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Some restaurants keep sales tax, using illegal 'zappers'

McClatchy Washington Bureau on

Published in Business News

In 2009, the Canadian province of Quebec conducted extensive audits of restaurants and found that they were under-reporting roughly 5 percent of all revenue received. If the U.S. restaurant industry is under-reporting a similar percentage, it would mean that states collectively could be losing more than $20 billion a year in sales tax proceeds, Ainsworth said.

The projected losses include $2.8 billion in California, $1.7 billion in New York, $1.6 billion in Texas and more than $1 billion in Florida.

Some state tax officials say those loss estimates are too high. Klomp, the district administrator for California's tax agency, estimates that as of 2014, the state was losing $218 million annually to sales tax fraud. Still, Klomp said, state tax authorities are lagging behind some of their Canadian counterparts in fighting this form of fraud.

In Quebec, tax-zapping software first gained notoriety in 1999, when the province's tax inspectors raided a chain of 32 restaurants founded by a group that included pop singer Celine Dion. The investigation found that the restaurants, part of the Nickels chain, were all using zappers. While Dion wasn't implicated, the investigation revealed a network of rogue software distributors that were providing Nickels and other restaurant groups with the zappers.

Sales tax fraud is made easier by the fact that multiple companies market legal point-of-sale systems that allow retailers to tally and record transactions, often using off-the-shelf database software. The systems can be modified to suit a retailer's language or other needs, but that flexibility also makes it easier for retailers to take advantage of zappers to manipulate sales records.

Profitek, a company based in Richmond, British Columbia, a suburb of Vancouver, is one company implicated in several investigations of illegal zappers.

 

Founded in 1985 by Hong Kong native Pius Chan, Profitek was originally called InfoSpec Systems Inc. It started out specializing in providing Chinese-language point-of-sale systems to Canada's Chinese restaurants and other businesses.

From 2000 on, Canadian authorities investigated Chan and his company for marketing zappers with its point-of-sale system. In 2012, a British Columbia court convicted InfoSpec of fraud and fined it $100,000. But Canada at that time did not have a law specifically prohibiting such software, and later that year, an appeals court overturned the conviction. Canada the next year passed a law criminalizing zappers and other sales-suppression techniques.

Soon after that law was passed, Washington state tax auditors started noticing that some of the state's Chinese restaurants were reporting unusually low cash sales. They set up a sting operation, comparing receipts received during meal purchases to the records kept by the restaurants.

In 2016, Washington's attorney general charged Yu-Ling Wong, owner of Facing East restaurant in Bellevue, with using Profitek software to pocket nearly $400,000 in sales taxes. Seven other restaurants were also cited for keeping roughly $3 million more in state and federal taxes.

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