Sprint's Sales Tax Blunder

May 07, 2012 8:47 AM ETSprint Corporation (S)8 Comments
Ted Barac profile picture
Ted Barac

I've recently written several bullish articles on Sprint (S) and I remain bullish on the stock. That said, since my last article (following Sprint's recent earnings release), I've done more research into the company's New York sales tax issues and, for the sake of balance, wanted to share my thoughts and heightened concerns on this particular issue.

A couple weeks ago (on April 19th), the district attorney of New York filed a suit against Sprint for unpaid sales taxes over the past seven years and Sprint's stock fell 5% that day. While the news was concerning to me, I somewhat dismissed it as just another corporate legal dispute with meaningful, but not substantial, potential implications. After all, large corporations face litigation all of the time and it's just a cost of doing business and this suit was not for an amount that would make or break Sprint, in my opinion (a $300mn suit for a company with over $33bn in revenues and $7bn in cash).

According to the district attorney's allegations, Sprint failed to pay approximately $100 million in New York sales tax over the past seven years (and they are claiming treble damages under New York law). The New York complaint alleges that Sprint allocated up to 28.5% of the cost of certain New York fixed-price plans as intrastate calls (calls between two states; which are exempt from sales tax in New York)from July 2005 to October 2008 and a 22.5% allocation for all of its New York fixed-pricing plans from October 2008. With regard to this allocation, and the resultant sales tax reductions, the state's complaint alleges that "Under New York law, Sprint's approach was and is unequivocally illegal".

Now, I'm not a lawyer and won't go into depth about the merits of the allegations (although, I will note that all

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Ted Barac profile picture
Mr. Barac is the founder of Barac Capital Management, LLC. Prior to founding the company, Mr. Barac held a variety of roles in institutional securities research and trading.Mr. Barac graduated from Trinity University (San Antonio, Texas) in 1989 and received a Master’s in Business Administration degree from Southern Methodist University (Dallas, Texas) in 1998. During his graduate studies, Mr. Barac’s broad-based business studies included a focus on international business which included an internship with Bank Boston’s media and telecommunications lending group in Buenos Aires, Argentina and an international exchange semester at the E.S.A.D.E. Business School in Barcelona, Spain. Following his graduate studies, Mr. Barac went to work for Moody’s Investors Services in New York, New York in 1998 and transferred to their London, England offices in 1999. At Moody’s, Mr. Barac became a Senior Credit Officer/Vice-President and lead analyst with responsibility for the credit ratings of a multi-billion dollar portfolio of high-profile European leveraged finance companies. As an expert in leveraged finance and corporate credit risk analysis, Mr. Barac was a regular speaker for Moody’s and was regularly quoted by major financial publications (e.g. the Wall Street Journal Europe, Financial Times, New York Times, Bloomberg News, and The Times of London). From 2005 to 2007, Mr. Barac worked at Schroders Investment Management, an investment management firm with assets under management in excess of $200 billion, headquartered in London, England. At Schroder’s, Mr. Barac was responsible for identifying profitable fixed-income trade ideas from within a portfolio of European high-yield and investment grade corporate bond issuers. Mr. Barac’s work at Schroder’s earned him selection for the company’s elite merit-based Business Leadership Program.Mr. Barac continued his work in corporate securities analysis with Barclay’s Capital (also in London, England) where he worked as a Director in their Principal Strategies Group from 2007 to 2008. At Barclays, Mr. Barac was a proprietary analyst and trader responsible for investing a portion of Barclay’s capital through a combination of bonds, stocks, and fixed-income derivatives (credit default swaps). Following his return from London to Austin, Texas in 2008, Mr. Barac founded, established, and now actively manages the Barac Capital Management, LLC.

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