NY Bill to Criminalize Sales Suppression Would Hit Wrong Targets

If a New York state bill becomes law, those who use an automated sales suppression device to evade state taxes could be charged with defrauding the government—a felony. The legislation is an ambitious but flawed attempt to boost tax revenue, purportedly by up to $1 billion annually.

The proposed statute could unfairly subject business owners to severe criminal charges for using common and innocuous software tools. New York might achieve its tax revenue goals without resorting to such draconian measures. It should target unintentional and purposeful tax evasion by bolstering information campaigns, compliance measures, and quality audits.

The bill has a broad sweep. Tax authorities only need to suspect that sales suppression may have occurred to charge a business owner. And thanks to the bill’s broad definition of an “automated sales suppression device,” this scenario could happen often.

Further, the bill aims to make manufacturing, selling, installing, using, or even attempting to use an automated sales suppression device a felony subject to a sentence of up to seven years in prison. It defines an automated sales suppression device as any software that can falsify electronic records, whether stored locally, on external drives, or in a cloud platform.

Under this broad definition, a copy of Microsoft Excel that may not even be installed on a business owner’s system, but can be accessed remotely, could technically fall under the scope. The legislation wouldn’t criminalize knowing alteration of transaction records; it makes it a felony to knowingly attempt to access a device that could alter transaction records.

This broad and ambiguous language is problematic even when considering civil penalties. States that have opted to criminalize zapper possession, such as Arizona, have done so by outlawing purchase or possession of such devices to try to defeat a tax—making violators subject to penalties, not prison. The knowledge and intent requirements are connected to fraud, the actual act that’s intended to be proscribed.

New York appears to be taking a problematic page from UK Revenue and Customs, which rolled out similar broad and misguided policies last year. As in the UK, New York would be able to charge a business owner with a felony even if the owner can prove they never successfully accessed the purported device—merely attempting to do so is sufficient.

Poorly Targeted Deterrence

Effective deterrence dissuades bad actors from behaving in certain ways by instilling fear of consequences, but the current approach risks driving the real perpetrators overseas. In a competitive business environment, particularly among smaller entities in industries with thin margins, pressure to keep up with competition drives innovation.

When the “innovation” is sales suppression, those businesses willing to jump on the bandwagon gain a comparative advantage. In an industry with slim margins, businesses that can use sales suppression tools to collect sales tax from customers and simply pocket the money stand to increase their profit margins by whatever the sales tax rate is in that jurisdiction.

In New York, this would mean a business owner that uses an automated sales suppression device can pocket an extra 4% on every suppressed sale and avoid paying income tax on the profits from those sales. This puts pressure on other businesses to follow suit or risk being left behind.

Businesses caught using sales suppression devices are already subject to massive fines and fees in the form of fraud penalties—they know consequences are possible. Lack of effective enforcement creates a cycle where compliance is a disadvantage, and noncompliance can make the difference between keeping your doors open and folding up shop.

Creating a zapper felony would likely drive manufacturers and designers of suppression devices overseas and outside the grasp of New York tax authorities. Such entities are mobile and need not be in the state to continue offering their services. This would once again leave only local business owners as primary targets for prosecution and place the actual bad actors safely abroad.

Using Existing Policies

State policy should focus on creating an enforcement strategy from existing policies and technology. Information campaigns are an excellent start—educating business owners on how automated sales suppression devices are marketed and how businesses that report being solicited to can be given safe harbor.

Conducting quality audits is the most critical component of any effective enforcement strategy. And audits necessitate properly funded revenue departments staffed with sales suppression experts.

Upstream manufacturers and designers of suppression devices should be enforcement efforts’ ultimate targets—the real architects of tax evasion schemes. Business owners, particularly small businesses, should be secondary, given they may be unwitting users of these devices.

If we want new ways of targeting tax evasion, we can certainly borrow from other countries’ successful models. Policies such as digital invoices or sales tax lotteries have proven effective in enhancing compliance.

Manufacturers of sales suppression devices know they can be subject to severe penalties, but they continue to build and market their products because they likely don’t think they’ll be held accountable. For the most part, they would be correct, as it is usually the business owner who gets prosecuted.

Increasing the penalties does nothing to dissuade business owners from using sales suppression tools, when they may not even be aware that what they are doing constitutes sales suppression.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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