Sprint asserts that such an interpretation of the Tax Law is preempted by the MTSA. This argument is unavailing. Sprint cites 4 USC § 123 (b) for the presumption that taxes may not be applied to interstate and international calls which are bundled with intrastate calls where the service provider can reasonably identify charges not subject to the tax. Section 123 (b) provides:

“If a taxing jurisdiction does not otherwise subject charges for mobile telecommunications services to taxation and if these charges are aggregated with and not separately stated from charges that are subject to taxation, then the charges for nontaxable mobile telecommunications services may be subject to taxation unless the home service provider can reasonably identify charges not subject to such tax, charge, or fee from its books and records that are kept in the regular course of business” (emphasis added).

This bundling provision expressly opens by respecting and incorporating state authority, rather than restricting it. Section 123 (b) anticipates disaggregation only of charges “not otherwise subject ... to [state] taxation.” Because the Tax Law imposes a tax on the entire amount of the fixed monthly charge for voice services, there is no exemption for any interstate and international component that would even trigger section 123 (b)’s exception here. However, no provision of the MTSA prohibits the taxation of interstate and international mobile calls. In fact, Congress eliminated this distinction in light of advances in mobile telecommunications technology. Section 117 (b) of the MTSA allows for the taxation of “fajll charges for mobile telecommunications services . . . subject] ] *112to tax ... by the taxing jurisdictions whose territorial limits encompass the customer’s place of primary use, regardless of where the mobile telecommunication services originate, terminate, or pass through.” Accordingly, the AG’s interpretation of the Tax Law is not preempted by the federal MTSA.

As to the AG’s cause of action under the FCA, in order to be liable under the FCA, a party must knowingly make a false statement or knowingly file a false record. The FCA defines “knowingly” to mean “that a person, with respect to information: (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information” (State Finance Law § 188 [3] [a]).

Sprint asserts that there is a reasonable interpretation of the Tax Law that does not subject bundled interstate and international calls to sales tax and, thus, there can be no knowingly false record or statement, and no valid FCA claim. This is not the stuff that a CPLR 3211 dismissal is made of. Even assuming there could be such a reasonable interpretation in the face of this unambiguous statute, it cannot shield a defendant from liability if, as the complaint alleges here, the defendant did not in fact act on that interpretation (see United States ex rel. Oliver v Parsons Co., 195 F3d 457, 463 [9th Cir 1999]). Otherwise, “[a] defendant could submit a claim, knowing it is false or at least with reckless disregard as to falsity . . . but nevertheless avoid liability by successfully arguing that its claim reflected a ‘reasonable interpretation’ of the requirements” (id. at 463 n 3). Sprint will have to substantiate in further proceedings that it actually held such reasonable belief and actually acted upon it.

Sprint argues that in Helio (DTA No. 825010), upon the taxpayer’s defeat at the Tax Appeals Tribunal on the issue of taxability of bundled interstate and international mobile telecommunications services, the Department of Taxation and Finance imposed only minimum interest because the audit report stated that “reasonable cause existed” for the taxpayer’s position (2015 WL 4192425, *9, 2015 NY City Tax LEXIS 8). But here, the AG alleges that Sprint, which is a much larger service provider, did not act in good faith and that it did not rely on what it now calls “its reasonable interpretation of the statute” when it made its decision to alter its tax practices. Importantly, although the Tax Appeals Tribunal stated that Helio’s similar position was reasonable, that case did not *113involve the level of deception and fraud alleged on the part of Sprint here.

Nevertheless, the AG has a high burden to surmount in this case. The FCA is certainly not to be applied in every case where taxes were not paid. Further, notice of a contrary administrative position alone is not nearly enough to prove fraud or recklessness under the FCA. There can be no doubt the AG will have to prove the allegations of fraud, that Sprint knew the AG’s interpretation of the statute was proper, and that Sprint did not actually rely on a reasonable interpretation of the statute in good faith. But, given the complaint’s allegations about the agency guidance and industry compliance with the AG’s position, Sprint’s payment of the proper amount of sales tax between 2002 and 2005, Sprint’s undisclosed reversal of its practices in 2005, and the explicit warnings that Sprint received from the Tax Department, the AG has stated a cause of action for a false claim. On a CPLR 3211 motion to dismiss, the Court accepts facts as alleged in the complaint as true, accords the plaintiff the benefit of every possible favorable inference, and determines whether the facts as alleged fit within any cognizable legal theory (Leon v Martinez, 84 NY2d 83, 87-88 [1994]). It is premature to dismiss this complaint on such a motion. The AG is entitled to discovery, and there are factual issues that must be fleshed out in further proceedings.

We also hold that retroactive application of the FCA is not barred by the Ex Post Facto Clause of the United States Constitution (US Const, art I, § 10). In analyzing whether such application of the statute is barred by the US Constitution, we must first consider whether the legislature intended the FCA to establish “civil” proceedings, and if so, whether it is “so punitive either in purpose or effect as to negate the State’s intention to deem it civil” (Smith v Doe, 538 US 84, 92 [2003] [internal quotation marks, brackets and citations omitted]). The FCA provides that a person who

“knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the state or a local government, or conspires to do the same; shall be liable to the state . . . for a civil penalty of not less than six thousand dollars and not more than twelve thousand dollars” plus treble damages (State Finance Law § 189 [1] [h]).

*114To assess whether the FCA is punitive, we look to seven factors highlighted by the United States Supreme Court “to determine whether an Act ... is penal or regulatory in character” (Kennedy v Mendoza-Martinez, 372 US 144, 168 [1963]). These include:

“[w]hether the sanction involves an affirmative disability or restraint, whether it has historically been regarded as a punishment, whether it comes into play only on a finding of scienter, whether its operation will promote the traditional aims of punishment — retribution and deterrence, whether the behavior to which it applies is already a crime, whether an alternative purpose to which it may rationally be connected is assignable for it, and whether it appears excessive in relation to the alternative purpose assigned” (id. at 168-169).

The balance of the factors here weighs in favor of permitting retroactive application. The penalty scheme does not impose an affirmative disability or restraint, and monetary penalties like those imposed by the FCA have not “historically been viewed as punishment” (United States ex rel. Bilotta v Novartis Pharms. Corp., 50 F Supp 3d 497, 544 [SD NY 2014] [internal quotation marks omitted]).

Although this Court previously stated that the FCA’s penalty and damage scheme serves the aims of punishment, retribution, and deterrence (State of N.Y. ex rel. Grupp v DHL Express [USA], Inc., 19 NY3d 278, 286-287 [2012]), federal courts have determined that the FCA’s provision imposing “treble damages carries a compensatory, remedial purpose alongside its punitive and deterrent goals” (Kane ex rel. United States v Health-first, Inc., 2015 WL 4619686, *22, 2015 US Dist LEXIS 101778, *69 [SD NY, Aug. 3, 2015, No. 11 Civ 2325 (ER)]; see also Bilotta, 50 F Supp 3d at 545-546; United States ex rel. Colucci v Beth Israel Med. Ctr., 603 F Supp 2d 677, 683 [SD NY 2009]). As a result, the penalty and damages scheme of the FCA “does not compel a conclusion that the statute is penal” (Bilotta, 50 F Supp 3d at 546).

Also, the FCA does not regulate conduct that was already a crime, and the penalty scheme may be rationally connected to the nonpunitive purposes of allowing the government to be made whole (see Cook County v United States ex rel. Chandler, 538 US 119, 130-132 [2003]). Finally, given the compensatory, nonpunitive aims of the statute, the penalties are not unduly excessive.

*115As the United States Supreme Court stated in Smith, “only the clearest proof will suffice” to “transform what has been denominated a civil remedy into a criminal penalty” (538 US at 92 [internal quotation marks and citations omitted]). Here, while the treble damages to be imposed are severe, Sprint’s arguments do not outweigh the Mendoza factors that weigh in favor of retroactive application, nor do they amount to the “clearest proof” required by Smith. Therefore, the retroactive application of the FCA does not trigger the Ex Post Facto Clause of the United States Constitution.

Accordingly, the order of the Appellate Division should be affirmed, with costs, and the certified question answered in the affirmative.