Public Hearing to Examine the Use of Automated Sales Suppression Devices in Evading New York State Sales Tax Collection, Including the So-Called "Tax-Zapper" Software That Lets Businesses, Especially Those That Deal Mostly in Cash, to Underreport Taxable Sales and Pocket Money That Should Be Given to the Government

Lecturer in Law, B.B.A. 11 Boston University, Graduate Tax Program 12 Scott Wexler 105 112

Executive Director 13 Empire State Restaurant & Tavern Assoc. 14 James Calvin 124 129

President 15 NYS Association of Convenience Stores 16 17 18 19 20 21 22 23 24 25 1 SENATOR MARCELLINO: Good morning. 2 My name is Senator Carl Marcellino, and I 3 represent the 5th Senate District on Long Island, 4 and I am the Chairman of the Senate Committee on 5 Investigations and Government Operations. 6 And, I thank you for coming. 7 The purpose today is to examine the issue of 8 the use of, or alleged use of, automated sales 9 suppression devices to evade New York State sales 10 tax. 11 The hearing will investigate the use of the 12 so-called "tax-zapper" software that let's 13 businesses, especially that those that deal mostly 14 in cash, to underreport taxable sales and pocket 15 money that should be given to state and local 16 governments. 17 These crimes, if occurring, hit our residents 18 twice: First, when they properly pay their sales 19 tax and it's kept by the merchant; and, second, when 20 the state and municipalities are short revenue, and 21 have to cut services or personnel -- and/or 22 personnel. 23 So, some of my colleagues will be a little 24 late. The weather, and the conditions, getting up 25 from the Island and New York City are slow, so we're 1 going to proceed ahead. 2 The first speaker will be Nonie Manion, who's 3 the director of the audit division for the New York 4 State Department of Taxation and Finance. 5 Welcome to you, and thank you for coming. 6 NONI MANION: Good morning. 7 SENATOR MARCELLINO: Good morning. 8 NONI MANION: My name is Nonie Manion. I'm 9 the director of the audit division. 10 And on behalf of Commissioner Mattox, I want 11 to thank the Chairman and members of the Committee 12 for inviting the Tax Department to submit testimony 13 on the issue of sales tax evasion conducted by the 14 use of automated sales suppression devices. 15 About $25 billion in state and local sales 16 tax revenue was collected last year. Most of this 17 revenue, about 96 percent, is from vendors 18 voluntarily complying with their obligations to 19 collect and remit the revenue to the State. 20 Recognizing that most vendors want to comply 21 with their state tax obligations, the Department has 22 recently begun an initiative to improve our guidance 23 and communication with businesses. 24 For example: We offer best-practices 25 guidance to help businesses understand the 1 recordkeeping obligations, and those things they 2 need to know when starting or expanding a business 3 in New York. 4 Nevertheless, the Department conducts about 5 35,000 sales tax audits annually, and issues over a 6 billion dollars in assessments of sales and local 7 sales tax -- of state and local sales tax. 8 The Department of Taxation and Finance 9 devotes a significant amount of audit and compliance 10 resources to identify sales tax underreporting. 11 One method of underreporting can be 12 facilitated by software that may reside in a 13 point-of-sales system, which is often referred to as 14 "phantom-ware," or, be run from removable media, 15 such as a CD or flash drive; i.e., a "zapper." 16 Through our audits, we have discovered that 17 functionality and a point-of-sale system that exists 18 for legitimate purposes can be used by unscrupulous 19 businesses intent on skimming sales tax collections. 20 A cash register system may have the 21 capability to void certain sales at the end of the 22 day to account for, example, returned merchandises. 23 Businesses that use this capability to, 24 instead, pocket the cash received from the customer 25 and eliminate any direct evidence by deleting the 1 sale, are misapplying the programming inherent in 2 point-of-sale devices. 3 The problem is compounded by suggestions from 4 point-of-sale salespersons that functionality exists 5 in their equipment in an attempt to close the sale 6 to a potential customer. 7 While the underreporting of sales tax may be 8 occurring through the use of these sophisticated 9 technologies, it should be noted that evasion may 10 also be committed by less-sophisticated methods that 11 result in not recording the cash sales. 12 Through our joint efforts with the 13 Legislature, the Department has been granted some 14 important tools to identify all types of sales tax 15 underreporting. 16 The 2009-10 State budget enacted requirements 17 that certain third parties file annual information 18 returns with the Tax Department. 19 Under this law, franchisers must report 20 yearly sales by their franchisees in the state, and 21 alcoholic-beverage wholesalers must report the 22 amount of sales made to bars, restaurants, food 23 stores, liquor stores, et cetera, and insurers of 24 motor vehicles are mandated to disclose payments on 25 behalf of their insured to motor-vehicle repair 1 shops. 2 This legislation is already providing 3 results. More than 500 vendors have been selected 4 for audit using the third-party reports, and these 5 audits have generated an additional $11 million in 6 state and local sales tax. 7 In addition, the 2009-10 budget required 8 financial institutions to annually report, by 9 New York State payee, their gross amount of settled 10 payment card and third-party network transactions. 11 The first report of this information was 12 received by the Department earlier this year. By 13 comparing the third-party information to reported 14 sales, the Department has an important tool to 15 detect underreporting by cash-based businesses. 16 Auditors routinely use this third-party 17 information to validate whether the information 18 captured by vendor's point-of-sale system or cash 19 register is complete. 20 To assist us in uncovering sales tax 21 underreporting, the Tax Department staff have read 22 the available literature on sales suppression 23 devices, and studied the sales-recording module, or, 24 "black box," approach taken by the Province of 25 Quebec as a measure to thwart the zapper use in the 1 restaurant industry. 2 This approach required the purchase of the 3 sales-recording modules by each business, the cost 4 of which was reimbursed by the provincial 5 government. 6 Each module costs about $800, plus 7 installation fees. 8 A number of states are looking to legislative 9 options to address zappers. 10 The Department is reviewing each of these 11 approaches for their cost to implement, and their 12 impact on the businesses that are regulated. 13 Any enforcement approach must be carefully 14 balanced in a manner that both maximizes voluntary 15 compliance and minimizes the cost of doing business 16 in New York. 17 An unavoidable reality of tax administration 18 is that some bad actors are determined to commit 19 fraudulent acts and retain tax revenue. 20 Use of automated sales suppression devices 21 and software is an especially sophisticated way to 22 commit this fraud, but constitutes one in a large 23 number of tactics. 24 We believe that the third-party 25 information-reporting laws mentioned above provide a 1 powerful mechanism for the Tax Department to 2 identify vendors that underreport sales, including 3 those that may use the sales suppression software. 4 We look forward to working in partnership 5 with you on the matter, and thank you for the 6 opportunity to appear before you today. 7 SENATOR MARCELLINO: And thank you for 8 coming. I appreciate your being here, and I 9 appreciate your testimony. 10 I noticed in the -- in your statement, you 11 point out that the Department conducts approximately 12 35,000 sales tax audits annually? 13 NONI MANION: Correct. 14 SENATOR MARCELLINO: And issues over 15 a billion dollars in assessments of state and local 16 sales tax. 17 35,000, that's huge. 18 NONI MANION: A number of those are from our 19 desk-audit area, so they might be limited-issue 20 audits. 21 SENATOR MARCELLINO: Which means, what? 22 NONI MANION: Meaning, that it's -- we -- 23 somebody puts in for a refund, and before we give 24 the refund, we look at it. 25 SENATOR MARCELLINO: Okay. Do you -- does 1 the Department have any feeling as to the extent of 2 this so-called "tax-zapper," or this "phantom" 3 business, as a scope of the problem, if there is a 4 problem? 5 NONI MANION: We don't have a feel for the 6 scope of this problem, as a zapper. 7 We feel that we cover this because, in the 8 course of all of our audits, we have to look for 9 completeness. 10 And as I mentioned in my testimony, it could 11 be -- they could be -- not be reporting using one of 12 these more sophisticated methods. Or, it could be a 13 matter of just not ringing in the cash sales and 14 putting it in their pocket instead of putting into 15 the register. 16 So there are many different ways that they 17 can avoid reporting the sales. 18 As a matter of course in our audits, we need 19 to validate for completeness, and also accuracy. 20 And as I mentioned in the testimony, with 21 your assistance, we've been able to get third-party 22 information to validate for completeness. 23 So an example of that, being: If we go into 24 an audit, and they're reporting that they're selling 25 10,000 bottles of beer, yet our report from the 1 third-party, from the suppliers, the beer suppliers, 2 show had they're selling 50,000 bottles of beers, we 3 know that what they're reporting is incomplete. 4 We always look to that third-party source for 5 a validation. 6 SENATOR MARCELLINO: So you're actually able 7 to and capable of cross-referencing, I assume, 8 thanks to computers, the sales from the distributors 9 versus -- or, suppliers versus the retail outlet? 10 NONI MANION: When we have the data with the 11 use of computers, we do it -- we do that up front. 12 During the course of any audit, we're always looking 13 for a third-party information to do validation. 14 With the information that's provided, through 15 the legislation, and the computer, what we do is, we 16 do it analytics, using the third-party information 17 and the information on the tax return. 18 We use many different sources of data, and we 19 analyze the data. And through that analysis, we're 20 able to identify the taxpayers that we feel are 21 compliant; and, therefore, we don't burden them with 22 an audit. 23 But if we feel that there is a question of 24 compliance, that's where we put our audit resources. 25 But even knowing that we have this data that 1 may show that there might be a compliance issue, we 2 know, in going into the audit, we need to be asking 3 questions. And there could be a good reason as to 4 why the data is different than what that business 5 actually is. 6 SENATOR MARCELLINO: Okay, have you noticed 7 an -- because, frankly, I have -- an increase in the 8 number of businesses that will not take 9 credit cards; cash-only? 10 NONI MANION: We've definitely seen those 11 businesses. 