On Tuesday, the New York Supreme Court granted Baker McKenzie’s motion to dismiss the New York Attorney General’s (“AG”) complaint against B&H Foto and Electronics Corp. regarding a purported False Claims Act (“FCA”) violation.  The AG incorrectly alleged that B&H made a false claim on its tax return when they did not collect sales tax on “instant savings,” a type of vendor funding where a manufacturer reduces B&H’s purchase price of a particular item based on each retail sale of such item.  In granting the motion, the court held that B&H did not violate the FCA and that “instant savings” are not subject to sales tax.  This is one of the first New York FCA tax cases where the AG intervened and the court granted the taxpayer’s motion to dismiss.

New York’s FCA, which was extended to apply to tax transactions in August 2010, permits individuals to bring whistleblower claims, on behalf of the state, against taxpayers for knowingly failing to remit the appropriate amount of tax to the state.  The whistleblower can receive up to 30% of the recovery depending on whether the AG elects to intervene.  Since the FCA was amended to include tax claims, there have been dozens of cases filed by whistleblowers.  Here, an anonymous whistleblower filed an FCA lawsuit against B&H under seal, and the AG intervened in the case to represent the state.

The AG argued that B&H’s instant savings were part of the total consideration paid to B&H by the customer and compared the program to manufacturer’s coupons, which are generally subject to sales tax in New York.  In contrast, B&H argued that instant savings function as a discount from the manufacturer to B&H and are included in B&H’s costs of goods sold (i.e., it is a reduction in B&H’s purchase price).  In support of its motion to dismiss, B&H cited to administrative guidance that held analogous savings were not subject to the New York sales tax, highlighted that Generally Accepted Accounting Principles treat instant savings as a costs of goods sold reduction, and pointed to B&H’s treatment being consistent with the industry standard.

In granting B&H’s motion, the court looked to New York’s definition of “receipt,” which is the “sale price of any property…” and concluded that the guidance Baker McKenzie cited in its motion “provide[d] persuasive support for B&H’s position that ‘Instant Savings’ disbursements are not calculated into ‘receipts.'”  In determining that instant savings was not part of the sale price, the court focused on the fact that B&H “may, but is not required to, discount the items during the promotional period to encourage sales.”  The court rejected the AG’s argument that instant savings were akin to manufacturer’s coupons because “there is no privity between the manufacturer and the customer.”  The court explained “[t]he Attorney General’s position that ‘Instant Savings’ disbursements are ‘receipts’ does not properly take into account how the transaction between the manufacturer and the retailer works.”

This is a great win for B&H, and all New York taxpayers as it provides confidence for taxpayers to rely on the plain language of New York law, along with administrative guidance interpreting such law,  without being subject to the FCA.  The AG has 30 days to appeal the decision. 

Scott Brandman, Widge Devaney, David Pope, and Trevor Mauck represented B&H, with the help of the litigation and tax teams at Baker McKenzie.

Contact the author: Scott Brandman, Widge Devaney, David Pope , and Trevor Mauck