The co-chairs of the legislature’s Finance, Revenue, and Bonding Committee have decided not to touch last year’s tax package, but that doesn’t mean they aren’t looking for revenue.
Instead, they will be drafting legislation to outlaw zappers—a software program that allows cash businesses to skim cash off receipts and possibly cheat the state out of sales tax revenues.
Department of Revenue Services Commissioner Kevin Sullivan said these commercially available zappers are hooked into the cash register to create two sets of books, “one you don’t show anybody and one you use to report your taxes.”
He said if someone buys something for $100, the software program could be set to skim $10 off the top to make it look as if the item was purchased for $90. So instead of paying sales tax on $100, the company is only paying sales tax on $90.
“Think of it as the butcher putting his thumb on the scale,” Sullivan said.
And while “underreporting taxes” is illegal, these zappers are not.
Currently there’s no way of knowing how many of these software programs may be installed in the thousands of cash businesses across the state, but at least one lawmaker believes the state could see millions from the move.
Rep. Chris Perone, D-Norwalk, who chaired a panel discussion in 2011 for the National Conference of State Legislatures on the issue of zappers, said it’s something that’s worth looking into both as a fraud protection method and consumer protection.
He said at the end of the day if you go into a restaurant where zapping is happening you won’t necessarily be hurt as a consumer, but it means that fewer state services will get funding because the money is going to the business instead of to the state. The pennies, he said, really start to add up.
Connecticut has already fallen victim to tax zapping back in the early 1990s when U.S. Customs officials detained Stew Leonard, founder of the popular grocery store chain, as he boarded a flight to the Caribbean. Federal officials found $70,000 of cash on him and in his luggage.
By 1993, Leonard pleaded guilty to his role in trying to conceal $17 million in sales, which resulted in $6.8 million in unpaid federal taxes. According to a paper by Richard Ainsworth, a tax attorney and Boston University School of Law professor, the Leonard scam was notable because of the sophisticated use of computer software to alter sales records. Ainsworth has been warning policymakers and officials both in the U.S. and abroad to take notice of these devices for years.
The devices have become more popular over time as technology has grown more sophisticated, making it easier to use and easy to hide from investigators. But Sullivan said his department is up to the task of rooting out the devices.
The devices can now be embedded in the hard drive of the cash register or they can be operated remotely, making it difficult for tax investigators or the local police to spot.
“It takes a tool away from somebody,” he said.
The Finance, Revenue, and Bonding Committee is in the process of drafting legislation.