12 I don't know if it's necessarily an increase 13 or -- and the business is saying that they won't 14 take the credit cards, or if they need to put that 15 out for people to know, because in -- I mean, if you 16 think about, 10, 15 years ago, there were probably 17 more businesses that didn't take credit cards. 18 It's just the prevalence of people using 19 credit cards now, that it's expected that you're 20 going to take the credit card. 21 However, it does -- that raises the concern 22 for us if they're not taking the credit cards. 23 As I mentioned in my testimony, we will be 24 getting information from the banks, as far as how 25 much money runs through on the credit cards. And we 1 feel that that will be very valuable, and we'll be 2 using that at audit. 3 We also use it -- now, even before getting it 4 for everybody, we use it during the course of an 5 audit, and getting their bank statements and seeing 6 how much money has come through. 7 When they're dealing just in cash, we very 8 often are not able to do -- to have a lot of books 9 and records, because if they're dealing just in 10 cash, they probably don't have a lot of books and 11 records to provide for us. 12 And if they do, we need to do some validation 13 of it. 14 So that's our normal course of the audit, 15 where we check for completeness and accuracy. 16 SENATOR MARCELLINO: Has the Department 17 discovered any or prosecuted any cases of the use of 18 these zapper programs? 19 NONI MANION: Not to my knowledge. 20 SENATOR MARCELLINO: So, in this state, there 21 has been nothing? 22 NONI MANION: I -- I can't speak to any 23 ongoing investigations. 24 I don't know. I'm more on the criminal 25 end -- on the civil end. 1 I do know, on the civil end, if we were to 2 find something of this sort, it would be a signal 3 that there was intent to cheat, and it would be 4 referred for a criminal case. 5 SENATOR MARCELLINO: But you don't know of 6 any referrals? 7 NONI MANION: I can't speak on any ongoing 8 investigations. 9 SENATOR MARCELLINO: Okay. 10 Did Tax and Finance run a sting involving 11 opening restaurants and soliciting for cash-register 12 salesmen to sell the machines? 13 NONI MANION: I don't know on that. 14 SENATOR MARCELLINO: There was article in the 15 "New York Post," in 2011, which talked about this. 16 In -- January 24th of 2011, where they 17 discussed a sting, with setting up a place, and 18 asking cash register vendors to come in and offer to 19 sell, and -- 20 NONI MANION: From what I understand, that 21 information was not provided by the Tax Department, 22 so, I can't verify it. 23 SENATOR MARCELLINO: Have you been in 24 contact, or the Department been in contact, with 25 other states that have introduced or produced 1 legislation relative to this issue? 2 NONI MANION: We regularly talk to other 3 states. 4 We're involved in the Federation of Tax 5 Administrators, and the Northeast Region Group, too. 6 Other states contact us on a regular basis 7 because we tend to be ahead of them on this 8 information. 9 Just like, when we were asking for this 10 third-party information, and we had the bills out 11 there, we had a number of other states contacting 12 us, asking for a copy of the bill, because they were 13 looking to institute it. 14 We have also had them contact us about the -- 15 you know, the legislation for the zapper. 16 And that conversation is, basically, we've 17 talked through the entire problem of taxpayers 18 reporting incomplete, whether it be for zappers or 19 through zappers or through other sources. And the 20 discussion has always expanded beyond zappers to the 21 use of third-party information. 22 SENATOR MARCELLINO: I'm just wondering, if I 23 went into a place and purchased 100 boxes of 24 widgets, and I paid cash, is there a way you could, 25 or the Department could, check, to find out that, in 1 fact, the tax on that sale of widgets was actually 2 sent, or it should have been sent? 3 NONI MANION: That would be, if we had the 4 receipt from you, it would be tracking again. You 5 would be like a third-party source that we would use 6 for that, and we would look to see that it was 7 included. 8 When we do an audit, we do look for all of 9 the receipts of all of the purchases and the tax 10 associated with it. 11 SENATOR MARCELLINO: Okay. 12 Well, again, I appreciate your coming in, and 13 I appreciate your testimony. 14 We are, hopefully, going to be in 15 communication with you, and looking to work with you 16 on any potential legislation that might come out of 17 this hearing. 18 Right now, there is a piece of legislation 19 proposed by one of my colleagues, Senator Krueger, 20 that is already there. We're going to see what we 21 can do; if that's sufficient, or if there's others, 22 or we want to make some changes. 23 But we're going to, hopefully, be in contact 24 and communication with you, and working with you to 25 do anything else on this. 1 If there's -- is there anything that you feel 2 that you need, that you don't currently have? 3 Is there some authority that the Department 4 needs, or could use, that you do not currently have, 5 and would like to have relative to this issue? 6 NONI MANION: We're in the early stages of 7 using the information from the -- on the 8 credit cards and the debit cards. And we feel that 9 that -- that we'll be able to get great value from 10 that. 11 We've been using our data analytical tools 12 that we currently use for a lot of our income tax 13 programs. And we've just moved that into the sales 14 tax program so we could do more advanced analytics, 15 so that we can identify the non-compliant taxpayers 16 and leave the compliant taxpayers to do their 17 business and not be burdened. 18 I think, as we progress with that, you know, 19 we'll have to watch that, to see if there is 20 additional data that can help us in supplementing 21 the information we have so that our analytics could 22 be more valuable. 23 SENATOR MARCELLINO: Okay. 24 And my staff, obviously, will be happy to 25 work with you and your staff, and be of whatever 1 assistance we can. 2 We're joined by Senator Liz Krueger, the 3 aforementioned Senator whose legislation I mentioned 4 to you before is out there. 5 Liz, this is Nonie Manion from the 6 Department of Taxation And finance. 7 SENATOR KRUEGER: Yes, thank you, Carl. 8 Thank you for having the hearing. 9 As you know I'm very interested in this 10 issue. And I'm sorry I got a little delayed coming 11 up from New York City. 12 SENATOR MARCELLINO: Everybody has. 13 SENATOR KRUEGER: I know. 14 So, I'm just playing catch-up on your 15 testimony, and I may have questions for you after, 16 if that's okay. 17 Thank you, Carl. 18 SENATOR MARCELLINO: Thank you. 19 Nonie, thank you very much for your 20 testimony. 21 NONI MANION: Thank you. I look forward to 22 working with you. 23 SENATOR MARCELLINO: Thank you. We do, too. 24 Our second speaker, who is 25 Richard T. Ainsworth, who is, because of the weather 1 conditions, delayed. He will be here. Apparently, 2 he's at the airport, and will be here shortly. 3 But we're going to move on to, Matt O'Connor, 4 who is the regional vice president of 5 Micros Systems. 6 MATT O'CONNOR: Good morning. 7 SENATOR MARCELLINO: Good morning. 8 MATT O'CONNOR: Thank you, Mr. Chairman. 9 The invitation for me to speak about this 10 important topic, automated sales suppression 11 devices, is important to restoring business 12 confidence in our state. 13 I'm not making statements on behalf of my 14 employer, but as an individual businessman and 15 resident of New York State with significant 16 knowledge in the field of sales capture, auto 17 practices, business, and point-of-sale industries. 18 Some of the issues and facts at hand, the 19 State of New York and taxpayers deserve the money 20 collected for taxes, lessen the overall tax burden, 21 and promoting fair competition. 22 Restaurants don't want to get audited. Most 23 restaurants reporting to the best of their ability. 24 And some businesses don't comply. Sales 25 suppression does exist. 1 Suppressing sales is easy to accomplish and 2 very hard to detect. 3 Tax collection is burdensome for business. 4 They prefer to remit the taxes collected 5 immediately. 6 This issue is no longer limited to simply 7 cash businesses. As technology advances, so does 8 the ability to circumvent using other forms of 9 tender. 10 Underreporting exists, but is not limited 11 solely to the restaurant industry. 12 Technology can solve these issues. 13 My name is Matt O'Connor, and I'm a lifelong 14 resident of New York State, and currently live in 15 western part of the state, in the town of Clarence, 16 with my wife and children. 17 I am currently employed at Micros Systems as 18 a regional vice president. 19 Micros Systems, Inc., is the recognized 20 leader in supplying POS systems to the hospitality 21 industry worldwide. 22 My background is diverse. I understand 23 technology by trade; business, both public and 24 private, which allows me to view this subject with 25 the unique perspective. 1 Through these viewpoints, I have developed a 2 strong opinion regarding the topic. 3 I have 32-plus years of 4 cash register/point-of-sale experience. 5 I grew up in a second-generation family-run 6 cash register company. 7 My father joined National Cash Register after 8 serving in World War II. 9 Ten years after joining NCR, he started his 10 own company, which was a successful business for 11 45 years, through 2000, when it was purchased by 12 Micros Systems. 13 I have a varied business background, 14 understanding small business from my family, and 15 large business through my current position with an 16 international company with revenues in excess of 17 $1 billion. 18 I have a unique position, with the ability to 19 understand both the small and large business 20 perspective, having lived both. 21 The hospitality companies I deal with daily 22 would be: TGI Fridays, Perkins, Burger King, Panera; 23 but, mostly, mom-and-pop restaurants with great 24 local reputations, pride of ownership, and proud to 25 actively participate in the community. 1 Any legislation, as a result of this 2 Committee's findings, will likely impact the 3 independent restaurant and regional chain groups the 4 greatest. 5 I have actively served on many advisory 6 boards in the point-of-sale and hospitality 7 industries, to include, NCR Global Hospitality 8 Advisory Committee, and a member of the 9 Micros Dealer Association for nine years. 10 Additionally, I have been active in the 11 Restaurant Association, and presented on the topic 12 of restaurants and audits. 13 Finally, I have been actively communicating 14 with New York State Department of Taxation and 15 Finance with respect to audits and practices within 16 the last several years. 17 I have sold and serviced many brands of 18 electronic cash registers (ECRs) and point-of-sales 19 systems, to include Micros, NCR, Samsung, Casio, 20 Omron, and TEC. 21 Growing up in the industry, I started as 22 hardware technician. I learned to program systems 23 which consist of bit setting, not coding. Continued 24 with installation and training, finally moving into 25 management. 1 My scope of knowledge spans many vertical 2 markets, to include retail, hospitality, front-desk 3 management, and C-Store operations. 