On August 30, the California Senate Appropriations Committee failed to approve A.B. 1270 which would extend the California False Claims Act to include tax matters, joining Illinois and New York as the only states that allow whistleblowers to file claims against companies alleging violations of the tax code. Notably, the Federal False Claims Act specifically exempts tax fraud from the types of fraud that it seeks to address.
More specifically, California’s bill would expand the definition of a “prosecuting authority” to include “counsel retained by a political subdivision to act on its behalf.” This slight shift of tax law enforcement to private citizens and plaintiffs’ attorneys could open the floodgates to litigation that is not premised on fair tax administration or discovering fraud, but on fishing expeditions seeking profit. Indeed, interpretations of the tax code and actions that constitute tax avoidance or fraud is a highly specialized field that is best governed by state taxing authorities.
At present, 21 states and the District of Columbia have their own versions of the federal FCA that permit private citizens to bring whistleblower lawsuits on behalf of the state and share in any successful recovery. The states include California, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Massachusetts, Minnesota, Montana, Nevada, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Rhode Island, Tennessee, Vermont, and Virginia. Several of these (e.g., New Mexico and Virginia) style their versions as Fraud Against Taxpayer acts. Nine additional states have narrower versions that address only fraud in the healthcare context, including Alaska, Colorado, Connecticut, Louisiana, Maryland, Michigan, New Hampshire, Texas, and Washington.
California, however, is not the only state in recent years to attempt to expand the scope of its false claims act to include tax fraud. Michigan and the District of Columbia both attempted to pass similar amendments broadening the scope of their respective FCAs to include state tax law issues that ultimately failed coming out of their respective legislative committees.
It is expected that California’s legislature will attempt to push through another version of this bill next year. Troutman Sanders will continue to monitor and report on whether that happens as well as any other attempts to expand state false claims acts across the country.