States cracking down on tax zapper programs

European tax collectors have a handle on tax cheats using zapper programs, a problem only now getting attention in the U.S. Image: Images_of_Money/Flickr/CC BY

Many states are starting to crack down on businesses that use so-called “tax zapper” programs to keep two sets of books by simply inserting a flash drive into the cash register. States say the programs cost them billions in unreported taxes.

Illegal in five states now

Florida, Georgia, Maine, Utah and West Virginia have all enacted legislation to make it illegal to use the tax-cheating programs. New York, Tennessee, Michigan, Indiana and Oklahoma all have bills pending targeting tax zappers. Lawmakers in Massachusetts, Connecticut and Alabama, meanwhile, are discussing drafting similar measures.

Maine’s legislation was signed into law in March. There, business owners who install the software could expect fines of up to $5,000, plus a maximum of five years jail time. Just owning the program could cost a business person a year behind bars and fines of up to $2,000.

States lose billions in tax revenue

Seth Berry, a Maine Democratic Representative who co-sponsored the measure in his state, said:

“Maine, like all of the other states, has revenues that should be coming in but are not. It’s our job to make sure that everyone’s pulling their weight.”

Richard Ainsworth, a tax law professor at Boston University, estimates that 30 percent of the cash-only business in the nation use the software, available for about $500.

Used mostly by cash-heavy firms

Cash-intensive businesses such as restaurants and convenience stores, where income trails can be obscure, are the kinds of establishments most likely to use the programs.

[Strapped for cash? We have short-term loans]

How a tax zapper works

The software works by keeping an extra set of books. During the business day, the register records actual sales amounts and issues accurate receipts to customers. But when the business is closed, a set amount can be deducted from the total sales, and the program cooks all the transactions accordingly, creating a second set of books for tax purposes. By shaving just a little off of each day’s receipts, a business can get itself a considerable tax break over a year’s time.

Well-known problem in Europe

The problem, says Ainsworth, is just now being recognized in the U.S., but has been well-known in Europe for some time. However, most European nations use a value-added tax system, which makes the cheats easier to track down.

Tracking down software users

So how are tax agents able to recognize which businesses use the programs and which do not? According to Ainsworth, it takes physical visits and painstaking legwork. “You have to dig,” he said.

Honest businesses support crackdown

Jeff Lenard, of the National Association of Convenience Stores, supports the crackdown. He said businesses that use the programs are cheating honest businesses as well: