New York Governor Kathy Hochul recently signed into law new legislation expanding the reach of the New York False Claims Act (NYFCA) to entities that fail to file tax returns in New York. Unlike the federal False Claims Act (FCA), which expressly carves out tax-based claims, the NYFCA does the opposite—specifically permitting them—and now purports to extend to non-filers.
Proponents of the bill [1] describe it as closing a “loophole” in the preexisting NYFCA, which applied only to statements made in a filed tax return. The amended statute purports to reach companies and individuals who do not file New York tax returns at all.
The new law took effect immediately upon passage and in any pending case shall apply to any tax obligation knowingly concealed or knowingly avoided before, on, or after the effective date of May 3, 2023; provided, however, that in any action filed after May 3, 2023, the new law shall only apply to tax obligations knowingly concealed or knowingly avoided on or after May 1, 2020.
The NYFCA [2] imposes liability on any party that “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government.” [3] In contrast with the federal FCA, [4] the NYFCA has explicitly included tax claims since 2010, limited to defendants with taxable income or sales over $1 million in the tax year and claimed damages in excess of $350,000. [5] However, the statute’s express terms did not provide for liability based on the absence of a record or statement in New York.
The amended NYFCA reaches tax-based claims under Section 189(1)(h), which prohibits “knowingly conceal[ing] or knowingly and improperly avoid[ing] or decreas[ing] an obligation to pay or transmit money or property to the state or a local government, or conspir[ing] to do the same.” [6]
The changes to the law also extend to Section 189(4)(b), which previously provided that the New York attorney general shall consult with the Department of Taxation and Finance prior to filing or intervening in a case based on “the filing of false claims, records or statements,” and which now includes any case based on “a violation of the tax laws”—i.e., including cases in which no tax return was filed.
Governor Hochul’s approval of the expansion arrives after two failed attempts to enact a broader version of the same law. In January 2022, Governor Hochul vetoed a version of the bill that arguably would have impacted more parties than the non-filing entity and which the governor’s office noted “could have the effect of incentivizing private parties to bring unjustified claims under the law.”
Following the New York legislature’s passage of a revised version of the bill in June 2022, Governor Hochul again vetoed it in January 2023, observing in her veto message that the bill “goes significantly beyond how the federal government and other states pursue civil tax fraud” and also contained an “undefined retroactive lookback period” that raised due process concerns.
Companies and individuals that are based outside of New York but with a presence or activities in New York, including owning or leasing property, employing individuals that perform services in the state, or making sales to customers located in the state, should all take notice of this change in the law. It is important to consult with tax advisors to confirm that the appropriate tax returns are filed in New York.
The expanded reach of the NYFCA reinforces the need to anticipate potential liability by preparing documentation that will demonstrate that a party had no obligation to file a New York tax return.
The implications of this expansion of the NYFCA cannot be overstated. This amendment represents a major expansion of the scope of the NYFCA, and determination of tax filing requirements based on nexus is significantly more fact-specific, subjective, and subject to constitutional constraints than FCA claims based on a “false statement.”
Companies and individuals with taxable income over $1 million that do not file state tax returns in New York face potential exposure to NYFCA liability under the expanded law if there is any basis on which a whistleblower could argue that a tax return should have been filed.
Like the previous versions of the bill, the current amendments may also incentivize whistleblowers to bring qui tam suits under the NYFCA against non-filers—even when the merits of such actions are questionable—given the NYFCA’s treble damages remedy and the potential for relators to recover between 15–25% of any damages awarded.
Moreover, because New York State may not even have been aware of the non-filer prior to a suit being brought against it, companies and individuals defending against qui tam suits may find it more difficult to argue for dismissal based on a lack of materiality—e.g., that the defendant had already been audited by or sought guidance from the Department of Taxation and Finance.
To be successful in a qui tam suit, whistleblowers or the government must meet a high burden of proof to substantiate a violation and must also prove the intentional or reckless state of mind of the taxpayer. Companies and individuals doing business in New York should ensure that they understand their historical tax filing positions and confirm compliance with all laws. As such, it remains critical to develop and maintain a strong compliance program in order to head off whistleblower suits and enforcement actions.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:
[1] S. 4009-C, 2023 Sess. Law of N.Y. Ch. 59, Part DD.
[2] N.Y. State Fin. Law § 189 et seq.
[3] N.Y. State Fin. Law § 189(1)(g).
[4] See 31 U.S.C. § 3729(d) (“This section does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”).
[5] N.Y. State Fin. Law § 189(4)(a). A growing number of states have followed New York’s lead in creating tax liability under state FCA statutes. See, e.g., New York False Claims Act Recovery Highlights Growing Risk of Tax Claims Pursued as False Claims.
[6] See S. 4009-C at Section 189(4)(a), striking the portion of the law that limited FCA tax liability to violations under Section 189(1)(a)-(g).