Lawmakers in Mississippi are tackling the pervasive use of automated sales suppression devices, commonly known as “zappers,” by businesses to hide a portion of their sales and thereby avoid paying sales tax. Zapper programs are used to delete certain transactions – usually cash sales – and then reconcile the books of the business. The result is that the company’s books appear to be complete and accurate, but are in fact false because they reflect fewer sales than were actually made. With fewer sales to report, the business is able to reduce the amount of sales tax it is required to pay.
In an article published in the Daily Journal, it was reported that during recent testimony before the Mississippi legislature, Revenue Commissioner Herb Frierson said that the use of zappers is costing the state millions of dollars in lost sales tax revenue. “The zapper has two sets of books. Al Capone (the Chicago gangster who was convicted of tax evasion) would have loved it,” Frierson said. “It has one set of books for tax purposes and another (true set of books) if you want to sell your business.”
We previously wrote about the Justice Department’s efforts to crack down on the use of tax suppression software by charging a software salesman in Seattle who worked for a Canadian company that sold “point of sale” program that enabled restaurants to underreport their sales. Historically, state law enforcement agencies, not the Justice Department or Internal Revenue Service, have taken the lead in cracking down on the use of revenue suppression software. In early 2016, the Attorney General of Washington filed what he called the “first-of-its-kind” criminal case against a restauranteur, Yu-Ling Wong, for allegedly using sales suppression software to avoid paying nearly $400,000 in state sales tax. That case began as a routine audit by the Washington State Department of Revenue, which trains its auditors to detect the use of revenue suppression software. Auditors noted an unusual change in cash receipts, as compared to the restaurant’s historical cash receipts, determined that the restaurant’s point-of-sale system could not be trusted, and eventually uncovered the use of Zapper software.
Many states have passed laws outlawing the use of revenue suppression software, including Washington, Michigan, Florida, Georgia, Utah, and West Virginia, and others — like Mississippi — are considering proposals to enact such laws. And the problem is not just confined to the United States. In a 2013 report entitled “Electronic Sales Suppression: A Threat to Tax Revenues,” the Organisation for Economic Co-operation and Development concluded that revenue suppression software “facilitate[s] tax evasion and result[s] in massive tax loss globally.”
BNA’s Michael J. Bologna and Paul Shukovsky have written a comprehensive article about the pervasive problem of sales suppression software used by restaurants and other cash-intensive businesses. In their article, entitled “Tax-Zapping Software Costing States $21 Billion,” the authors note that the use of revenue suppression software by businesses costs states a whopping $21 billion in lost tax revenue.
In Mississippi, Frierson is seeking the passage of legislation making it a felony to possess or sell the zapper software. A version of the bill already has passed the Senate Judiciary Committee.
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