State Tax Whistleblower

There seems to be as many ways to cheat on your taxes as there are taxes.  State sales and use taxes are no different.  Some may not realize it but sales and use taxes are two different taxes.  Sales tax is usually collected by the seller at the time you buy an item and most of us have seen this on everything from car purchases to restaurant bills (even residents of the five states without a sales tax have likely left their little tax havens and paid sales tax somewhere else).  Use tax is the backstop when sales tax was not charged.  Bought a new mixer online and had it shipped to your house without a sales tax being collected; congratulations, you probably owe your state use tax.  Has anyone ever actually filed a use tax return declaring their legally owed taxes?  You are probably not surprised to learn the answer is very very few. 

We focus primarily on Federal taxes with submissions to the IRS Whistleblower Office, but there are some possibilities of a whistleblower getting paid for rooting out state tax issues.  Currently, Florida and New York have programs that we work with to report state tax issues.  Florida’s program is similar to the IRS program in that you report the information and they take it from there.  Florida pays a 10% award.  New York amended its False Claims Act in 2010 to add taxes to the list.  There you actually sue the taxpayer on behalf of New York.  It is a lot of work, and a wild ride but the end “Relator Share” that you receive could be up to 30%.

We have dealt with several state tax issues (and even received awards!) but the circumstances must be right to make them worth pursuing.  First and foremost, you need a lot of avoided tax.  While the top Federal income tax rate is 39.6%, Florida has a sales and use tax rate of 6% and New York 4% (8.875% for sales and use in New York City).  It takes some pretty big ticket items to add up to a worthwhile award in a use tax case.  For example, to get a million dollar award from Florida, they would need to find an underreporting of around $170 million dollars’ worth of stuff (170,000,000 x .06 x .1 = 1,020,000 for those playing along at home).  That’s a lot of blenders. 

From where does that level of use tax violation come?  Usually it comes from things that don’t need license plates or captains, like art and jewelry (cars, planes, and boats are almost always registered making avoiding sales and use tax slightly more complicated).  I was reminded of this in today’s Wall Street Journal.  Daniel Grant wrote an interesting piece entitled, “Art Collectors, Pay Your Taxes.”  The article discusses states, particularly California and New York, cracking down on sales or use taxes.  Often, purveyors of art are more than happy to accommodate requests of buyers that help them avoid sales tax, tacitly knowing the use tax will never be paid.  Insiders with quality information about large-scale art or jewelry purchases may do well to consult with a tax whistleblower lawyer to see if their information is actionable.

In the third part of a four part series on qui tam suits, Jennifer Carr of Tax Analysts interviewed University of California, Davis School of Law tax professor Dennis J. Ventry, Jr. about his article, “Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States.”  The article, which will be published in the Villanova Law Review, argues that states could benefit greatly from adopting tax whistleblower statutes or tax enforcement through state false claims acts (FCAs). 

In the article, Ventry argues that states are leaving billions of dollars “on the table” that a whistleblower program could help to shrink by closing the information gap.  Ventry claims that state tax agencies are “totally outgunned” and whistleblowers could assist by exposing and explaining a taxpayer’s noncompliance by providing detailed and unique information.  Moreover, Ventry argues that a “robust whistleblower program” in the states could have the effect of preventing tax noncompliance by adding significant risk to noncompliant taxpayers by increasing the probability that they will be detected by a whistleblower in the tax department, in an outside accounting firm, or outside counsel, or even a partner, associate, paralegal, or intern. 

Ventry also discussed the possibility that states would adopt what he called “mini-7623s” which would align them with the IRS whistleblower program.  Ventry pointed to successes in New York, the first state to specify tax claims under its FCA, such as Attorney General Eric Schneiderman using the program to sue Sprint Nextel for over $300 million, and the multimillion dollar settlement reached with a medical imaging company.  Towards the end of the interview, Ventry acknowledged the “parade of horribles” that some practitioner-critics have regarding FCA tax suits.  Although Ventry says that concerns need to be taken seriously when creating the state statute, abusive uses of the statutes have been the exception and not the norm.  To that end, Ventry said that he dedicated a lot of space in his upcoming article to describing how a properly drafted and implemented whistleblower program can minimize the potential harms that critics are concerned about.

If all this comes to fruition, it opens up the possibility of simultaneous state and federal tax whistleblower filings, which would be great for those whistleblowers whose claims arise under both sets of laws.