4 In part, the focus of today's hearing will 5 include the hospitality industry. 6 My understanding spans food costs, labor, 7 inventory, operations, kitchen management, 8 profit-and-loss statements, along with overall 9 restaurant management. 10 I have a detailed understanding of POS. 11 I worked in Mexico with fiscal printers. 12 Studied European, Scandinavian, and Quebec fiscal 13 devices. 14 I understand the architecture and fundamental 15 pluses and minuses of each system. 16 The stakeholders: Government. 17 Local and state governments are confronting 18 major budget challenges. Technology has both 19 improved and diminished their collection efforts. 20 The business-governmental environment is 21 confrontational and overreaching in the eyes of 22 taxpayers within the hospitality industry. 23 The governments view the situation and deal 24 with the restaurant industry using their primary 25 weapon, the tax audit. 1 Government simply want their legislative 2 funds. 3 Our neighbors to the north have concluded 4 studies, estimating their annual tax losses in 5 excess of 400 million on a tax base of restaurant 6 business less than half that of New York State's. 7 These tax losses have a multiplier impact 8 when these funds are now used to pay employees off 9 the books, resulting in lost federal and state 10 revenues. 11 As a result of these individuals working off 12 the books, additional burdens are placed on 13 government to provide medical and social assistance, 14 putting a squeeze on the taxpayer. 15 As quoted about tax evasion in the restaurant 16 sector, the following was stated: 17 "For several years, the Quebec government has 18 been fighting the underground economy in all forms 19 of tax evasion. Among the different economic 20 sectors targeted in this fight, is the restaurant 21 sector, one of the most highly affected by tax 22 evasion. 23 "Even though most restaurateurs fill their 24 tax obligation, the Quebec government sustains tax 25 losses of more than 400 million per year in the 1 restaurant sector." 2 It was further stated that the impact is 3 significant, as follows: 4 "In Quebec, losses related to tax evasion 5 reduced the government's capacity to fund public 6 services and finance programs to meet our society's 7 needs, whether it be in the health, education, or 8 transportation sector. 9 "Because of tax evasion, some taxpayers pay 10 for others, some workers are without social 11 protection, and honest businesses are confronted 12 with unfair competition." 13 Every resident of the state has a right to 14 make sure tax collectors remit the fair and accurate 15 amount of tax collected from their consumers. 16 The State has the responsibility to collect 17 taxes, ensuring that it is done accurately and 18 fairly. 19 As expressed by Quebec: "Fighting tax 20 evasion is a question of fairness to consumers, 21 taxpayers, restaurateurs, and workers." 22 Underpayment of taxes hurts our social 23 fabric, unevenly distributing the burden on the 24 those who pay promptly, accurately, and willing, as 25 prescribed by law. 1 By means of comparison: With 40,000 bars and 2 restaurants, the lost revenue has been estimated 3 close to $1 billion annually just within this 4 industry in New York. 5 Currently, Quebec is seeing post-sales 6 reporting module (SRM) collection rates at nearly 7 70 percent with respect to the 400 million. 8 This mandatory compliance is passive, and 9 allows government to channel their efforts on the 10 30 percent trying to evade, versus previous 11 architecture which makes auditors sift through 12 100 percent of taxpayers. 13 The SRM device records and reports to the 14 business owner their exact tax liability without 15 keeping additional records, making it less 16 burdensome to the owner. 17 Additionally, Revenue Quebec has the ability 18 to develop further analytics by which they can hone 19 their efforts more efficiently by market segment and 20 business size, et cetera. 21 Education of auditors: While they are far 22 more educated than we were several years ago, the 23 ability to educate auditors and keep them aware of 24 changes in the POS industry would be a daunting 25 task, and almost impossible. 1 The restaurant industry: Independent 2 restaurateurs are under financial pressures. Food 3 and labor costs are up year over year. National 4 chains are causing pricing pressures on 5 independents, creating and eroding bottom line. 6 Coupled with this are certain companies that 7 pay employees off the books and don't declare all of 8 their sales, lowering their operating costs and 9 beating their tax obligation. 10 I have personally talked with many operators 11 that have a disdain for those other operators that 12 run part of their business off the books. 13 Anecdotally, it is my belief that most 14 restaurateurs wish to report sales accurately, but 15 all competition doesn't, putting a law-abiding 16 restaurant at a disadvantage, competitively. 17 Paying your taxes will win every time, given 18 a choice between paying or going through an audit 19 which lasts between 18 and 24 months, at a cost of 20 thousands of dollars, plus lost opportunity costs. 21 Restaurants do not want to get audited. 22 The State has done a good job under previous 23 and current commissioners, and credit is due to 24 enforcement and the audit groups as well. 25 The industry doesn't necessarily fear an 1 audit, but fears what it does to their business. 2 They also look to accountants and other POS 3 vendors to provide guidance with respect to adequate 4 records, but they are often left befuddled when 5 these experts defer to state regulations which are 6 significantly vague and left to the discretion of 7 the auditor. 8 Often, the best of intentions and advice from 9 experts results in alternative audit, usually 10 followed by an assessment, unless the restaurant can 11 prove otherwise. 12 The impact to the state's economy is 13 significant. 14 Within my group, we have fielded no less than 15 20 calls from customers, restaurateurs, regarding 16 audits. 17 Within a single -- without a single 18 exception, these restaurants cease spending on any 19 capital projects, don't hire employees, and hold the 20 reduced cost significantly. 21 The small-business economic engine we need to 22 improve the financial conditions within the state is 23 being put in neutral. 24 Fear is pervasive with anticipation of a 25 sales tax audit. 1 Restaurateurs, if given the chance, wouldn't 2 even touch the tax they collect. They would pass it 3 to the State coffer's as soon as possible. 4 The responsibility put on business, on the 5 business owner, to collect sales tax, when viewed 6 from a risk-reward perspective, by far, favors the 7 State. 8 For our maximum $200 quarterly tax credit, 9 the business person collects the State's money, 10 ownership runs the risk of audit, found to have 11 inadequate records, assessed, and personally liable 12 for thousands of dollars, and maybe put out of 13 business. 14 I assert to this Committee, if this were a 15 business proposition, and not a governmental 16 requirement, few would volunteer. 17 I further state to the Committee that there 18 is a better way to even out the risk-reward 19 proposition through the use of technology. 20 The stakeholders have needs, and are willing, 21 therefore, to create a win-win situation. 22 Sales collection: Why? 23 The following issues exist within our 24 industry, the point-of-sale industry, with respect 25 to sales suppression: 1 There is no common reporting standard between 2 systems. 3 There is no common database platform. Some 4 are proprietary. Some are off-the-shelf, such as 5 Sybase, Oracle, Access, MS SQL, et cetera. 6 There is no consistent electronic journal 7 format by which auditors have the training or the 8 ability to audit. 9 The ability to suppress reporting information 10 in particular, with respect to those transactions, 11 can impact sales reporting, such as: voids, coupons, 12 discounts, promos, item and subtotal discounts, 13 hash totals, non-sales, non-resettable grand totals, 14 Z and X counters, date-and-time suppression, 15 clearing all totals, et cetera. 16 These functions are not provided by 17 manufacturers with the intent to allow or act as a 18 sales suppression device, but by design, to allow 19 for an end user to customize the reports, or, for 20 someone that has done testing or training on the 21 system, prior to installation, to reset totals so 22 everything starts from zero. 23 There is also ineffective logging tools. 24 How is sales suppression accomplished? 25 You have zappers, which are devices which are 1 inserted, or are native in the point of sale, that 2 automatically, by a determined percentage or amount, 3 deletes transactions or sales totals from the ECR or 4 point of sale. 5 The most sophisticated devices also clean up, 6 what I call "the bread crumbs." 7 "Bread crumbs" are defined as the trail used 8 by an auditor to tie back to an accurate sales 9 number. It's, basically, reconstruction of the 10 audit trail. 11 Reports: And reports are probably one of the 12 more pervasive means by which people evade. I 13 wouldn't say the zappers are the most. 14 They shape and program report data in a 15 format which is favorable to the evader. There's 16 several ways to do this. 17 There's internal report writing, which is 18 used to camouflage critical tracking data used by an 19 auditor to determine debit and credit information, 20 making it difficult to discern; 21 An external report writer, which is similar 22 to an internal report writer; 23 And then there's an export to an Excel 24 spreadsheet, where sales totals are manipulated and 25 made to appear as though they were generated by the 1 POS or ECR. 2 There's also system reset or clear all 3 totals, usually used in the maintenance mode to go 4 live; 5 And then there's training mode. 6 There's database manipulation through voids, 7 discounts, negative menu items, coupons, promos, 8 hash totals, non-revenue service charges, and 9 grand-total suppression. 10 Credit card scam with a second terminal is 11 another way people evade taxes. 12 Not ringing up sales in the system, Z counter 13 suppression, date-and-time suppression, and data 14 corruption. 15 The ability to change, modify, or conceal the 16 reporting system by an end user, college kid with 17 computer experience, or a rogue programmer, for the 18 purposes of underreporting, is relatively easy to 19 accomplish. 20 The functionality provided by manufacturers 21 is required to satisfy end-user demands, and has not 22 been developed, in most cases, to defraud or 23 underreport sales. 24 I understand technology, and technology can 25 fix all of these issues. 1 Resolution: This is a big problem with many 2 moving parts. 3 Respectfully, the Committee needs to consider 4 the following to remedy this situation and enforce 5 the proper collection of sales tax. These 6 guidelines will provide a framework for a fair 7 resolution for the stakeholders: 8 Continuous strict enforcement with the 9 efforts that are currently out there, compliance, 10 and enforcement -- unilateral enforcement. 