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21st-Century Tax Evasion: How cash businesses make transactions disappear

31st May 2015 Print

Imagine the ability to collect cash from a cash register transaction and then make the transaction disappear. You’d keep the cash without recording revenue, and you’d slash your sales and excise tax bills.

This scenario doesn’t use some brand new form of technology. In fact, it’s been around for decades. It involves a device called an automated sales suppression device, better known as a zapper in street parlance. 

The European Union banned zappers long ago, but they’re still alive and well in the U.S. Cash-heavy businesses use them to avoid paying taxes, and in most states, they’re not even illegal.

How Zappers Work

Individuals use cash transactions to avoid tax payments all of the time. For example, paying a nanny in cash allows her to avoid a paper trail of taxable income — and allows employers to avoid I-9s and other pesky immigration matters. Businesses do it, too, using plenty of non-technological methods. They fail to record transactions in a ledger, or they conduct the transaction without putting it through a POS system. Alternatively, they keep two sets of books, or they simply lie to avoid tax payments.

Zappers make it much easier to disguise tax evasion in the course of everyday business. Some are hardwired into cash registers while others operate as pieces of software. Business owners set the zappers to erase cash transactions, or they erase transactions involving items susceptible to excise taxes, like cigarettes or alcoholic beverages. Zappers can then renumber the rest of the transactions to hide the missing transaction. Some zappers copy the original transaction data to a separate directory, create a new transaction, and then independently delete the original data.

Business owners install zapper software through USB sticks, removable media, or even through online URLs. Because the transactions simply disappear, the numbers always add up. Also, ratios that would normally raise red flags for auditors, like the ratio of transactions to sales revenue, remain normal. Business owners keep the sales and excise taxes that customers pay during deleted transactions. They also avoid paying income taxes on erased revenue. 

Zappers in the U.S.

In 1993, a Connecticut grocery store chain called Stew Leonard’s used zappers to skim $17 million over a 10-year period. The owner of the store, Stewart J. Leonard, then packed the money into suitcases and headed to the island of St. Martin’s. Leonard was eventually convicted of income tax fraud, but Connecticut never recovered a proposed $1.4 million in lost sales tax revenue.

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In Detroit, the owners of a restaurant chain called La Shish zapped over $20 million in cash during a five-year period. The restaurant’s owners, Elfat El Aouar and her husband, Talil Chahine, sent the money to Lebanon, where it supposedly funded Hezbollah activities. Chahine was sentenced to 18 months in prison in 2007, but his wife remains at large in Lebanon. 

Twenty U.S. states have outlawed zappers, and Minnesota is following suit. Minnesota lawmakers estimate that they lose $17 million in annual tax revenue from zapped convenience store sales and $41 million from zapped restaurant transactions.

How Governments Have Cracked Down on Zappers

In Quebec, authorities estimated that in 2008, 48.4 percent of restaurant operators avoided taxes by hiding transactions. Authorities calculated that Quebec lost $136 million in tax revenue from restaurants because of zappers, so they set out to eliminate the threat. 

In addition to banning the devices, Quebec has required restaurant owners to purchase a separate sales recording machine (SRM). The machine is separate from the restaurant’s POS system, and it records and generates a unique code for each transaction. Inspectors can download data from SRMs and compare it to what the restaurant reported to Revenu Quebec. 

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In 2011 alone, Revenu Quebec recovered over $160 million in revenue. By 2018, they expect to recover $2.4 billion by going after zappers. The project only cost $94.4 million to implement, which means it was profitable during its first year. Restaurant owners caught using zappers pay a $5,000 fine for first offenses and $50,000 for subsequent offenses. Possessing a zapper can result in a $50,000 fine, and selling or developing zapper software could result in a $100,000 fine.

New Technologies

Authorities say that some zappers are sophisticated enough to skim credit card transactions, although most only focus on eliminating cash sales. For now, solutions like SRMs are helping revenue offices catch up with cash skimming business owners.

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