The New York State Attorney General has argued that Sprint’s failure to pay at least $100 million in owed sales taxes to New York taxing authorities may leave its customers in the state on the hook for past taxes, interest, and fees the company never paid.

As the state continues its lawsuit against Sprint-Nextel for what it argues is deliberate underpayment of New York sales tax, Sprint’s lawyers argued Thursday that the entire case should be dismissed because the state is selectively interpreting state and federal law.

The case originally began as a whistleblower action through a private company, Empire State Ventures, which is seeking a 25% share of any lawsuit proceeds. N.Y. Attorney General Eric Schneiderman is seeking $300 million in damages from Sprint for knowingly violating tax laws.

A review of the lawsuit shows there are serious implications for Sprint’s customers in New York if the company loses the suit or fails to pay sales taxes the state claims are owed.

Over three million current and former Sprint customers could be liable for sales tax underpayments representing a portion of their monthly bills dating back to 2005, potentially including accumulating interest charged at 14.5% annually, and penalties amounting to double the amount of the unpaid taxes or up to 30 percent of the underpayment.

Sprint has also misled millions of New York customers who purchased Sprint flat-rate plans. In its customer contracts, on its website and elsewhere, Sprint represented that it would collect and pay all applicable sales taxes. Yet Sprint did not, and it concealed this fact from its New York customers. As a result, 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.

Although Sprint misrepresented how it would handle sales taxes, it has locked its customers into contracts with early termination fees. The customers must remain in these contracts sold under false pretenses unless they pay hundreds of dollars to Sprint.

Schneiderman

Schneiderman’s office appears to have a strong case, with evidence showing Sprint allegedly conspiring to undertax customers using an arbitrary formula to gain a competitive advantage over other wireless carriers with the promise of a lower monthly bill, in part because the company was not collecting the proper amount of state sales tax.

The lawsuit claims Sprint repeatedly ignored warnings from state taxing authorities, including senior tax officials, that declared Sprint’s creative way of determining applicable taxes was putting the company at serious risk of adverse tax department action.

That adverse action came in April when the state filed the lawsuit against Sprint seeking back taxes and triple damages.

A careful reading of the lawsuit reveals just how much bureaucracy America’s wireless industry maintains to seek out any edge it can find against regulators, tax authorities, and local, state, and federal elected officials.

Sprint, the third largest wireless company in the country, can afford to maintain that bureaucracy with $33 billion in annual revenues partly at stake.

Wireless Industry’s Tax Employees Go to Vail to Ski Discuss Tax-Avoidance Strategies

The wireless industry employs hundreds of workers who spend their days pouring over tax laws in all 50 states looking for loopholes, strategies, and creative solutions to the ongoing problem of paying local, state, and federal taxes. Sprint, a considerably smaller wireless carrier than either Verizon or AT&T, still has the resources to maintain more than 100 workers in their State and Local Tax Group. It includes a well-defined management chain, with an assistant vice-president that runs the unit reporting to Sprint’s vice president of Tax, who, in turn, reports to Sprint’s chief financial officer.

These employees, and similar ones working at every other wireless phone company, try to figure out how to pay the least amount of owed tax possible, and kick tax strategies around in regular sessions and conferences at posh resorts in places like Vail (come for the corporate meeting, stay for the skiing), Colorado.

At the 2002 Communications Tax Executive Conference in Vail, Sprint executives told other wireless carriers that tax avoidance strategies like “unbundling” posed risks of audits by taxing authorities and litigation.

The wireless industry sends their tax experts to posh resorts in Vail, Colorado to discuss tax-avoidance strategies.

The following year, a Sprint executive turned up at another industry-backed conference run by “the Wireless Tax Group,”  alerting other wireless companies that “unbundling for taxes causes significant assessment risk.” He told the group that his “marching orders” at Sprint were to “mitigate tax issues by pursuing legislation or pre-audit agreements that allow for component taxing.”

In Schneiderman’s view, Sprint never followed those marching orders in New York.

In fact, the lawsuit argues even as Sprint was lecturing other phone companies about the importance of being conservative when dealing with tax authorities, the company was conspiring to use its own creative tax interpretations to undercut their competitors with a lower monthly cell phone bill.

How to Lower Your Prices Without Risking Profits

The technique Sprint uses to this day to hand customers that lower bill is based on selectively applying sales taxes only to certain portions of a customer’s voice plan. Sprint is the only company engaged in this practice in New York. Verizon, T-Mobile, Cricket, AT&T, and MetroPCS won’t go near the concept.