11 More auditors by sector within the same 12 geography, tighter standards at an audit level, to 13 diminish subjective calls in the field with respect 14 to adequate records. Be consistent. 15 Record standards: Consistent records 16 retention policy with published guidelines for what 17 needs to be kept, and what kind of order it needs to 18 be kept in. 19 Current regulations need to be better 20 defined. 21 I personally requested clarification with 22 respect to current regulations, resulting with no 23 additional guidelines or meetings. 24 Legislative or regulatory demands, a 25 certification process, and standards for data output 1 from point-of-sale transactions are required. 2 Technology: Deploy solutions that are 3 available to make stakeholders accountable and fair 4 competition. This will mean less-stressful audits, 5 they will be timely, resulting in the State's 6 ability to perform a greater number of targeted 7 audits, and, allowing business people to get back to 8 what they want to do: running their business. 9 Communication between all stakeholders: 10 Government, restaurateurs, and POS vendors. 11 It is my belief that most of these people are 12 committed, and good citizens of the state, wanting 13 to do the right thing. Given the right framework 14 developed by this body, we will have a progressive 15 business climate that allows all of stakeholders to 16 consider resulting legislation a win-win. 17 In summary: I feel strongly about this 18 topic, as a business person outside of the 19 point-of-sale-business industry, and as an insider 20 within the two industries at the center of 21 discussion. 22 Developing a win-win is important for 23 stakeholders. 24 I do have suggestions, recommendations, and 25 knowledge I would share outside of this hearing to 1 those that would like to listen. 2 If handled correctly, this will be a turning 3 point in the relationship between the State and 4 businesses. 5 I also make myself available to the Committee 6 for future conversations regarding the topic. 7 We have the right technology, personnel, and 8 companies to provide solutions within New York 9 State. 10 Thank you again, Mr. Chairman, and 11 Committee members. 12 SENATOR MARCELLINO: Thank you, 13 Mr. O'Connor. I appreciate your time, and your 14 testimony. 15 Do you think the Tax Department needs more 16 audit authority? 17 MATT O'CONNOR: With respect to more audit 18 authority, I think they do a very good job now. 19 If by the question you mean the ability to 20 track transaction data more effectively, I believe 21 the answer to that would be yes. 22 SENATOR MARCELLINO: Do you see, or do you 23 think, that the use of these so-called "tax-zapper" 24 devices is occurring now in New York State? 25 MATT O'CONNOR: I believe there is a level of 1 sales suppression going on through the use of sale 2 zappers. If you want to call it "phantom-ware," if 3 you want to call it "report writing." 4 Very often, the report system that is 5 deployed within any point-of-sales system is very 6 similar to an Excel spreadsheet. We all know how to 7 make additions and subtractions from an Excel 8 spreadsheet, or make something hidden. 9 And that is very often what occurs, so it's 10 very difficult for an auditor, given that there is 11 no standard that's out there, to come up with a 12 process by which to effectively audit and not 13 completely disrupt a business for 18 to 24 months. 14 I believe the last -- the last testimony, 15 from Ms. Manion, last we talked, I believe an 16 audit -- an average audit is 18 to 24 months. And 17 that was, not during her testimony, but the previous 18 conversation we had together. 19 And that is very disruptive to businesses. 20 They don't want it. It just completely 21 disrupts the business flow. 22 So I believe that -- I believe that that 23 means greater audit powers? I guess I would have to 24 know a better definition of that, but -- 25 SENATOR MARCELLINO: Well, you talk about the 1 use of technology as a solution. 2 Can you give us more details on it? 3 MATT O'CONNOR: There is several different 4 types of technology that are out there. 5 There's a -- our friends to the north, in 6 Quebec, utilize a device which is a one-to-one 7 relationship, which becomes a little more costly for 8 businesses because it is a one-to-one device. 9 But that is a collection device, where it 10 takes transaction data from the point of sale, takes 11 it in an XML format, encrypts it, sends it over to 12 the collection device, by which reporting can be 13 done. 14 Additionally, it issues a receipt with a bar 15 code at the bottom. 16 So an auditor, at any time, could pick a 17 receipt up and validate that that hash amount, which 18 is the security code at the bottom of the receipt, 19 actually ties to the exact item within the database 20 of the collection device, the SRN. 21 That's one type. 22 Another type is an encryption card. Again, 23 it's a one-to-one type of relationship which goes to 24 each one of the units. 25 And there's several different types of 1 technologies out there. They all have that similar 2 characteristic, in that, they are capturing 3 transaction data for future reporting, and some type 4 of an algorithm to basically encrypt that data so 5 it's protected. 6 SENATOR MARCELLINO: Does -- do the -- do 7 current point-of-sales systems have a code or some 8 method to use to prevent the use of zappers? 9 MATT O'CONNOR: There is none that I am aware 10 of at this point. 11 The closest thing would be the Greece type of 12 structure. 13 In Greece they have -- you need to be 14 connected to a device. It sends a signal from the 15 ECR -- 16 And there's a very big distinction, by the 17 way, between ECRs and point of sale. 18 I left that out at the very end of my 19 testimony. 20 But, it sends a signal from the ECR to the 21 collection device, to ensure that it is online. 22 And if it's not online, it won't allow you to 23 capture sales at all through the ERC or the 24 point-of-sale device. 25 Does that answer your question? 1 SENATOR MARCELLINO: Partly. Partly. 2 Do the systems that you sell have 3 phantom-ware built in? 4 MATT O'CONNOR: No. No. 5 There's not phantom-ware built in. There's 6 reporting utilities that are built into the system 7 in order to provide custom reporting for each one of 8 the end users. 9 This custom reporting, and I have worked 10 with, I know the Tax Department in Buffalo, and 11 actually gone through and shown them how reports are 12 constructed. 13 And it's very easy, if someone wants to go 14 in, just like it is in Excel, if someone wants to 15 make something a minus instead of a plus, it's 16 relatively easy to do. It's not, you know -- it's 17 not a lot of tutorial, it's not a lot of work to do 18 that. 19 So, it -- it exists by the very nature and 20 the design of the product, to give a customer what 21 they're looking for. 22 SENATOR MARCELLINO: Assuming this problem is 23 out there, what is the -- what's the best way we 24 could go about, either detecting it and/or stopping 25 it? 1 MATT O'CONNOR: I think there's -- there's a 2 couple pieces to that. 3 The best way to stop it, and to detect it, 4 would be to insert a device which is 5 State-controlled, that captures transaction data. 6 Once you capture the transaction data, you 7 can derive certain analytics from that transactional 8 data, as to number of voids, number of discounts. 9 And you can do that by -- you can either do 10 it by a SIC code or you can do it by a NAICS code. 11 So you can get very specific with respect to 12 what data you're getting from what type of 13 restaurant within what piece of geography as well. 14 So, as you develop those analytics, you have 15 the ability to pinpoint or to hone on to those that 16 might be abusing the system that's there. 17 So, to answer that question directly: The 18 best way to do this, would be to have some type of a 19 collection device, that takes this information, and 20 allows it, use it as an audit tool as well, to 21 report back to the State. 22 SENATOR MARCELLINO: Recently -- 23 And I'll let you have at it. 24 Recently, I went to a charity place. They 25 were selling things, and the money was going to go 1 to a certain charity. 2 We paid by check for the objects we bought. 3 The person took my check, handed it into a 4 machine, punched a code, the check was canceled, it 5 was returned to me on the spot, instantaneously. 6 My account was debited immediately. Whatever 7 had to be paid was paid out; the bank was 8 notified...whatever. 9 There was no delay in the process...whatever. 10 Would terminals like that in businesses, 11 where the sale is instantly recorded, taxes 12 instantly sent to where they're supposed to go, 13 banks notified, whatever, would that work? 14 MATT O'CONNOR: Yes, it would. 15 That's exactly what I'm referring to. 16 And most countries that have put some type of 17 a fiscal device in place, that is indeed how they do 18 it. 19 SENATOR MARCELLINO: What's the cost? 20 MATT O'CONNOR: The cost varies. And each 21 governmental agency actually handles it differently. 22 Some put that cost onto, you know, the 23 restaurateur, or the retail individual. 24 It ranges, anywhere from, you know, 25 100-some-odd dollars, up to -- the $800 number is 1 probably a little -- not quite exactly it, because 2 that's a one-to-one relationship, so it becomes a 3 little more expensive. 4 The average in our industry, we do 5 calculations based on an average of 2 1/2 point of 6 sales terminals per location. 7 So, that number might not be 100 percent 8 accurate when you say $800, but that is the Canadian 9 number. 10 And then I heard installation is probably 11 another 800, roughly. 12 We do have offices in Canada, so I've talked 13 to them quite a bit on the whole topic, and I'm very 14 well versed in their setup. 15 SENATOR MARCELLINO: Could something like 16 that be paid for by a tax write-off on the part of 17 the business, so it wouldn't be an additional cost 18 to the business? They could write it off as a tax 19 deduction? 20 MATT O'CONNOR: Yes. A lot -- Quebec did it 21 as a rebate type of program. 22 And, in Quebec, I believe their capture rate 23 was 70 percent. So, they felt their investment was 24 very well spent, for providing those to the end 25 users, to the businesses. 1 You know, I do believe, in this particular 2 case, there are some significant benefits to 3 ownership. 4 I've had several people say to me, that: I 5 will take one if I don't have to worry about getting 6 audited again. 7 You know, and it's true. It is very -- it is 8 very dramatic, it is very stressful, it is very 9 difficult, and it hurts business in New York State 10 because, you can't conclude an audit any quicker, 11 given the current technology that's out there. 12 And that's just -- it's just the way it 13 works. 14 And I think they do a good job, you know. 15 So I think that, when you look at it from 16 that perspective, you know, I think that it's a -- 17 something that can be a win-win for everybody. 18 And I guess that needs to be discussed a 19 little further, as far as how it's funded, but I 20 think that there certainly are some creative means 21 by which it can be, again, a win-win for businesses 22 and for the State. 