States Try to Zap Tax Cheats

As Americans rush to meet tomorrow’s federal tax deadline, states are going after computer programs that allow businesses to cheat on the amount of taxes they pay. 

At least five states (Florida, Georgia, Maine, Utah and West Virginia) have enacted laws that target “tax-zapper” software that essentially allows businesses to keep two sets of books, the Associated Press has reported. 

By plugging a flash drive into cash registers, the software lets businesses under report taxable sales. The new state laws make it illegal to possess or install devices that falsify a cash register’s electronic records. Other states considering such measures include Oklahoma, Indiana, New York, Tennessee and Michigan, AP reported. 

Richard Ainsworth, a Boston University tax law professor who has studied the issue, estimates that 30 percent of businesses that primarily rely on cash transactions are using tax zappers. In the restaurant industry alone in California, the loss from zappers was estimated at $2.8 billion three years ago and in New York $1.7 billion, Ainsworth says. 

Until recently the largest tax fraud case in Connecticut was a zapper case. Stew Leonard’s Dairy in Norwalk Connecticut skimmed $17 million in receipts and hid the cash in St. Martin, a Caribbean island. The owners of the La Shish restaurant chain in Detroit, surpassed that amount, and zapped $20 million in cash sales and sent the funds to Hezbollah in Lebanon, Ainsworth wrote in a paper. 

Sujit M. CanagaRetna, a tax and budget expert at the Council of State Governments, says “States are becoming more aware of these kinds of activities and are aggressively going after them.” 

States have long used various techniques to look for tax cheats, including posting tax delinquents online. California’s latest list includes notable names such as CNEt co-founder Halsey Minor and “Baywatch” actress Pamela Anderson, The Los Angeles Times recently reported. California figures its tax gap — the difference between taxes owed to the state and taxes actually paid — is $10 billion. 

Taking a different approach, tax amnesty programs are another way states have tried to get taxpayers to pay their full share. Ohio currently is offering taxpayers through next May the chance to make good on what they owe without facing the usual penalties.