mda-logo-90x90Manhattan District Attorney Cyrus R. Vance, Jr., announced that a New York State Supreme Court Grand Jury has issued a report outlining a series of recommendations to prevent fraud related to sales suppression software programs. These programs – which include “Phantom-ware” and “Zappers” – can be used by businesses to automatically falsify financial records by giving the appearance of fewer and smaller transactions and, as a result, less taxable revenue.

New York State was the first to release anti-zapper bill (sponsored by Senator Liz Krueger). Same draft was used in 30+ States, out of which 20 have made it a law, but New York State is stalling.

Sen. Krueger believes it’s the kind of policy that should generate bipartisan support since it merely helps the state enforce existing tax laws. “I sort of think this bill is a no-brainer,” Krueger said in 2011 interview.

What has happened in the past 5 years leading to this Grand Jury verdict?

To calculate amount of losses, Professor Richard T. Ainsworth conducted analysis in comparison to in-depth research undertaken by Revenue Quebec, who so far did tremendous job in justification of their handsome investment in solving zappers in restaurants. The following comparison concerns only the hospitality sector:

State GDP (in billions) % of Quebec Estimated Losses
QUEBEC 166.9 $425 million
New York 706.6 423% 1,798 billion!!
Richard T. Ainsworth – Estimation based on PPP component
Sources: estimated from US Department of Commerce, European Union, OECD, Statistics Canada, Australian Bureau of Statistics, New Zealand Bureau of Statistics, Japan Statistical Bureau.

2011

In January, NY POST author John Crudele, now famous for many of his articles addressing the sales suppression problem, reported from confidential source there was a sting operation:

Soon after the tipster came forward, investigators set up sting operations at various times in Buffalo, Albany, Dutchess County and the Bronx.
In the first three sting operations, undercover operatives for the state Department of Taxation and Finance temporarily took over restaurants and pretended to be starting up under new ownership.
They invited salesmen from cash register manufacturers to make pitches. “Invariably, the sales pitch is [our machines] beat taxes,” said one of the people involved in the sting.
A number of these salesmen referred to the technology as a “dump switch” or a “zapper,” although others said a code needed to be put into the register — like “two fries and three beers” — to get the machine to void and hide a purchase.
Some salesmen, according to this source, even offered to crash the restaurant’s hard drive — with all its recorded transactions — if a state tax audit was threatened.
In all, almost two dozen point-of-sales companies made pitches to sell registers to the undercover operatives. Most used the tax-avoidance angle in their proposals, said the source.

2011

In February, State of NY Department of Taxation and Finance issued a request for Information (RFI) on Sales Tax Collector’s Electronic System Solution. This action attracted international vendors to offer solutions.

2011

In June, without any known outcome from the previously issued RFI, DOR has chosen to update its rules-based approach and published Tax Record keeping requirements.

2011

Anti-zapper bill introduced by Senator Liz Krueger, mentioned above was a role model for many States enacted this legislation, however NY is still stalling.

2012

The Investigations and Government Operations Committee, Senator Carl L. Marcellino, convened on June 4 at the Legislative Office Building in Albany, New York to investigate the use of automated sales suppression devices in evading New York State Sales Tax collection, including the so called tax-zapper software that lets businesses, especially those that deal mostly in cash, to underreport taxable sales and pocket money that should be given to the government.

Testifying before the committee were:

  • Nonie Manion, Director of Audit Division at the New York State Department of Taxation and Finance
  • Matt O’Connor, Regional Vice President for Micros Systems, Inc.
  • Ted Potrikus, Executive Vice President and Director of Government Relations for the Retail Council of New York State
  • Richard Ainsworth, Lecturer in Law B.B.A. at the Boston University Graduate Tax Program
  • Scott Wexler, Executive Director at the Empire State Restaurant and Tavern Association
  • Jim Calvin, President of the New York State Association of Convenience Stores

As a result of the hearing, the Investigations and Government Operations Committee made the following recommendations and introduced legislation, S. 7733

  1. LEGISLATIVE REMEDIES
  • Define zapper and phantom-ware in law
  • Prohibit the sale, purchase, installation, transfer, or possession of an automated sales suppression device (zapper) or phantom-ware that eliminates point-of-sale transactions randomly, and creates a shadow record of the sale, making it difficult to detect understated records of sales and sales tax liability
  • Make the use of tax evasion devices a felony
    • Create a fine of up to twice the amount of taxes that “would otherwise be due” with a cap of $100,000
    • Create a prison term of not less than one year or more than 5 years
    • Clarify that the perpetrator is legally responsible for all taxes and penalties due the State resulting from the use of automated sales suppression devices
  • Offer a reward for those who report offenders of 50% of any fine collected against the perpetrator, up to $10,000
  • Forfeiture of professional or business or alcohol licenses
  • Require the use of encrypted tracking software in point of sale machines.
    • Could limit to only bad actors
    • Could offer audit indemnity for use o Could offer tax credit for installation
  • Require the instant electronic remission of Sales Taxes or sales records to the State.

GOVERNMENTAL REGULATIONS

  • Department of Taxation and Finance could certify software for point of sale machines that would maintain all the records needed for a Sales Tax audit

ENFORCEMENT

  • Enhance technology training for auditors in the Department of Taxation and Finance
    • Participation or hosting of Internal Revenue Service training seminars
  • In the course of enforcement, the tracking down of other parties that may have had devices installed by a perpetrator
VIDEO: New York State Senate Committee on Investigations and Government Operations Public Hearing

2013

In January, New York Republican Rep. Michael Grimm was deposed in a federal lawsuit filed by two former ‘Healthalicious’ employees who accused him of paying them less than minimum wage. According to the indictment, Grimm attempted to hide his cash-payment scheme by lying under oath about whether he paid employees in cash, what his interactions were with the payroll management company, whether he corresponded via email about Healthalicious’ business, and whether he still had access to the email address.

Long story short, Grimm pleaded guilty in December 2014. Indictment available upon request.

2014

In April, Sales Suppression and Detection Techniques Symposium held by California state tax authorities attracted many States and their department of revenue representatives, except New York, which NY Post author John Crudele have used to post criticism to DOR ignoring this event, and publicly offed to pay return tickets for them.

The conference was a place of significant findings where many government representatives testified about interaction with zappers. But most valuable finding was presented by Professor Richard Ainsworth who revealed details regarding the NY sting operation. Read more about this as he has shared it with the world in his research paper.

2015

And finally, the Grand Jury REPORT.

What happens next?

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