States Pushed to Attack Business Tax Evaders

Many governmental tax agencies in Quebec have successfully combatted business tax evaders through technology and now there is movement to bring this approach to U.S. municipalities.

The problem Quebec governments decided to attack in recent years was retailers hiding a significant amount of cash transactions through skimming to evade both sales and incomes taxes. This process got more sophisticated in the mid-1990s when software commonly referred to as “zapper” was developed that erase sales transactions from electronic cash registers (ECR) or point of sale systems (POS) to make it appear as through fewer transaction have taken place.

The sophisticated “zapper” software is costing municipalities hundreds of millions of dollars, according to Ted London, vice president of CGI’s Tax, Revenue and Collections Center of Excellence in Sacramento, Calif., which has been working with Quebec governments to get a handle on the issue.

“The automated software is not only fast and easy to use, but it is also extremely hard to detect,” said London in a CGI white paper entitled “Using Modern Technology to Zap the Zapper” published in April 2013. “In as little time as it takes to press a button, tens of thousands of dollars of transactions can be erased from the businesses books, allowing the owner to keep all of the concealed sales tax that has been collected from the buyer and avoid paying income tax on those transactions that were cleared from the books.”

Richard T. Ainsworth, an internationally recognized expert on retail tax frauds in the U.S. and Europe who heads the Boston University School of Law Graduate Tax program, estimates $21.1 billion in tax revenue losses for the U.S. restaurant industry resulting from use of the zapper. He said however that since there are so few publicized zapper cases that convincing already finally-strapped states to invest in going after the problem can be a hard sell even though doing so can positive dividends in terms of extra revenue.

“It’s a very expensive help,” said Ainsworth of what is required to successfully attack the zapper while keeping up with the latest technology trends. “The states are behind the curve.”

CGI has been working with the Provence of Quebec on developing and implementing a solution called sales recording module that attacks problems presented by both zappers and cash transactions not being recorded in cash registers. This product, which has been used in the restaurant industry, places a lock box between the ECR or POS system and the receipt printer that captures all of the transactional information.

Quebec reported collecting an additional $160 million of taxes during its first year of implementing the sales recording module solution, according to London. By 2018-19, Quebec officials are estimating receiving roughly $2.3 billion in tax revenue from the CGI platform, which equates to around $300 million per year in U.S dollars, London said.

London told MFT that CGI has been in contact with a number of states including New York and California about running a pilot program to fight this fraud. He said once there is data to back up the extra revenue that can be created, he forecasts many other states coming aboard.

“I suspect that if two states do it you are going to see several others coming forward because of the revenue they are losing,” London said. “Skimming has always been a problem but the zapper has taken it to a new level.”