Weekly Round-Up: States Outlaw Zappers, a New Variation on ‘Hidden Cash Register’ Trick

A customer pays cash for her order of soup, salad, and steak at a restaurant. When the restaurant is audited for sales tax liability, the steak order has disappeared from the restaurant’s records. What happened to it? Chances are the transaction was “zapped” or deleted from the restaurant’s receipts through the use of data suppression software.

As with other scams such as maintaining two sets of books or a hidden cash register, the idea behind “zapping” is to avoid remitting taxes by refusing to disclose certain transactions. Cases addressing cash skimming where a Zapper was used include:

United States v. Leonard
, 37 F.3d 32 (2d Cir. 1994) (enhanced fines and incarceration reviewed under sentencing guidelines where taxes evaded using computerized program altering sales data)

United States v. Leonard, 67 F.3d 460 (2d Cir. 1995) (heightened fine upheld for tax evasion effectuated by data suppression software)

United States v. Elfat El Aouar,
Cr. No. 06-20248 (E.D. Mich. 2006) (example of sentencing memorandum where cash receipts were reduced using computer program)

This week Maine and Utah join Georgia (see Ga. Code Ann. §16-9-62 ) in establishing criminal penalties for the knowing sale, purchase, or possession of any automated sales suppression device—software used to falsify records of electronic cash registers and other point-of-sale systems. Any installation or transfer of these devices, also known as “Zappers” or “Phantomware,” is also unlawful.

The new Maine law, L.D. 1764, takes effect July 17, and establishes two separate classes of felonies: one for possession of automated sales suppression devices, and another for manufacture, sale, installation, or transfer of such software. The penalties are in addition to those existing for intentional evasion of tax.

In Utah, the legislation signed by Gov. Gary R. Herbert (R), requires also that all profits associated with the sale or use of an automated sales suppression device be disgorged, and designates the devices as contraband subject to forfeiture. H.B. 96, which was enacted March 15, takes effect July 1.

For additional coverage of these legislative developments check out this week’s issue of Bloomberg BNA Weekly State Tax Report.

In other developments

Desperate measures to raise much-needed tax revenue.

California taxpayers may not simultaneously report tax under a single sales factor election and the standard three-factor formula to avoid application of the large corporate understatement penalty. See Sutherland Legal Alert for more information.

Applicability of Vermont’s sales and use tax to computer software, including business activity conducted through cloud computing, is discussed in this article from BurlingtonFreePress.com

Prentiss Willson and Timothy Gustafson Join Sutherland State and Local Tax Practice in Sacramento.

Compiled by Deborah Swann

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