New York tax law says that phone companies must collect taxes on the monthly voice plans wireless companies sell customers. If Sprint sells you 450 minutes a month for $39.99 a month, New York taxing authorities expect customers will be charged the prevailing state and local tax rate on the fixed amount of $39.99 each month. Only Sprint does not do this. Sprint leverages federal rules which state that telephone calls placed to numbers outside of the state (also known as an “interstate call”) cannot be taxed. Therefore, in Sprint’s view, customers deserve a tax break for those interstate, non-taxable calls.

But Sprint does not actually review individual calling records to figure out what specific out-of-state numbers were called. Instead it created what New York officials argue is “an arbitrary formula” to guesstimate how much the average customer spends talking to in-state vs. out-of-state numbers. But those percentages varied wildly from 2005 to the present day, with different amounts for Sprint-Nextel customers living in upstate and downstate New York:

• July 2005-October 2008: Sprint did not pay state or local sales taxes on 28.5% of its fixed monthly voice service charge;
• April 2006-October 2008: Nextel of New York did not pay state or local taxes on 13.7% of its fixed monthly voice service charge;
• May 2006-October 2008: Nextel Partners of Upstate New York did not pay state or local taxes on 15% of its fixed monthly voice service charge;
• October 2009-Present Day: Sprint does not pay state or local taxes on 22.5% of its fixed monthly voice service charge.

Here comes the taxman.

In January 2005, an internal Sprint memo obtained by New York State found the company could save $4.6 million per month using this tax avoidance strategy, without costing the company a cent in profits.

It implemented the strategy later that summer.

New York’s lawsuit makes it clear the company was warned about the practice before the suit was filed:

Sprint continues to not collect and pay New York state and local sales taxes on the full amount of its receipts from its fixed monthly charges for wireless voice services, despite being specifically informed of the illegality of this practice by a field-auditor of the New York Tax Department in 2009, and then, in 2011, by a senior enforcement official of the New York Tax Department.

Customers Caught in the Middle?

As the case winds its way through court, New York has informally put Sprint customers on notice they could be held responsible for the unpaid taxes and penalties if Sprint reneges on the owed amounts. Schneiderman’s office recognizes customers are caught in the middle, partly because Sprint decided to keep the tax changes “secret” to keep customers off the phone to Sprint customer service:

[…] In its contracts with these customers, on its website and elsewhere, Sprint represented that it would collect and pay all applicable sales taxes on its calling plans. […] Sprint’s representations in the contracts, on its website and elsewhere were false because Sprint knew it would not collect and pay the applicable sales taxes in New York.

Contrary to its promises, Sprint failed to collect and pay sales taxes on substantial portions of the fixed monthly charges for voice services under its flat-rate calling plans. As a result of this non-payment, Sprint left its New York customers liable for those unpaid amounts of sales taxes under New York law.

At no point did Sprint disclose to its New York customers that it was leaving them liable for the sales taxes that Sprint failed to collect from the customers and pay to the government, as promised.

Before Sprint began unbundling, members of its State and Local Tax Group and its marketing group considered in the early part of July 2005 whether to communicate with customers about the fact that Sprint was unbundling and that the unbundling would affect taxes for some customers. They jointly opted not to communicate the change. Sprint’s Director of External Tax was concerned that disclosing the information would “drive too many calls” to Sprint’s customer care division.

In November 2005, just months after Sprint began unbundling, a Sprint employee in the Customer Billing Services department questioned a member of Sprint’s State and Local Tax Group about whether unbundling was “presented to the customer as part of the Subscriber agreement, shown in the invoice and/or available to Customer Care Rep.” The response was simply that “we have not educated our customers on how we are de-bundling transactions for their tax relief.”

Sprint continues to misinform its current and prospective customers about sales taxes, and to subject them to undisclosed sales tax liability even today.

Sprint’s position in court is that New York’s tax laws give the company the option of unbundling its tax obligations and that the state was trying to collect money it was not owed.

“The New York Attorney General’s complaint seeks to impose liability for practices that do not violate New York law,” said Sprint’s response to the lawsuit.

Luckily for Sprint’s tax experts, many states foreclose the possibility of creatively escaping taxes by imposing a “gross receipts tax” on the total gross revenues of a company, regardless of their source. That makes it difficult, if not impossible to escape the kind of sales taxes Sprint has been maneuvering around for nearly a dozen years in New York. With fewer loopholes to find, that leaves the wireless industry’s tax experts more time on the ski slopes.

