Some restaurants keep sales tax, using illegal 'zappers'

McClatchy Washington Bureau on

Published in Business News

WASHINGTON -- States nationwide are losing billions of dollars in sales tax revenue to restaurants and other businesses that deploy technological methods to evade tax collectors, including cloud-based computing systems originating in Canada, China and other foreign countries.

But there has been little coordinated action to root out the offshore operators that help rogue retailers under-report their sales, especially those handled in cash.

Richard Ainsworth, a Boston University professor who has written extensively about sales tax fraud, estimates that states are losing roughly $20 billion in taxes yearly due to various "sales suppression" methods. But he acknowledges that the real amount is difficult to determine.

"Manipulation of American business records offshore is happening on a wide scale," Ainsworth said. "The fraud is moving much faster than the tax agencies can catch it."

With the help of federal prosecutors, Washington this year became the first state to successfully prosecute a U.S. distributor of illegal software used to commit sales tax fraud. That prosecution was helped by a 2014 state law criminalizing use of "zappers" and other ways of altering cash register records. Twenty-six other states have passed similar laws.

Over the past six months, restaurant owners in Minnesota, Michigan and Connecticut have been charged with using illegal sales-tax suppression software. In some cases, restaurateurs have allegedly taken the diverted tax money to pay employees in cash, thereby skirting requirements to pay for workers' compensation, overtime and other benefits.

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But states lack jurisdiction to go after bigger fish –– the offshore syndicates that market tax-zapping software. Moreover, retailers are increasingly managing their sales records with cloud-based computing, posing other challenges.

"More and more, this is going to the cloud," said Warren Klomp, a district administrator for the California Department of Tax and Fee Administration. "The owner uses the data to see what is selling well, the best hour for sales, and so on. But if it is all sitting in the cloud, there is an opportunity to log into the cloud and manipulate the data."

Under state and federal law, retailers are required to report to tax agencies all income they receive, keep records on those sales and remit all taxes they collect from customers. Yet from the advent of the sales tax, unscrupulous businesses have managed to get around the law simply by keeping two sets of books.

Now such businesses have turned to more technological tricks. One common method is to install "zapper" software into their computerized cash registers –– commonly known as "point-of-sale" systems –– either with a thumb drive or a disk. With use of a zapper, business owners can delete entire transactions from a day's receipts, allowing them to under-report the sales tax collected from customers and owed to the state.


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