Focus and Law

State targets sales record zappers

August 31, 2012
| By Pete Daly |
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Any Michigan business owner tempted to underreport cash receipts with the use of “zapper” software had best beware: Since last week, simple possession of the software is good for a one-year minimum mandatory jail sentence plus severe financial penalties.

And, you would lose the money you tried to hide.

The new state law is blunt and simple — “like somebody having a kilo of heroin: Possession is illegal,” said Varnum Law partner Paul McKenney. He is an attorney with 38 years of experience in tax law and works out of the firm’s Detroit office.

Automated sales suppression software, aka “zapper” software or “phantom ware,” has been around for a few years, but Michigan is joining a number of states that now are cracking down on its use, since a couple of big states, such as California and New York, have admitted their lost tax revenues are estimated in the billions of dollars.

The state of Michigan enacted tax enforcement legislation that took effect Aug. 28, making it illegal to sell, purchase, install, transfer or possess the zapper software. The legislation signed into law in May by Gov. Rick Snyder was sponsored by State Sen. John Pappageorge, R-Troy, who said at the signing that more than $740 million was zapped in Michigan during 2010.

According to Pappageorge’s Senate website, devices such as these are most commonly used at restaurants, convenience stores, vending machines, entertainment venues, or any place with high-volume cash transactions. They can be programmed to reduce by a certain percent or dollar amount every charge put on customer credit cards, as well as cash totals recorded over a given timeframe.

McKenney said the software typically is loaded onto a thumb drive that is sold to a business owner who then plugs it into the business computer. The thought is that, since the software does not reside on the computer, if investigators seize the computer there won’t be any evidence. McKenney said buyers might pay up to “a couple of grand” for a zapper.

Another variation is the owner of the illicit software makes regular stops at unscrupulous businesses to alter their receipts data for a fee.

“There is no purpose to have a zapper other than tax evasion,” said McKenney.

People who sell the software always assure the buyers that its use is undetectable by law enforcement, according to McKenney.

A call to the Michigan Department of Treasury indicates the state apparently isn’t flooded with businesses skimming huge amounts of cash by zapping their receipt records, but there was a significant case in the Detroit area that began in 2005 with Talal Chahine. He was the owner of a chain of 12 popular Middle Eastern restaurants called La Shish, which had been in business for 20 years. Federal investigators claimed he had skimmed $20 million from his business, using zappers to hide the missing cash. Chahine was indicted on income tax evasion charges but fled the U.S.

On his Senate blog, Pappageorge wrote that the new laws allow the state “to go after the true ‘bad guys’ — those who are making, selling and installing the Zapper.” He said Quebec seized its first zapper in 1996, and since 2009, has begun aggressively searching for tax cheats who use them.

“Quebec authorities found that businesses often said they did not want to use the Zapper, but as their competition started using automated sales suppression devices, they turned to the Zapper to help them stay in business. Michigan wants to be certain that we alleviate any pressure our law-abiding businesses may feel because of Zappers,” wrote Pappageorge.

When asked how business owners with zappers get caught, McKenney said it happens when someone who has one lets a friend in on the secret. The friend gets one and uses it at his business, and more friends are let in on the secret. Then one of them gets caught or picked up on some unrelated charge and rats out the “friend” using a zapper to try to work a better deal with the prosecutor.

He said an individual in Detroit who was under arrest tipped off investigators about a guy he knew who was zapping the books for business owners. Then the traveling zapper owner was picked up and a case against him presented by the law enforcers. He eventually “gave up his customer list” to investigators in a successful deal for leniency, according to McKenney.

According to McKenney, the zapper salesmen claim it leaves no electronic fingerprints, but that is not true. The IRS and other agencies have sophisticated technicians who can spot evidence of a zapper.

McKenney said zappers also pose a risk to unwitting business owners who have an employee who is embezzling cash receipts: The employee can use the zapper software to hide his or her tracks. If the employee is caught, he might claim the owner of the business was really behind the zapping scam. But business owners can protect themselves by unannounced electronic audits to determine if any zappers have been used, and a telltale sign is when servers — according to the unscrupulous managers — need to be replaced with unusual frequency. That can be an attempt to hide evidence of electronic tampering.

In addition to a one-year minimum mandatory jail term, the Michigan law provides a fine of up to $100,000, according to McKenney. However, there is yet another costly provision that allows the state to seize all illicit gain stemming from the sale or use of a zapper. And the offender is also responsible for all Michigan sales, withholding and other taxes, plus penalties and interest, and, of course, corporate and individual income taxes.

McKenney’s zapper alert on the Varnum website states that cash businesses that are prone to zapper use typically pay employees all or some of their wages in cash under the table, and may also purchase food or inventory with cash.

He said the new Michigan legislation is patterned after another enforcement problem the Michigan Department of Treasury encountered: counterfeit cigarette tax stamps. The Michigan Treasury was losing tax revenue because of cigarettes brought in illegally from out of state with counterfeit Michigan stamps. The phony stamp business was flourishing, so the Treasury urged the legislature to outlaw the mere possession of cigarettes with counterfeit stamps, with conviction entailing a minimum prison term. The mandatory jail time virtually ended the fake stamp problem very quickly, and Treasury receipts from cigarette taxes increased.

The IRS also has taken steps to target businesses that might be using zappers, according to McKenney, and the state of Michigan has taken notice. There is an exchange of information agreement between the IRS and the Michigan Department of Treasury, he added.

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