It is safe to assume Sprint hopes for a positive outcome of the case, if only to avoid the inevitable avalanche of customer complaints from New York customers who might find a notice of apparent tax liability in their mailbox one day in the future.

Cogeco Cable is mailing flyers to residents in eastern Canada promoting the company’s ‘value’ option:

• 4Mbps download speed
• 12 Month Contract with $75 early termination fee
• Increases to $32.95/mo off contract
• “Generous” 15GB usage cap with $1.50/GB overlimit fee (maximum penalty: $50)

Cogeco calls this plan ideal “for anyone who uses the Internet to exchange emails with friends, search sites and download pictures.”

In other words, it’s barely broadband for those who barely use the Internet.

Many Ontario and Quebec phone companies can offer even faster speeds through traditional DSL service. In Bell Fibe areas, for $6 more a month, customers can get a 15/10Mbps package for $26.97/mo for six months, which includes a safer 75GB allowance. At the end of six months, threaten to walk and Bell will extend the offer an extra six months.

Customers bundling services with either Bell or Cogeco may be able to negotiate for a package with better speeds and a more generous allowance. While Cogeco has cracked down on promotions, Bell has not, so customers served by Cogeco are advised to ask about all available deals before committing to either provider.

A consumer firestorm is growing over Verizon Wireless new service plans.

As a growing firestorm over Verizon Wireless’ newly-announced plans continued today as some on Wall Street are becoming convinced Verizon has bungled the case for their new “Share Everything” concept.

Industry analyst Rob Enderle told ComputerWorld that Verizon’s handling of their pricing changes “is similar to the Netflix mistake last year that almost sunk that company.” Enderle believes the changes Verizon wants to force on the wireless market are potentially too radical to be embraced within the next two weeks, when Verizon’s new rate plans become active.

Verizon Wireless has been trying to quell the increasing criticism from consumers by reminding them they will not be forced to move to the new plans from an existing account.

“We’re allowing the existing customer base to have a choice; we’re not forcing anyone to more to new plans,” said Steve Mesnick, head of marketing for Verizon Wireless. “I take exception to [suggestions] of people leaving Verizon,” he said.

While Mesnick is correct Verizon will not force customers to choose new plans on June 28, the company will require existing grandfathered data customers to abandon unlimited data when they renew their Verizon contract or upgrade to a new discounted device.

Verizon claims it interviewed 50,000 customers before implementing the new plans and believe they will be embraced by the majority of Verizon customers.

Verizon Wireless spokeswoman Brenda Raney followed a different approach, pretending consumer complaints don’t exist: “We are very pleased with the response to our announcement as customers begin to understand how the new Share Everything Plans will save them money or provide them with more value for the same money they are paying today.”

Meanwhile, customers who have no intention of either forfeiting the unlimited data plan they have grandfathered on their account or who refuse to pay Verizon’s new asking price are busily upgrading their phones and signing new two-year contracts before June 28, buying an additional two years of unlimited data. Many others claim to be leaving, often for Sprint, which continues to offer unlimited data, or a prepaid provider.

Customers are worried about losing their grandfathered unlimited data plans.

Verizon and AT&T have a combined 38 percent of customers on grandfathered unlimited data plans and most are insistent on keeping them. News that customers could retain unlimited data by forfeiting the wireless carrier’s subsidy for new phones has gone over like a lead balloon, especially with price tags of $699 or more for popular new smartphones.

“The importance of this client base cannot be overstated–unlimited mobile data plan users are some of the most valuable subscribers in the industry,” Iain Gillott, president and founder of iGR, told Fierce Wireless. “Our research shows that these two carriers need to be very careful to offer a migration plan to replace the grandfathered unlimited plans that provides the data service, value and recognition that meets these valuable consumers’ needs.”

With popular new smartphones like the iPhone becoming available on no-frills prepaid carriers like Cricket, wireless carriers are at risk of subscriber defections.

Despite consumer discontent, Wall Street has supported the income-enhancing new wireless plans and is embracing the increased fees Verizon will likely earn as data demand rises.

When a company like Comcast grows so big, it no longer cares whether its marketing claims are true or false, perhaps it is time to put those claims to the test in court or before a state attorney general for review.

Recently, Comcast’s claim it runs the fastest Internet Service Provider in the nation came under scrutiny by the Better Business Bureau. The simple truth is, Comcast is not the fastest ISP in the nation — not even close. But because PC Magazine ran a limited test of some national broadband providers and found Comcast barely making it to the top, the cable giant has been running ads across the country that are disingenuous and incomplete at best, completely misleading and false at worst.

