California has not uncovered a single instance of technology-assisted cash skimming - there are no zappers, and no phantomware in California. Is this because Californians are not skimming cash sales with technology, or is this because the California technology works so well that the fraud cannot be detected?
The record in foreign jurisdictions is reasonable clear. Automated sales suppression technology is widely used to skim cash sales, denying the state revenues from consumption taxes that have been paid by the consumer, reducing taxable business profits, and funding a cash hoard out of which unreported employee wages are paid. Government studies indicate that upwards of 50% of the electronic cash registers (ECRs) are infected with fraud-facilitating software.
This paper recommends that the California Commission on the 21st Century Economy look carefully at this digital tax fraud. There are new ways of performing old frauds. The new ways have made familiar frauds difficult to detect without the assistance of technology-sensitive legislation (and regulation) as well as technology-intensive audit tools. In short, California needs to determine if a digital hole has been cut through the bottom of the modern ECR through which revenue is being poured. Foreign revenue authorities are making efforts to plug this hole, as of yet California has not done so.
Specifically, this proposal asks the Commission to recommend that a randomized, statistically valid study be taken of automated sales suppression within the State. The study should consider add-on software (zappers), factory or distributor installed software (phantomware), and manually re-programmed ECRs (self-help phantomware). The Commission should further recommend that if the results of this study align with the results of similar (foreign) studies then appropriate legislative (or regulatory) changes should be enacted to meet this challenge. A technology-intensive audit response will most likely (but not necessarily) also be required. This paper summarizes four of these approaches.
Admittedly, one of the reasons this problem has not been better addressed is that almost all of the work in this area is being done in foreign languages - French, German, Portuguese, Dutch and Swedish. However, California might consider reading some foreign newspapers and begin to ask questions when a business with California operations is found to be using zappers to skim cash sales in a foreign jurisdiction. Zappers follow the path cut by the ECRs. They do not respect judicial boundaries. For example, when Celine Dion's Nickel restaurant chain was raided by Revenue Quebec, and each of the 32 Nickel restaurants in the Province were found using zappers, the zapper question should have arisen in the mind of the Florida Department of Revenue where there were 2 more Nickel restaurants. It certainly did in the mind of the Ontario authorities where the remaining 10 Nickel restaurants were located.
Richard T. Ainsworth,
California Zappers: A Proposal for the Commission for the 21st Century Economy
Available at: https://scholarship.law.bu.edu/faculty_scholarship/1486
Accounting Law Commons, Banking and Finance Law Commons, Business Organizations Law Commons, Criminal Law Commons, Law and Economics Commons, Science and Technology Law Commons, Taxation-State and Local Commons, Tax Law Commons