New York lawmakers recently introduced two bills to expand the application of the New York State False Claims Act (“FCA”). The first intends to require the FCA to apply to non-filers, the second to remove the scienter element (i.e., no longer imposing a “knowing” requirement). Although both bills are retroactive and concerning, removing the scienter element should put all businesses on high alert as enforcement of the tax laws could now be in the hands of opportunistic whistleblowers and/or the New York State Office of the Attorney General (“AG”).
On July 29, 2020, S 8852 was introduced in the New York Senate. According to the Memo accompanying the legislation, it was intended to remove a “loophole” present in the FCA. The purported loophole was that “wealthy individuals and businesses” could avoid the provisions of the FCA by simply failing to file returns. (https://www.nysenate.gov/legislation/bills/2019/S8852). Companion legislation was introduced in the Assembly on October 7, 2020. (https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A11061&term=2019). Presumably, the “wealthy” reference relates to the fact that the FCA only applies to individuals and/or businesses with income or sales exceeding $1 million.[1] However, high volume, low margin businesses could easily exceed a $1 million sales threshold and may still not be profitable or “wealthy.” Regardless, New York State nexus laws, including the application of P.L. 86-272 protection, for businesses and domicile/statutory residence rules for individuals are notoriously complex and involve highly fact-intensive inquiries, and should be weighed and understood by legislators prior to adopting such a provision. Among the most obvious examples is New York’s $300,000 sales tax economic nexus regulation that was published in 1989, but never enforced until after the U.S. Supreme Court decided Wayfair in 2018.
This legislation is not to be confused with the much more problematic legislation that was introduced in the Senate on August 3 (https://www.nysenate.gov/legislation/bills/2019/S8872), with corresponding legislation introduced in the Assembly on October 7. (https://nyassembly.gov/leg/?default_fld=&leg_video=&bn=A11066&term=2019). According to the Memo accompanying S8872, the legislation “would allow the New York False Claims Act to be used as a tool to recover large unpaid tax obligations based on false claims made by wealthy individuals or businesses without the statutory requirement that such false claims were made knowingly.” The memo goes on to say that S8872 would allow the Attorney General, local governments, and citizen whistleblowers to bring claims against individuals and businesses without having to demonstrate that the failure to pay was done “knowingly.” Damages on these claims would be limited to tax plus interest pursuant to the bill (i.e., treble damages would not apply for these claims).
This would, quite simply, be an enormous problem for taxpayers. The bill would give the AG and qui tam plaintiffs (e.g., opportunistic whistleblowers) essentially coterminous authority along with the Department of Taxation and Finance (“DTF”) for determining the tax liability of taxpayers. However, the qui tam plaintiffs and/or the AG would conduct its investigations through a complaint filed in Supreme Court, with no audit and no automatic taxpayer secrecy protections. Moreover, the extended statute of limitations–ten years, while the statute of limitations for tax actions is generally three years–would apply to any suit brought under the FCA, including any suit under this bill (and it would apply retroactively). Under current law, an FCA qui tam plaintiff and/or the AG must adequately plead that the taxpayer had knowingly filed a false claim (i.e., the intent of the FCA was to address transactions with indicia of fraud). With this requirement gone, it will be easier for qui tam plaintiffs to not only sue but also sustain suits. This could easily create a cottage industry of plaintiff law firms suing businesses for failure to comply with extraordinarily complex tax laws (e.g., determining the appropriate taxability of candy versus food). Moreover, allowing third party litigants to enforce the tax laws creates incentive to maximize whistleblower rewards (e.g., filing a lawsuit with the hopes of settlement), and will inherently affect New York State tax policy without the input of DTF. There are sound reasons why DTF does not pay its auditors on commission, and for those reasons alone, this bill should fail.
Despite its flaws, DTF has the personnel and experience to audit taxpayers, and determine potential liability in an administrative setting that has been in place for more than 30 years, along with an administrative appeal system that allows taxpayers to appeal audit determinations at multiple levels before tax experts. Putting tax enforcement in the hands of the AG and individual qui tam plaintiffs will create enormous burdens for taxpayers and businesses, in addition to creating potentially inconsistent or unintended tax policy. We will be tracking developments related to these bills and other FCA developments.
[1] Damages plead must also exceed $350,000. NYS Finance Law § 189(4)(a). We note that FCA actions relating to sales tax can easily exceed a $350,000 liability and have no impact on profitability of the business.