Phillip “Comcast is not too big to deserve a FAIL“ Dampier

The National Advertising Division of the BBB, a self-regulating industry-controlled body, found the advertising deceptive, which says a lot for a group that lives or dies on the whims of the industries that support its operations.

NAD previously determined that Comcast cannot, based on its current offerings, make an unqualified claim in national advertising to be faster than the competition. NAD noted that while Comcast is the fastest Internet option for 94 percent of the 52 million households in its competitive footprint, it is not the fastest where Verizon FiOS is available.

Consumers need deep pockets to read the actual report that mildly criticizes Comcast. The NAD keeps the public out of its business with a subscription rate of $550 a year to read detailed individual case reports. We learned about the case from one of our readers who shared a copy.

Among the false claims Comcast is still making:

• “It’s official.  We’re the fastest.” — Officially, Comcast is not the fastest.
• “…the fastest downloads available.” — False.
• “FiOS Does Not Live up to Expectations….With Speeds of Up to 105Mbps, XFINITY was rated as the fastest Internet provider in the nation by PC Magazine.” — But FiOS speeds are faster than Comcast. PC Magazine did not test Verizon FiOS.

Comcast agreed to consider making changes to their advertising to comply, but that now appears to be a non-starter.

In Chattanooga, Tenn., EPB Fiber broadband beats the pants off Comcast. No, it’s actually worse than that. EPB embarrasses Comcast’s comparatively slow broadband service. While Comcast was looking for a way to manipulate customers into using its Xbox online video app to avoid their unjustified usage cap, EPB customers were bypassing that problem altogether by choosing EPB’s fiber to the home service that doesn’t have usage caps and delivers speeds up to 1Gbps.  Comcast, (remember they are “America’s fastest”) tops out at 105Mbps.

One would think Comcast would be hurrying their blatantly false advertising off the air and out of sight in Chattanooga, but the company has refused.

The Times Free Press reports Comcast won’t be making any changes to their ads, and has actually doubled-down with more blatantly false marketing claims. Why? Because EPB is too small of a player for Comcast to be concerned with telling the truth:

Jim Weigert, vice president and general manager of Comcast in Chattanooga, said the request won’t apply to this area and advertising will stay the same.

“I don’t see any changes at all,” he said. “Our use of that designation as the fastest ISP and fastest commercial ISP is still the same and will still be used the same as it is today.”

Weigert said local networks such as EPB, which delivers maximum download speeds about 10 times faster than those of Comcast, is too small of a player to affect the region’s advertising or PC Magazine‘s designation.

“Those awards exist, and we just need to make sure we’re using it properly and quoting it properly,” he said. “It doesn’t reference EPB at all because they’re not national. They’re not big enough to get that attention.”

In other words, actual facts about broadband speed don’t matter. With standards like this, it is only a matter of time before we’ll be seeing program length commercials for snake oil.

Beyond the fact Comcast is morally and ethically wrong here, I’m not sure I would want my company admitting to customers truth should come in second. With that kind of attitude, Comcast customers should put their wallets in their front pockets, leave the kids home and lock their car doors before visiting a Comcast Cable Store.

Deborah Dwyer, public relations supervisor for EPB, notes the Comcast ads are self-serving and “cause pretty significant confusion among the public.”

At least the public that still believes what Comcast Cable tells them represents the truth.

Sprint is notifying their mobile hotspot customers the company is now prepared to enforce their formerly soft-capped 5GB plan with a $50/GB overlimit fee, billed at $0.05/MB increments.

Sprint has long informally capped customers using their phone as a Wi-Fi hotspot or tethered device, but until now was not prepared to enforce the limit because it could not accurately track usage.

“Starting June 2012, and effective on your next bill, your phone or tablet’s Mobile Hotspot on-network data allowance will be limited to 5 GB,” reads the message sent to Sprint customers.

Customers will begin receiving text message alerts when they reach 75% of their usage allowance, with repeated alerts at both 90 and 100%. When the 5GB limit is reached, Sprint will give customers the option of continuing service at the penalty price of $50/GB billed in megabyte increments, or shut the service down until the next billing cycle.

Some customers have been confused by the change, in part because Sprint has made a series of sometimes-confusing adjustments to their data pricing. But the company insists it has always had a limit on its mobile hotspot service, even if not enforced.

Smartphone customers using broadband on their phone still receive unlimited access. But other devices with mobile broadband access are usage capped based on the usage tier selected.