On April 14, 2022, the First Department issued a decision in People v. Sotheby’s, Inc., 2022 NY Slip Op. 02501, holding that allegations that an auction house knew that employees were helping buyers submit false tax filings were sufficient to state a claim for violation of the false claims act, explaining:
The complaint states a cause of action under the New York False Claims Act. It alleges that, in 2010, an employee of defendant advised her client (identified in the complaint as the “Collector”), a foreign shipping executive, to submit a resale certificate to avoid paying New York sales tax on his upcoming purchase, although she knew his occupation and that he had no plans to resell the art. The employee, known as a key client manager (KCM), then not only provided the Collector with a resale certificate, but also partially filled it in on his behalf. Although the Collector sent the resale certificate back to the KCM with the “Purchaser Information” line blank, the resale certificate ultimately filed with defendant’s Client Accounting department, which reviews and processes resale certificates, stated that the Collector was an art dealer and principally sold fine arts, both materially false statements. During the next five years, the Collector purchased $27 million in artwork from defendant, initially individually and later through a corporate entity, without paying sales tax, based on resale certificates filed with defendant’s Client Accounting department. Those resale certificates, procured by the KCMs, stated that the Collector and his entity were in the business of selling fine art, although the KCMs were aware that that statement was false and that the Collector purchased the art for his own personal use. In 2018, the Attorney General’s office settled with the Collector’s entity for $10.75 million in taxes, penalties, and damages under the NYFCA.
These facts, if proven, would demonstrate that defendant had actual knowledge that the basis for the Collector’s purported tax-exempt status under Tax Law § 1132(c)(i) was false and therefore that defendant violated its obligation to collect sales tax owed on the subject purchases.
The complaint further alleges that it was defendant’s practice to isolate the Client Accounting department from employees on its sales teams and that there were no policies in place to govern communication between the two divisions, which permitted a fraudulent practice to continue without detection. These allegations, if proven, would demonstrate that defendant did not accept the resale certificates in good faith. Contrary to defendant’s contention that it cannot be held liable for the actions of a small number of employees, the facts alleged in the complaint reasonably permit the inference that the facilitation of knowingly false resale certificates by defendant’s employees fell within the scope of their employment and was committed, at least in part, in furtherance of defendant’s commission-based business.
(Internal citations omitted).