GTP Director Richard Ainsworth on the $20 billion tax fraud states are overlooking

Graduate Tax Program Director Richard Ainsworth has partnered with states with sales tax to tackle prevalent “zapper” problem.

Two billion dollars a year. That’s how much tax revenue New York State is missing out on, says Graduate Tax Program Director Richard Ainsworth—and that’s just from restaurant sales. In fact, he estimates states in the US have been cheated out of some $20 billion over the last decade, but few are doing anything about it. “We have the means to fix this problem,” he says. “It’s simply a matter of getting governments to do it.”

The culprit is a technology called an automated sales suppression device, or a “zapper.” Essentially, it’s a virtually untraceable software program that erases the record of a transaction, or part of one, allowing business owners to evade sales taxes, which generally are relative to transaction volume. The problem is particularly widespread in restaurants, which have been Ainsworth’s main focus, however, any retail store or company that wants to avoid paying taxes on all of their sales could potentially purchase zapper technology.

Ainsworth learned about zappers from a Canadian Tax Journal researcher who asked him a question while giving a paper on tax fraud and technology in Canada. The incident sparked Ainsworth’s six-year crusade to raise awareness and help American and international governments reverse their tax losses.

Zappers: A Medium-Rare History

The first zapper in North America was discovered by an auditor in Quebec in 1997, when she ordered a French onion soup, a medium-rare steak, and a cup of coffee from a restaurant she was auditing. When she audited the restaurant’s records, however, the price of the steak had vanished from her transaction, leaving only “French onion soup, medium rare, coffee” in the record. The restaurant was using an early form of zapper: an additional memory board hard-wired into the cash register for the purpose of deleting transactions.

Both the memory board and its more technologically advanced successor—“phantom-ware,” software activated on a cash register via code—were difficult, but possible, to detect because they were installed in the cash register. More recent zapper software, however, is inserted into the cash register in a memory stick, which is removed once transactions have been deleted.

Even so, “it isn’t that hard to find them if you look for them,” says Ainsworth, “but you have to be a little bit persistent, and a little bit suspicious.”

The traditional, pre-announced audit won’t work, he notes. It takes more time and money, which has made states loath to undertake the effort. But Ainsworth is determined to show lawmakers the value of pursuing zappers. California, for example, was convinced to start taking action once Ainsworth calculated the state was losing approximately $2.8 billion per year in sales tax revenue.

Who to Prosecute?

“The real bad guys are not the restaurants,” Ainsworth notes. “It’s the people who sell and install the zappers.” The zapper salesmen essentially coerce restaurants into purchasing their products, he says. “They tell you, ‘Every one else is buying my zapper, and if you don’t, they’ll drive you out of business.’ Once it gets into the marketplace, it’s like a virus. It becomes embedded in the process of doing things, which makes it incredibly difficult to stop.”

Under old tax laws, the business owners, the perpetrators of the fraud, were subject to penalty. But Ainsworth has been working to change these laws, writing extensively and speaking across the country to encourage all 45 states that have sales tax to think differently about the cause of this problem. “I’ve encouraged the states to pass laws that criminalize the manufacture, sale, and possession of zappers. So, if you’re the person carrying the zappers around, installing them, and updating them, then you are subject to penalty.”

Ainsworth worked closely with lawmakers in New York State, translating and adapting Quebec’s laws, which have served as a model for legislation criminalizing zappers. Thanks to Ainsworth’s efforts, Georgia was the first state in 2011 to enact a law making the sale, purchase, installation, transfer, or possession of zapper technology illegal, not just the actual fraud itself. And 21 others have followed suit.

Finding a Solution that Sticks

Enforcement has proven another expensive obstacle to state buy-in.

When Quebec mandated that every restaurant have a device next to the cash register that saves and prints every receipt, creating a permanent record of every transaction, many complained about the cost of the devices, about $800 apiece. So the government purchased them for the restaurants—an expenditure of about $25 million. Quebec got an excellent return on its investment, recouping the $25 million in just nine months, since the newly installed machines found zappers nearly everywhere.

Ainsworth says that there is a cheaper and more efficient solution available, one that has been put to surprisingly good use in an unexpected place: Rwanda. The Rwandan government has mandated that everyone who owns a business must have a technology called an Electronic Business Machine (EBM), which does all of the business’ accounting, and sends a daily electronic report to the tax administration. Within six months of the law going into effect, Rwandan tax revenue went up by 16 percent. The best part, says Ainsworth, is that the EBMs are remarkably inexpensive, costing only about a dollar per day.

EBMs have been met with objections in the United States because of privacy concerns. “People don’t want the government to know everything their business is doing, largely because it hasn’t yet been proven that zappers are a prevalent problem in the US,” Ainsworth says. “What we need to do, and what we’re working on now, is finding the fraud. We’ve got to prove that there is a problem before we can implement the solution.”

Of his tireless, often thankless work on the zapper problem, Ainsworth says, “I feel it’s an obligation of an academic: if you think about something, and you find a problem, then you have to make constructive suggestions for change. I need to contribute to the society that I’m part of, so if I find these things, I write about them, and I talk about them, and if people don’t believe me the first time, maybe they’ll believe me later, and maybe I’ll make something better. That’s what we’re supposed to do—that’s our job—to give something back to the system.”

Reported by Sara Womble