23 SENATOR MARCELLINO: Liz? 24 Thank you. 25 SENATOR KRUEGER: Thank you very much. 1 Thank you, Carl. 2 Well, I am so glad you're having this 3 hearing, now that I've gotten myself settled in, 4 because, as you mentioned earlier, I carry two 5 bills: one to study the issue, and the other to 6 actually outlaw the use of illegal zapper-like 7 devices in New York State. 8 And even reading through your testimony, as 9 you were speaking, and through some of the other 10 testimony here, including Tax and Finance's, 11 clearly, the majority of businesses follow the laws, 12 and try to do everything correctly. 13 I don't have any debate on that. I don't 14 think anyone here does. 15 And, yet, there is a significant amount of 16 money that isn't being collected, that should be in 17 sales tax. 18 And the Tax and Finance Department actually 19 says that themselves: they're doing 35,000 audits 20 per year. And then they issue over a billion 21 dollars in assessments for state and local tax that 22 hasn't been paid, assuming to some percentage of the 23 35,000 businesses that they audit. 24 I didn't ask you -- or, your testimony did 25 not say how many of the audits translate into the 1 owing of a billion dollars. 2 And we are watching things go on around the 3 world, and around the country. 4 And what I think was very interesting about 5 your points, which I just wanted to reiterate, was 6 your logic that, it can actually be much less 7 painful for businesses, and much more effective for 8 government, to use technology to track mistakes, 9 either intentional or unintentional, by businesses, 10 and collect the revenue owed us. 11 And, that, since audits are so painful for 12 the people going through them, they're particularly 13 painful for the businesses who, it turns out, didn't 14 owe anything more, after they were audited. It's a 15 very labor-intensive and complex situation that, as 16 you referenced in your materials, limits a 17 business's ability to do all these other things, 18 because they're dealing with the audit. 19 I don't even want to ask how many manhours 20 are involved by Tax and Finance to have 21 35,000 audits, but I'm going to guess, a lot. 22 Yes. She's shaking her head behind you. 23 A lot. 24 So that if, in fact, because we have moved 25 into the twenty-first century, where so many 1 businesses use some kind of automated system to 2 collect their sales tax, and to track their 3 billables, and so much is done online and with 4 credit cards, and not -- you know, yes, there's cash 5 being transferred, but less and less every year. 6 More and more people are moving to plastic, 7 that it seems obvious that the State of New York 8 would want to set up some kind of system, where we 9 can, without the need for audits and enormous labor, 10 because if there's X number of hours by the 11 Department of Tax and Finance in 35,000 audits, I 12 bet there's twice as many hours by the businesses 13 being audited, dealing with their tax accountants, 14 and their staff, having to go through this. 15 Wouldn't it be elegant to be able to have a 16 system, or a series of models, where it's put right 17 there into the business, so that bells and whistles 18 go off if somebody is fooling around with the tax 19 numbers or the bottom-line numbers? 20 As you described, when you were describing 21 the spreadsheet -- 22 Carl, I don't know whether you and I have 23 worked together on this at all. 24 -- but, now that we've moved into electronic 25 tracking of votes during elections, somebody messes 1 with the spreadsheet, you can change the outcome of 2 an election pretty easily. 3 We don't want that to happen, so, in theory, 4 we have all kind of bells and whistles built in to 5 prevent that from happening. We're still not sure 6 if that's the case in New York State, but we're 7 trying. 8 And, so, why not be able to use technology, 9 through an anti-zapper series of protocols. 10 Or even, as you described it -- 11 And I appreciate your company's in this 12 business, so you have to be very careful not to be 13 marketing a particular set of devices or software. 14 -- but how -- wouldn't it be great if, 15 actually, the State of New York could recommend a 16 specific group of types of software that we know are 17 user-friendly for businesses, but also allowed the 18 State of New York to have its own anti-zapper, 19 so-to-speak, eye on the whole thing, and avoid, 20 conceivably, a vast majority of those audits, 21 manually by hand, by people coming in and tracking a 22 piece of paper from going forward. 23 So, am I sort of describing the vision that 24 you were setting up? That in this world of 25 technology, we can have our cake and eat it, too, so 1 to speak? 2 MATT O'CONNOR: Absolutely. 3 And I think it creates less stress, and a 4 better business climate, in general, by doing it. 5 One thing, with the exception, would be, 6 individuals in our industry, traditionally, have not 7 provided these solutions. 8 There have been found in other countries, 9 issues where the manufacturer has actually developed 10 the zappers. 11 So, we probably wouldn't be in that business, 12 nor would we want to be, due to the conflict of 13 interest I believe that it would pose. 14 So, you would want to have some level of 15 integrity between a point-of-sale manufacturer and 16 the capture device, I believe. 17 SENATOR KRUEGER: So, in other countries, a 18 specific business, both, sells the software to 19 businesses to, theoretically, do their books right; 20 but, then, as a secondary market, sells them the 21 zappers, to be able to allow them to cheat on their 22 taxes? 23 MATT O'CONNOR: There's some -- there's some 24 cases -- 25 SENATOR KRUEGER: Okay, we want to outlaw 1 that, Carl Marcellino. 2 MATT O'CONNOR: There's some cases in Canada, 3 with exactly that, yes. 4 I know Mr. Ainsworth, who will be 5 testifying, can probably talk a little bit about 6 that, specifically. 7 SENATOR KRUEGER: Thank you very much for 8 your testimony. 9 MATT O'CONNOR: Great. Thank you. 10 SENATOR MARCELLINO: Thank you very much. 11 MATT O'CONNOR: Thank you. 12 SENATOR MARCELLINO: We'll allow Ted Potrikus 13 to come up, from the Retail Council, to give 14 testimony, because I understand he has something 15 that he's got to deal with that's an emergency 16 afterwards. 17 And we're gonna let you do that. 18 Mr. Ainsworth, we've got you coming right 19 after this. We know you have a flight to get back 20 to -- 21 RICHARD T. AINSWORTH: That's okay. 22 SENATOR MARCELLINO: -- and a plane to catch. 23 We'll be sure you get your connecting flight. I 24 appreciate your attendance. 25 Ted. 1 TED POTRIKUS: Thank you, Senator. 2 SENATOR MARCELLINO: Mr. -- Potrikus? 3 TED POTRIKUS: Yes. 4 SENATOR MARCELLINO: -- is the executive 5 vice president and director of government relations 6 for the Retail Council of New York State. 7 You are joined by...? 8 TED POTRIKUS: By Melissa Googas, who is the 9 Retail Council's assistant director of government 10 relations. 11 Thank you very much for the courtesy of being 12 able to speak out of turn. I do appreciate it very 13 much. 14 We appreciate your invitation to speak this 15 morning at this hearing, addressing tax-zappers. 16 While it may sound counterintuitive to plead 17 ignorance on an issue about which we are offering 18 testimony, I'm pleased to say that our member 19 stores, generally, were unfamiliar with this 20 software, or any automated sales suppression 21 devices, save for a familiarity with the concepts 22 and the dangers related thereto, from newspaper 23 articles, and, Senator Krueger, from the 24 conversation we had a couple of years ago on the 25 collection of sales tax on the Internet when we were 1 discussing that. 2 We're confident that the preponderance of 3 New York merchants are indeed law abiding. 4 It's unlikely that an entrepreneur dreams of 5 opening his or her own store so that they can become 6 a tax collector for the State of New York. 7 And, yet, that is an expensive obligation 8 that is as much an everyday part of retailing in 9 New York State, as is selling the right product, 10 hiring the right people, and finding the right 11 location. 12 New York's merchants may qualify for a 13 minimal tax credit to offset a fraction of those 14 costs, but we emphasize the "minimal" label, 15 particularly in light of the amount of time and 16 money a merchant must devote to fulfilling his or 17 her obligation to the State. 18 The merchant, as you know, must calculate, 19 charge, collect, and remit in a timely fashion the 20 state and local sales and use taxes on the products 21 that they sell. It's by no means an easy calculus, 22 particularly in a state where the final levy paid by 23 the shopper is a blend of state and local rates. 24 While the state's rate is uniform 4 percent 25 for most goods and services, local rates vary from 1 jurisdiction to jurisdiction. 2 As we see with the sales tax treatment for 3 clothing and footwear costing up to $110 per item, 4 the sales tax base can vary across county borders. 5 And, of course, there's no shortage of 6 confusion over whether this item or that is subject 7 to the sale tax. 8 We used to cite the "big marshmallow versus 9 mini marshmallow" controversy, until Governor Pataki 10 did away with that debate in the late 1990s, but, 11 there are other examples. 12 Iced tea in a bottle versus iced tea in a 13 cup; 14 Fruit packaged in a basket versus fruit and a 15 basket sold separately; 16 Cosmetics containing certain degrees of SPF 17 protection; 18 The treatment of manufacturers' coupons 19 versus store coupons. 20 The list is long. 21 Making a long story short, retailers, 22 regardless of size, devote an enormous amount of 23 resource to ensure full compliance with the maze of 24 laws, interpretations, changes, and fluctuations 25 that characterize sales tax collection across 1 New York State. 2 It's an expensive hit on the bottom line of 3 merchants of all size. As you might guess, the 4 larger the retail company, the more complex the 5 sales tax-compliance operation becomes. Large 6 stores have entire departments devoted solely to 7 sorting through and complying with their obligations 8 to multiple states and localities. 9 The Retail Council believes strongly that 10 out-of-state, mostly Internet-based merchants, 11 selling to and shipping products into New York State 12 should be equally obliged to collect and remit sales 13 and use taxes due and owing. 14 Simply put: If brick-and-mortar merchants 15 can do it, so too can the purportedly streamlined, 16 hyper-efficient retailers selling primarily through 17 the Internet. 18 The Retail Council believes equally strongly 19 that sales tax vendors purposefully deploying 20 systems to evade sales tax obligations, particularly 21 in those cases where customers have, in good faith, 22 paid their sales taxes to the merchant, should be 23 held accountable. 24 As we understand it, other states have 25 entertained legislation that would outlaw zapper 1 software, such as Senator Krueger's bill, not 2 software, prohibiting possession and use. 3 While we make no comment on legislation at 4 this time, it sounds like something we could support 5 in concept. 6 What we do know, and what we do support, is 7 the good work of the State's Department of Tax and 8 Finance as they pursue vendors who do not remit the 9 sales tax they have collected on the State's behalf. 