States are getting creative in how they hold companies accountable for the taxes they owe. A new tax enforcement tool that’s being used by New York state against Sprint Nextel Corp. is the qui tam action.
As The AICPA explains, qui tam is short for the Latin phrase, qui tam pro domino rege quam pro se ipso in hac parte sequitur, meaning, “who as well for the king as for himself sues in this matter.” Basically, a qui tam action is a suit an ordinary citizen brings on the government’s behalf as a whistleblower. The incentive for the person (called the relator) to bring the suit is typically an award of a portion of the government’s recovered funds.
In the current case against Sprint Nextel Corp., a qui tam action was filed in 2011, alleging that Sprint knowingly and intentionally avoided more than $100 million of New York sales taxes by arbitrarily unbundling its cellphone charges. If Sprint is found liable, its total potential out-of-pocket tax liability may be more than $400 million, including interest and the effect of a punitive damages multiplier in the New York statute. Sprint Nextel Corp. is appealing, so this particular case has an uncertain outcome.
On the one hand, the qui tam action allows resource-strapped states to go after companies intentionally not paying taxes owed. Ordinary citizens can act as whistleblowers on the government’s behalf.
However, if the problem the whistleblower uncovers was simply a mistake, the onus is on the taxpayer to establish the lack of fraudulent intent. And proving lack of fraudulent intent typically requires costly depositions and, possibly going to trial. This creates an issue for taxpayers who are trying to comply with the law but took a tax position in a gray area. This additional enforcement mechanism exposes taxpayers to potential harassment.
It’s best to proactively avoid this type of action, by staying out of gray areas and being conservative in assessed taxes. In areas such as sales tax, this may mean higher costs for consumers purchasing certain goods and services in those states that allow the qui tam action.