‘Tax Lottery’ Would Help Abate Remote Cashier Auditing Nightmare

Despite many companies’ return-to-office policies, remote work remains popular and more common than before the Covid-19 pandemic. The shift isn’t limited to office work—in New York, restaurants are pioneering use of remote cashiers based in the Philippines.

The change doesn’t introduce a significant hurdle for sales tax calculation purposes; New York’s tax policies will still control any transaction taking place in the Empire State. The challenges come when the state department of revenue or other tax authority audits the business that performs remote checkouts and offshore payment processing.

Without physical records at the business location, local tax authorities will face a daunting task. Efforts to demand records from offshore payment processors or remote checkout businesses may prove fruitless depending where they are sited.

If tax authorities can’t see transaction logs, sales tax suppression will be easy to accomplish and difficult to prove. To counteract these challenges, individual customers could be enticed to obtain and scan their receipts, creating a shadow record of transactions that can provide a robust foundation for audits.

Scanning receipts could automatically enter consumers into a lottery—either by providing tickets for an existing state-run lottery or creating a separate prize fund via the revenue generated from enhanced compliance.

As far-fetched as this may seem, such programs have been created and administered by countries around the world, and increased compliance followed suit.

Remote Suppression

If offsite, or even offshore, payment processing isn’t going to be eliminated, then the next best step to compel business owners to maintain a local transaction record is to facilitate a shadow record for consumers that will also reflect in tax agency records. This approach creates a source of transaction data outside the control of the business owner.

Imagine a simple scenario involving a restaurant in New York City. A customer approaches the counter to pay for a meal with a credit or debit card and encounters the functional equivalent of a Zoom call, with a cashier located a world away.

If the customer pays by credit card, and the processing of that transaction is handled by the same company offering the remote cashier services, there may be no record of the transaction in the restaurant itself. The cashier will process the transaction in conjunction with a payment-processing company, and the customer will be given a receipt—digital or otherwise.

At that moment, three individuals or entities can speak to the details of the transaction that has just been conducted: the customer, cashier, and payment processor. The cashier and payment processor may forget the transaction happened.

This may be one of the service’s selling points, essentially sales suppression as a service, because it allows the restaurant owner to retain the sales tax charged to the customer—up to 8.875% in New York City—and reduce their income tax liability by the amount of the transaction.

If the transaction record doesn’t exist, the restaurant owner can retain the full value of the transaction, without needing to report that value as income, and any sales tax collected on behalf of the customer. When the average restaurant profit margin is as little as 7%, pocketing 8.875% on every cash transaction can mean the difference between a profitable enterprise and a foundering one.

Only the customer can be made to stand separate from the business owner and used as a source of true transaction data, which is where a lottery system would come in.

Encouraging customers to tell the tax authority what they know about a given transaction by scanning their receipt into a tax authority database would significantly reduce the ability of the restaurant to suppress sales.

Tax Lottery

The crux of the sales suppression issue revolves around tax authorities not having sufficient access to unmanipulated data—data reflecting actual totals for sales made and sales taxes collected, without any manipulation by the business owner.

A fraudster business knows how much they made in sales and how much tax they collected, but they’re motivated to lie. Customers know how much they paid but are difficult to track down and are unlikely to retain receipts for de minimis purchases even if you could find them.

Incentivizing customers to scan and submit their receipts to the tax authority shortly after purchase through entry in a lottery for a cash prize is a scalable solution.

A number of states in Europe have already done this to combat value-added tax fraud. Results have been mixed—some African states adopting such lotteries have seen minimal revenue increases, but Brazil and China have had success.

The extent that sales suppression was occurring before the introduction of a new policy can determine the possibility of success. If the sales tax gap in a given state chiefly comprises sophisticated evaders, a lottery system may not make a significant difference in terms of tax revenue. Similarly, if there is a general anti-tax culture, fraudster businesses may succeed in offering discounts for goods and services purchased without a receipt—bringing the customer unwittingly in on the fraud.

But these international experiences don’t reflect what will be possible if remote cashiers become the norm. Putting all the transaction data for a business outside the reach of state departments of revenue is a recipe for rampant fraud—it will be too easy for fraudsters to resist exploiting.

A lottery system essentially would deputize customers to help tax authorities create a near-complete record of the transactions conducted by a given business.

To the extent that not every receipt is scanned, the business wouldn’t be able to know at the point of the transaction which customers will and won’t use their receipt to enter the lottery. They’d be forced to gamble themselves, betting that any transaction they choose to delete and suppress isn’t one for which the customer has submitted a receipt.

Balancing penalties for failure to issue receipts and payouts for the lottery would be key for efficiency—the point at which adding another dollar to the lottery or another dollar to the penalty won’t enable another dollar to be contributed in tax revenue.

At best, a customer doesn’t care if a business charges them sales tax on their transaction and then pockets the tax and suppresses the sale. The effect on the individual’s wallet is the same, and they have nothing to gain from encouraging or discouraging it.

Appealing to customers’ monetary interests through a tax lottery can be a powerful breakwater against what may otherwise be a cresting wave of fraud.

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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