10 From recent conversations with the 11 Department, we understand that they're progressing 12 on an ambitious outreach effort to vendors that may 13 be showing signs of growing remittance delinquencies 14 or, altogether, missed payments. 15 This is the sort of project that should be 16 enhanced and supported, ensuring that sales tax 17 vendors are fully up to speed on their obligations, 18 and the fundamental importance of staying in 19 compliance with the sales tax laws. 20 What we strongly and inexorably oppose, on 21 the other hand, would be any effort to impose new 22 obligations across the entire spectrum of sales tax 23 vendors in New York State. 24 Stated in another way: Don't punish the vast 25 majority of vendors, those in compliance, because of 1 the sins of the few. 2 We apply that immoveable opposition to one 3 bill currently before the Assembly, Assembly 9681, 4 by Member of Assembly Perry, which would require all 5 vendors to establish mandatory escrow accounts for 6 sales tax collected, and give to the State the 7 authority to have immediate access to those taxes. 8 This is a bad idea on many, many levels. 9 Conceptually, it casts every sales tax vendor 10 as a likely law-breaker, assuming that every vendor 11 will stray from the obligation to remit to the State 12 in a timely manner the sales taxes it has collected. 13 It's an insult to the merchant who knows how 14 to run his or her business, who has never had a 15 single problem with the Department of Tax and 16 Finance, who has endured and passed every sales tax 17 audit that has come their way. 18 Specifically, it means tremendous profit for 19 the company or companies that create the software 20 and the product that would become the costly mandate 21 for businesses large and small. 22 And from what we know of the underlying 23 concept, merchants would be forced to process credit 24 and debit card sales only through select vendors, 25 rather than the vendor of their choice, or the 1 vendor who might provide the lowest cost for 2 processing of credit and debit transactions. 3 For small merchants, these are the sorts of 4 mandates that spell life or death for the store. 5 For large merchants, these are the sorts of 6 mandates that would cast New York as a decidedly 7 retail-unfriendly state, one in which entire 8 corporate operations would be upended all for the 9 sake of the clicheed, wholly mercenary, and 10 short-sighted "one size fits all" approach. 11 One size, as any merchant will tell you, does 12 not fit all. 13 There's nothing to date to stop merchants or 14 other sales tax vendors from establishing escrow 15 accounts on their own. We know of some 16 Retail Council members that have done exactly that; 17 putting money aside weekly, so that when it comes 18 time to remit to the State, that payment is an easy 19 transaction. 20 The Tax Department has the authority, too, to 21 require such escrow accounts under certain 22 conditions; that is, when the vendor is deeply 23 delinquent. And that's when it makes sense. 24 What makes no sense, is a requirement that 25 all sales tax vendors be subjected to the same 1 punishing and punitive mandate. It's no answer to 2 any vestige of sales tax shorting that may be taking 3 place in New York State. 4 Instead, we urge the discussion, to follow 5 the path of prosecuting those who purposefully evade 6 the full payment of sales tax obligations due to the 7 State of New York. 8 The installation and use of tax-zapping 9 software clearly would fall under this umbrella. 10 We look forward to working with you 11 constructively to reach that goal. 12 Thank you again for your interest, and for 13 allowing me to speak out of turn. I do appreciate 14 it very much. 15 SENATOR MARCELLINO: Well, thank you for your 16 testimony. 17 We have been joined by Senator Squadron, 18 who's the ranking member on the Committee on 19 Investigations. 20 Ted -- 21 TED POTRIKUS: Yes, sir. 22 SENATOR MARCELLINO: -- you heard me before, 23 I hope you heard me before, when I talked to 24 Mr. O'Connor about that instant terminal, where -- 25 when I paid for the objects -- 1 TED POTRIKUS: Yes, with the check. 2 SENATOR MARCELLINO: -- with the check. It 3 was instantly canceled, instantly cashed. My 4 account was debited, and I was given the check back 5 as a canceled check. I didn't have to wait any 6 period of time. My bank was notified 7 electronically, and so forth. 8 TED POTRIKUS: Right. 9 SENATOR MARCELLINO: What would -- what is 10 your position? 11 What do you think about something like that, 12 if that was done by the State, saying that every 13 business would get that, and if we would provide 14 with you some type of a tax credit, or something 15 like that, as a business deduction, to help pay for 16 it, so it wouldn't be a cost that gets a burden to 17 the business person, but some type of methodology 18 where we could make up the cost of the business? 19 TED POTRIKUS: So, essentially, what -- if 20 I've this right, if I understand it: Every 21 transaction that would take place, there would be 22 some sort of record of that? 23 SENATOR MARCELLINO: Tax would be collected 24 instantly. 25 TED POTRIKUS: The tax would be collected 1 instantly, and delivered to the state instantly? 2 Is that the -- 3 SENATOR MARCELLINO: Yeah. 4 TED POTRIKUS: I think that's what's falling 5 under the rubric of what we would oppose. 6 And, again, I would have to see it. 7 I hate to cast judgment on an idea that's, 8 you know, just coming out today. 9 So, rather than say that we would support 10 it -- 11 SENATOR MARCELLINO: You're talking about 12 setting up an escrow account. 13 TED POTRIKUS: Yeah -- 14 SENATOR MARCELLINO: We're not talking a 15 setting up any escrow account. 16 TED POTRIKUS: But I think it would fall -- 17 and, again, just listening to it now for the first 18 time, and the idea in its early genesis, I think 19 what you would find, is a number of -- particularly, 20 of the larger retailers, where it would, as we 21 mentioned in our testimony, even that technology 22 upends their entire system, where they've got their 23 sales taxes going into a certain place, and 24 everything has been receded and taken care of. 25 SENATOR MARCELLINO: Wouldn't it be better if 1 we could just eliminate the need for the business to 2 worry about the sales tax at the point of sale? 3 TED POTRIKUS: Well, if you want to get rid 4 of the sales tax, that might -- 5 SENATOR MARCELLINO: No. But the -- well, 6 frankly, if we could, we might, if we were ever in a 7 position to do that. 8 TED POTRIKUS: -- that would be a couple of 9 billion dollars. 10 SENATOR MARCELLINO: You know, I don't think 11 I like taxes under any circumstance. I don't think 12 anybody likes taxes. 13 But the nature of the beast is, if you could 14 eliminate the necessary bookkeeping required of the 15 businesses right now, which, as you just said, they 16 have to have a methodology, it has to be collected, 17 it has to be accounted for, it has to be, you know, 18 put down in a ledger, and so forth and so on, in a 19 set of books, and so forth, the traditional set: one 20 for me, one for my partner, and one for the 21 governor. 22 This kind of thing, if we can avoid all of 23 that, where it just gets: I give you my check, my 24 credit card, my debit card -- whatever it is. It 25 gets scanned. The taxes get remediated or get sent 1 instantly to the State. You get the credit for it, 2 and you get your money that goes to the merchant, 3 directly accounted for in his account, or her 4 account, as the case may be. 5 TED POTRIKUS: Well, far be it from -- for me 6 to be a naysayer this early on, but, I just -- you 7 know, I think what we hear from our members, let me 8 put that it way, is an immediate concern about the 9 complexity of what that sort of software would have 10 to be, just given the number of wrinkles in New York 11 State's sales tax law, as it pertains just to the 12 industry that Melissa and I represent through the 13 Retail Council. 14 You know, the various manifestations of what 15 is and isn't taxable. 16 What do you with the coupon? 17 How many voids do you have? 18 You know, for a retail business, particularly 19 a large store, operating in a number of different 20 locations and jurisdictions across the state, 21 those -- those laws are going to jump all over the 22 place. 23 And, the number of transactions that they're 24 taking -- that are taking place avoid, how do you 25 give the sales tax back, if you don't have that 1 money? 2 It's -- I -- you know what? If that's a part 3 of the conversation, we'll look forward to having 4 it. And I certainly -- like I said, you know, we 5 want to be constructive. 6 SENATOR MARCELLINO: Well, that's the point. 7 That's -- 8 TED POTRIKUS: That's a good point to raise. 9 SENATOR MARCELLINO: -- these are fair and 10 reasonable objections. 11 I remember going to a movie at one time, with 12 my wife, to see a first run of, I believe it was 13 "Superman" at the time. The first movie, 14 "Superman"? 15 We were in Manhattan, and we went to a 16 Manhattan movie theater. The reel started, and 17 about five minutes into the reel <snaps fingers> it 18 died. It just wouldn't work. 19 They had to cancel the performance, and 20 refund the money. 21 TED POTRIKUS: Sure. 22 SENATOR MARCELLINO: Everybody then had to 23 sign a form, which the movie theater, obviously, 24 didn't have enough of, and had to make copies, and 25 so forth. Went crazy. 1 People were refusing to sign, because they 2 didn't know what they were signing. They didn't 3 realize that they had to prove that they, in fact, 4 got their tax money back. 5 TED POTRIKUS: Oh. Sure. 6 SENATOR MARCELLINO: That the theater 7 hadn't -- had collected a tax, and had to refund the 8 tax as well. And they had to prove that they are 9 done that. And that there was the -- they needed to 10 the signature of the customer. 11 TED POTRIKUS: Right. 12 SENATOR MARCELLINO: And, obviously, some 13 people who were there shouldn't have been there. 14 SENATOR KRUEGER: And I'm trying to figure 15 out, was that my district, or his district? 16 SENATOR MARCELLINO: I think it was 17 Marty Connor's at the time. But that -- it was -- 18 it was early on. It was early on -- 19 SENATOR SQUADRON: It was certainly my 20 predecessor's responsibility. 21 SENATOR MARCELLINO: That's true. 22 With the -- but name of the game is, the -- I 23 understand the complexity issue. That makes some 24 sense. 25 But, I look forward to some discussions with 1 you on this, because the issue is complicated. 2 TED POTRIKUS: It is. 3 SENATOR MARCELLINO: It isn't as simple as it 4 sounds, but it's certainly worth looking into. 5 Do you think -- just, last question, and 6 we'll turn it over to my colleagues. 7 Do you think the Tax Department should have 8 more details in their regulations? 9 TED POTRIKUS: Details about what they're 10 looking for in their audits? 11 Details about how they -- well, not being an 12 attorney -- 13 SENATOR MARCELLINO: Neither am I, thank God. 14 TED POTRIKUS: -- there are times when I look 15 at it, and think that it's -- they're overly 16 detailed, the sales tax regulations. 