Tax ‘Zappers’ Warrant Transparency by State Revenue Departments

If state departments of revenue want to fight tax evasion—specifically the type facilitated by electronic sales suppression tools—their current strategy requires an overhaul. Relying predominantly on post-hoc enforcement to combat the use of such tools is like laying traps for escaped horses and making no effort to close the barn door.

The battle against sales tax evasion has taken a sophisticated turn in the past few decades with the advent of sales tax “zappers”—electronic sales suppression software that manipulates sales records to evade remitting collected sales tax. Most recently, Wisconsin in December joined more than 30 other states in criminalizing the use of these tools.

A 2023 case in Connecticut, in which a restaurant owner faced sentencing for a $2 million fraud involving a zapper, brings the issue and ramifications into sharper focus. It isn’t an isolated incident—states grappling with revenue shortfalls will need to intensify their efforts to uncover and seek recourse against tax evasion schemes.

In so doing, state departments of revenue shouldn’t shirk from their duty to inform the public of threats in addition to their duty to curb the use of fraudulent tools. State revenue departments should promote transparency by listing problematic point-of-sale software in a manner akin to the IRS’s practice of listing known tax shelters as listed transactions.

Listed Software

The presence of a zapper for any given POS system—zappers aren’t one-size-fits-all—casts doubt on the integrity of the data created by that system. That can spur increased scrutiny by state departments of revenue.

It may not rise to a “guilty until proven innocent” stance, but a business’ use of a piece of software for which there is a known zapper may signal to state auditors that a business owner’s records aren’t accurate.

A more compliant and informed business environment can be fostered by state revenue departments increasing transparency. They can maintain publicly available lists of POS systems that are under scrutiny for facilitating tax evasion through zappers or other electronic sales suppression tools.

State revenue departments should provide lists of POS systems they have found to contain, or have available, corresponding zappers or electronic sales suppression tools—just as the IRS maintains its listed transactions lists. Publishing such lists wouldn’t necessitate an end to audits or investigations of businesses that choose to use them.

Instead, it would represent a shift toward an environment where businesses are put on notice and given an opportunity to avoid entanglement with problematic systems from the outset. It would further encourage POS system providers and developers to maintain high standards of compliance and stay ahead of zapper development.

Undue Scrutiny

In the realm of sales tax compliance, the adage “if you have nothing to hide, you have nothing to fear” holds no weight—doubly so when dealing with business record data. State revenue departments that use customer lists from vendors of POS systems, known to have zapper software, as a roadmap for audits unwittingly set traps for fraudsters and innocent business owners alike.

Pieces of software that can be used to suppress sales, such as database cleanup utilities, often have legitimate primary uses unrelated to tax evasion. Those utilities may be repurposed as zappers but may be included in the POS system under another guise—such as to facilitate simple maintenance of the system by the business owner.

In some cases, a business owner may be said to be in possession of an electronic sales suppression tool and subject to prosecution simply because the software they’re running could be used to alter transaction records.

In those situations, business owners are targeted for audit owing simply to their use of a suspect POS system and then found in violation of the law for possessing the same element that led to the increased scrutiny. The owner needn’t have engaged in any fraud or have even been aware that the sales suppression feature was available to them.

Possessing a zapper doesn’t tell you much about the likelihood of it having been used. A business using a system that has a zapper available in the underground market tells you even less. Zappers often become available as a “premium feature” through a paid upgrade to the POS installer, cloaked as a monthly service fee.

In such situations, business owners are offered the ability to delete a significant portion of their cash sales from their records and reindex the database to broom the footprints of fraud behind them. Business owners can then retain sales tax collected on these vanished sales and lower their reported income for income tax purposes.

Deciding which businesses to audit based on their use of a POS system for which there is a known zapper captures bad actors, and it captures individuals that either declined such a paid “upgrade” or were never offered one to begin with. Put simply, targeting business owners that use a given software system is a poor rule of thumb for determining who engages in abusive practice.

It also subjects the latter to business record data generated by a piece of software that may have been designed and developed by a programmer chiefly interested in selling said paid “upgrades.” Honest business owners are compelled to bet their reputation and livelihood on the transaction records created by a potentially shoddy piece of software.

Building Trust

State revenue departments can build a foundation of trust with the broader business community by adopting a transparent approach. Providing a schedule of listed software would deter the use of such systems by making the presence of a tool of fraud known. It simultaneously would promote an atmosphere where businesses can feel more supported in their efforts to comply with tax laws.

It isn’t quite the “safe harbor” approach—providing a list of approved pieces of software—but it gives business owners more guidance than simply waiting to be informed they are using a problematic POS system when they receive an audit notice.

A call for listed software to be provided to business owners by state revenue departments, rather than using such lists against business owners, is a call for a collaborative approach to tax compliance. By sharing knowledge of suspect POS systems, state revenue departments empower businesses to make informed decisions in an area for which there is little guidance.

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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