17 And, you know, when you get the phone call 18 from one of your member stores because they've 19 gotten into some trouble for applying the sales tax 20 to a receiving blanket, which was the same thing as 21 the crib blanket, it just happens to go on your 22 shoulder rather than the crib, but, one is a piece 23 of clothing, so it's not furniture, the other is a 24 part of furniture, so it's taxable, that's pretty 25 detailed. 1 Now, you know, we have a good relationship 2 with the Department. We've spoken with them about 3 some of these issues. 4 And, as far as their ability to go in and 5 audit, and ask questions, you know, we've -- from 6 the Retail Council's perspective -- 7 And Melissa correct me if I'm wrong. 8 -- but we've not received complaints about 9 the audits, or anything of that. I think it's more 10 a question, sometimes, of procedure, and, did our 11 members do the right thing? 12 And that's when I go back into my testimony, 13 and we -- and it's true; they do spend a great deal 14 of time and effort trying to make sure that they 15 comply appropriately. 16 So, short answer to your question, Senator, 17 is: We've had no complaints about the lack of 18 specificity. 19 SENATOR MARCELLINO: Okay. 20 I appreciate your testimony, and I thank you 21 for coming in. 22 TED POTRIKUS: Thank you for having us. 23 SENATOR MARCELLINO: And we will be in touch 24 with you, because -- 25 TED POTRIKUS: Very well. 1 SENATOR MARCELLINO: -- I think we should 2 have conversations with the Committee, in 3 conjunction with the Department, so that we can work 4 out some things to make things run a little 5 smoother. 6 TED POTRIKUS: I agree. 7 We'll look forward to that, Senator. 8 SENATOR MARCELLINO: I appreciate that. 9 Thank you for your cooperation. 10 TED POTRIKUS: Thank you. 11 SENATOR MARCELLINO: Liz, Dan, either way. 12 SENATOR SQUADRON: Thank you very much. 13 TED POTRIKUS: A pleasure, Senator. 14 SENATOR SQUADRON: I appreciate it. 15 I'm glad that I was able to join at the 16 beginning of it. 17 Just in a -- is -- in a zapper-free 18 environment, or environment in which either there 19 were law on the books or in which there was a way 20 for Taxation and Finance to certify that the 21 software being used was zapper-free, do you see 22 opportunities to ease retailers' burdens relative to 23 the risk of audit, et cetera, with this? 24 I know that, earlier, and I guess I've seen 25 the written testimony, Micros, or discussed with it 1 Senator Krueger, talked about, you know, sort of the 2 quickly developing technology, and speed with which 3 it's possible to gather and store and transmit 4 information. 5 Are there ways for retailers to self-certify 6 with the Tax Department that they are, in fact, 7 doing what they're supposed to, using some of these 8 software systems? 9 And might "zapper" legislation help with 10 that? 11 And, if so, can you sort of think of 12 mechanisms that would be helpful? 13 TED POTRIKUS: I don't know the exact -- you 14 know, might that help? 15 Would it be easy, would it be difficult, for 16 a retailer to comply? 17 I think the overarching concern of the retail 18 industry, when -- you know, when the idea of the 19 mandatory escrow account came up, when -- and I 20 realize that we're talking about two different 21 things, but, conceptually, and it may be helpful, to 22 say, that what retailers were most concerned about, 23 was trying to apply some sort of a blanket 24 requirement on all of them. 25 And I have to say, you know, I've been in 1 the -- at Council for 24-plus years, and it's been 2 very rare to get a response as quick, and as almost 3 universal as it was, to the whole escrow account. 4 And it was directly about the escrow account, 5 but it was indirectly about the idea that each 6 merchant, each vendor, was going to be treated as a 7 potential scofflaw. 8 I think what they were worried about was the 9 notion, that: I've never had a problem with this. 10 I've never done anything wrong. I've done 11 everything correct. 12 And I think what -- where the concern might 13 want to look, is: Is that the sort of message 14 that's being sent out? 15 Now, a self-certification, you know, we've 16 seen that before. Some credit card vendors will 17 require certain procedures to make sure that you're 18 compliant with this privacy standard, or that. 19 So, in some ways, it might not be 20 objectionable; but in other ways, it might. 21 SENATOR SQUADRON: And I -- 22 TED POTRIKUS: I realize it's a little 23 wishy-washy. 24 SENATOR SQUADRON: And I understand that 25 distinction. 1 But I guess another way of asking the 2 question is: Do you think if they were 3 voluntarily -- either quarterly or annual 4 transmitting of the actual data, from folks' 5 point-of-sale software, to Taxation and Finance, a 6 voluntary program, in order to decrease the odds of 7 an audit, and, in order to show that you don't have 8 zapper software, right, because it means a lot less 9 likely that you are underpaying? 10 Do you think that's something retailers would 11 make use of in order to decrease the chances they 12 would be audited, or do you think that -- that, 13 probably not? 14 TED POTRIKUS: I -- you know, I have no idea 15 how to answer that question. 16 I'll go back to any first paragraph, where I 17 plead temporary ignorance on some of this, because, 18 to be quite honest, for our members, a lot of this 19 is -- it's a new concept. 20 SENATOR SQUADRON: Right. And, so -- 21 TED POTRIKUS: We always like to think that 22 we represent the good guys. 23 You know, and then, this case, it was, like: 24 We've never heard of this. 25 SENATOR SQUADRON: So one of the 1 opportunities here, potentially, I think, both for 2 the retailers and also for the State, in addition to 3 increasing tax collection, is doing a better job of, 4 up front, separating the vast majority who are good 5 guys, as you point out, from the small number of 6 scofflaws. 7 That's good for the State, because it let's 8 us target our enforcement resources -- limited 9 enforcement resources. 10 It's also good for the good guys, if there's 11 a relatively easy way to prove it up front, so that 12 they're not facing random audits, they're not facing 13 some of these very burdensome enforcement efforts 14 that could sometimes happen. 15 And so -- so, the question really here, is: 16 As we become more aware of the zapper software, as 17 we talk about ways of making sure it's not being 18 used, are there also opportunities, voluntary or 19 mandatory, for retailers and for the State, to -- 20 because that we have such a great deal of 21 information now, and such a sophisticated software, 22 to share information up front, to show that they 23 are, in fact, in that vast majority who are doing 24 the right thing? 25 TED POTRIKUS: Yeah, I think that would be a 1 part of the conversation. 2 And I do -- you know, I see what you're 3 saying. And I think it would be interesting to find 4 out from our members how they would feel about 5 something like that. 6 But, again, you know, they look at -- they 7 look at a lot of this as another cost of the doing 8 business. 9 And I think they're -- you know, just be 10 prepared for some sensitivity to that as well, just 11 to make sure that -- 12 SENATOR SQUADRON: I mean, I would submit 13 that potentially uploading a file quarterly, with 14 your quarterly filings, might be, actually, a -- you 15 know, a really simple, easy way to keep yourself 16 from having inspectors come in and, you know, make 17 you have two or three people with them for a number 18 of months. 19 TED POTRIKUS: Yeah. 20 And as I said, I would be happy to look into 21 that with you, as this issue marches on. 22 I'm the wrong guy to ask, if it would be 23 technologically easy, because I don't have my 24 daughter next to me to help me with my iPod. 25 So, you'll have to excuse my technological 1 ignorance. 2 SENATOR SQUADRON: Okay, but I would love 3 to -- assuming if it would be technologically 4 easy -- 5 TED POTRIKUS: Assuming. 6 SENATOR SQUADRON: -- knowing nothing, 7 myself, about technology -- assuming it would be 8 technologically easy, I would be really interested 9 in whether it would be a policy that retailers would 10 make use of. 11 And if not, why they wouldn't. 12 TED POTRIKUS: Be happy to talk about that. 13 SENATOR SQUADRON: Thank you so much. 14 TED POTRIKUS: Thank you, Senator. 15 SENATOR MARCELLINO: Liz? 16 SENATOR KRUEGER: Thank you, Carl. 17 Again, Ted, I appreciate your testimony. 18 I think you're right, the majority of 19 businesses out there aren't cheating. And probably 20 the ones you asked, aren't cheating. 21 Although, I suspect, even if you asked me, 22 and I was cheating, I wouldn't tell you. 23 Just as a guess. 24 But I do think -- and I hope, you know, you 25 were listening when Tax and Finance was 1 testifying -- because I really do think it can be a 2 win-win, to come up with for -- at least some 3 standards for the kinds of software that should be 4 put in place, and an ability to track, and make sure 5 that cheating isn't going on, you know, via software 6 at the retail level. 7 And that, I bet, if your retailers were 8 asked, "Would you like to see decreased number of 9 audits?" I'm going to put money on that they're all 10 going to say yes. 11 We would much rather see some kind of 12 standards put into the software that we use, that 13 factor in, again, your question -- your answers, I 14 think to Carl, about, you know, how there are 15 certain things you almost couldn't do immediately, 16 or without some kind of pretty sophisticated 17 software tracking, that, you know, I would certainly 18 like to see the State come up with standards and 19 practices for. 20 That that would actually be a win for most of 21 the people that you represent. 22 TED POTRIKUS: And, you know, I would agree 23 with that, you know, again, using that -- the 24 fallback term of "conceptually," because you never 25 know what things like that end up looking like. 1 But one of the things that interested us so 2 much about this hearing today, and we dropped it in 3 a little it be in our testimony, is we're in 4 agreement with a lot of the concepts that you've 5 raised, particularly with leveling the playing field 6 with, where the good guys are looking at the 7 not-so-good guys, and saying: Wait a minute. We 8 should all be on the same page here. 9 But what we dropped in, was the point about 10 the Internet collecting the sales tax, because to 11 the -- by the same token, you know, Ted's Shoe 12 Store, I would get irritated if, you know, 13 Melissa's Shoe Store in Illinois were not collecting 14 the sales tax, but we were all shipping it into the 15 same. 16 We'd looked at that the same way. 17 And I won't make Melissa the bad guy anymore. 18 She -- you know, if she were looking at me 19 down the street, and saying, "He's got tax-zapper 20 software," you know, the concept is the same. It's 21 the same sort of tax evasion. 22 Actually, the difference is, that I'm 23 collecting the sales tax from the people, and 24 keeping it. 25 SENATOR KRUEGER: Right. 1 TED POTRIKUS: You know, at least the 2 out-of-state merchant isn't collecting it. 3 So, yeah, the idea of making sure that 4 everybody's doing what they're supposed to be doing 5 is very important, to us, and to our members. 6 So, you know, if there's a way to do that, 7 without a costly mandate, without saying to the 8 large retailers that have those stores in 9 61 different counties, and then the cities inside of 10 the counties that have their own rules, you know, if 11 there is a way to do that without exploding the 12 entire system as we know it, it's a great idea for a 13 conversation. 14 SENATOR KRUEGER: Thank you. 15 SENATOR MARCELLINO: Thank you very much, 16 Ted. Appreciate it. 17 And we will be in contact. 18 TED POTRIKUS: Thank you very much for your 19 time. 20 SENATOR MARCELLINO: Thank you. 21 MELISSA GOOGAS: Thank you. 22 SENATOR MARCELLINO: Our next speaker will be 23 Mr. Richard Ainsworth, who is a lecturer of -- in 24 law, from Boston University, Graduate Tax Program. 25 Mr. Ainsworth. 1 RICHARD T. AINSWORTH: Good morning. 2 Senator, thank you very much for inviting me 3 here. 4 SENATOR MARCELLINO: Thanks for coming. 5 RICHARD T. AINSWORTH: I very much appreciate 6 it. 7 Liz Krueger, it's very good to see you. 8 [Laughter.] 9 RICHARD T. AINSWORTH: You're becoming very 10 famous. 11 At least in the small world of zappers -- 12 SENATOR KRUEGER: [Unintelligible.] 13 RICHARD T. AINSWORTH: In the small world of 14 zappers, you're becoming famous. 15 North Carolina just introduced a bill like 16 yours. 17 And I think Wyoming is planning on doing the 18 same thing. 19 So, instead of 13 states, I think we're up to 20 15 states. 21 I have this prepared material here. 22 Rather than just -- 23 SENATOR MARCELLINO: Feel free to summarize. 24 RICHARD T. AINSWORTH: Yeah. 25 Essentially -- essentially, my background is, 1 I worked for the State of New Hampshire for about 2 13 years, in the tax department. 3 Then I went to the IRS for four years, worked 4 in taxes, litigation. 5 I went to Harvard for about ten years, and I 6 taught taxes to international people; and, mostly, 7 government people that came to our program, sort of 8 foreign IRS people. That's where I started doing 9 comparative tax work. 10 Now I teach at BU, and work for ADP, which is 11 a computer processing company. I started with 12 Taxware. I work with government relations, with 13 ADP. 14 Essentially what I do is, I find problems, 15 and try to help the governments identify where the 16 problems are. 17 My background is comparative, and I usually 18 work in value-added tax. 19 And you guys have a really nice value-added 20 tax in the hotel area, whether you know it or not, 21 but, it's there. 22 So, I see this as a problem all around the 23 world, zappers, but I don't see it in the 24 United States. I think three cases in the U.S. 25 So, I started to write some articles on it, 1 and suggest that maybe we would look a little it be 2 more carefully at what's happening in the U.S, 3 because, if it's in the rest of the world, it might 4 be here also. 5 And then I noticed, in Quebec, you've got 6 250 cases, to which is right across the border. 7 And in the initial cases in Quebec, are a 8 subsidiary of an American company that's selling 9 devices up there. So, I feel that it might be here 10 in the U.S. 11 So, I ran some numbers. 12 And I assumed that, if people in New York eat 13 at restaurants about the same amount that the people 14 in Quebec eat in restaurants, and, if there is 15 zapper software in New York, about the same ratio as 16 it would be in Quebec, you're losing about 17 a billion dollars a year, every year, for ten years. 18 Can it be solved? Yes. 19 It's being solved by various places. 20 The German government has a smart card. 21 They've spent about four or five years developing 22 the smart card. They'll give you the technology for 23 it free, and, essentially, cost 50 euro, which is 24 about $50, to insert inside an electronic cash 25 register. 1 That's the bottom-line cost to securing a 2 cash register or a POS system. 3 It has some problems with it because they 4 simplified it a little bit. It uses their retained 5 memory of the machine itself, in order to record and 6 encrypt the data. 7 You would probably prefer to have the data 8 encrypted and stored someplace else outside of the 9 machine. That's what Quebec works on their model. 10 They're a little bit expensive up there in 11 Quebec, about $800 a machine. You can probably get 12 a better machine to do the same sort of thing for 13 around $300, $350. They're fairly available on the 14 market. 15 But, they're not being sold in the 16 United States because the states are not all that 17 interested. It seems, in identifying this as a 18 problem, the states seem to be missing it, from my 19 point of view, because the tendency of a state is to 20 follow the federal audit. 21 And the feds currently don't have a sales tax 22 or a value-added tax or a transaction tax. So, 23 because the feds aren't really doing these audits, 24 unless they fall around them because of something 25 else, then the states usually don't get notified in 1 advance that there's a sales tax problem. 2 But, there are solutions out there, and 3 they're available. They probably should be by a 4 third party, not by the person who makes the 5 electronic cash register. 6 I heard a comment back there. 7 Yes, there are instances. 8 Brazil has some instances, where they hired 9 somebody, in order to develop the software that's 10 going to prevent the zapper, and, at the same time, 11 they developed the zapper that defeated the software 12 that prevented the zappers from the other people. 13 So it's -- you know, you really need to get a 14 third party involved. Somebody that specializes in 15 security, not somebody that specializes in 16 electronic cash registers. 17 And, so, the security person can testify: 18 This is a secure system. It really is accurate, 19 what you're seeing for data. 20 And that's our job. That's our business. 21 And, so, you set up an arrangement, so that a 22 third party secures the cash registers that are 23 being sold by the cash register people. 24 But, there are solutions. 25 Oh, I -- incidentally, Senator, I heard your 1 comment about: Wouldn't it be a nice idea, if when 2 a payment is made to MasterCard and Visa card, it 3 immediately splits, and the money goes to the 4 states? 5 That is being done. 6 A lot of places in Latin America do it right 7 now. 8 I made a recommendation to a person who was 9 doing a tax-advisory mission to Iceland, that they 10 do exactly the same thing. 11 Is it good or bad for business? 12 It's good for business. It saves business 13 money. It reduces the credit card fees on what they 14 would pay. 15 For example: If you got $100 coming in, and 16 $5 is tax and $95 is for stuff, Visa or MasterCard 17 charges you on 100. 18 But, if $5 goes to the state, and $95 come 19 from you, the charges go down on what you have to 20 pay. 21 So, it's good for businesses to get that 22 money siphoned off. 23 But, it's not just the big countries that are 24 doing it. I mean, Ecuador does it, for goodness 25 sakes. El Salvador does it. 1 There was a bill in Texas two years ago, to 2 do the same thing. 3 What's the next thing in zappers? Well, it's 4 already come. 5 Some of my early papers predicted that -- or, 6 not predicted. But, I guessed that the next thing 7 that was going to happen was going to be, you will 8 download your zapper from the Internet. 9 Portugal has six cases right now, where, if 10 you purchased an electronic cash register in 11 Portugal, you can download the zapper software for 12 free. 13 Portugal is concerned. 14 They say: Well, who's putting this zapper 15 software for free on the Internet? 16 And they think it might be somebody that sold 17 you the cash register to begin with, and, they're 18 trying to put these pieces together. 19 But, essentially, the problem with the zapper 20 in the past has always been, sort of like your 21 laptop computer. 22 If your computer gets an update from 23 Microsoft, which they do all the time, the zapper 24 has to be updated at the same time. 25 So the bad guy in this whole thing is the 1 installer because, once he installs the zapper in 2 your system, you've got to bring him back. Because 3 when the underlying software in your ECR or 4 POS system gets updated, he's got to come back and 5 visit you. 6 So this is sort of like a tapeworm to your 7 business: Once you get them, it's hard to get them 8 out. 9 They know that -- what you're doing. They 10 may not know how much you're taking, but they know 11 it's there. So, you've got to bring them back and 12 they got to update the software. 13 And that's why, when Stew Leonard's Dairy did 14 it in Connecticut, they hired the guy and made him 15 part of the business. And they said: You know, 16 every time -- 17 In that instance, it was National Cash 18 Register. 19 -- any time that National Cash Register 20 updates the system, please go in and update the 21 zapper. 22 And he said: That's my job. That's what I 23 do. 24 I know Micros was here earlier today. 25 Micros got a good system. It's pretty 1 secure. 2 But, you know, there's an investigation in 3 the IHOPs in Ohio. They have Micros System. 4 In fact, when I heard about the Ohio 5 investigation, I sent it to some guys in Europe, and 6 I said: What do you think is going on here? 7 And they said: Well, Richard, there's 8 probably a zapper involved in the whole thing. 9 And what it is, is, they say: Chances are, 10 if we were looking at this thing, what we would do 11 is, he's got some remote software that operates off 12 his computer, at home, and he dials into the 13 computer in the IHOP and he accesses the files. 14 He gets access to the system. He manipulates the 15 thing from of a home, in his laptop, and then off he 16 runs. 17 He says: The guys in Europe are telling me, 18 they're saying, Richard, it's not possible that you 19 can alter the check-number sequences, like what 20 they're telling us in the FBI reports, without 21 having a zapper inside of the system. 22 But when I called the guys from the FBI, they 23 don't want to talk to me because, you know, it's one 24 of these criminal-investigation stuff. 25 But, there's 200 illegal immigrants there. 1 They're paying the people under the table. There's 2 double paychecks going on. There's, the whole 3 thing. 4 So what it is, is the zapper software allows 5 you to skim sufficient money so that you can do 6 other sorts of things. 7 So you've got, homeland security is there, 8 ICE is there, the anti-terrorist force is there. 9 So, you can go onto the Internet. I mean, if 10 you go onto the Internet, there's a thing on the 11 Internet. This -- here's a nice thing. 12 A guy writes in to a website, and he says: 13 Hi. I run a Micros System for a local restaurant, 14 and I need to know how I can purge transactions from 15 the system, basically, at the end of the day. The 16 manager would like to be able to delete some checks 17 and some transactions. 18 And the response by the person on the other 19 side is: Oh, you can't do that with a 20 Micros System. It's -- you know, they don't want 21 you to do that. 22 And the conversation will eventually go on, 23 and they'll say: Well, you know, it's a little 24 tricky if you do that. You have to get in and do 25 some technology, and, nah nah nah nah nah nah, and 1 you'll probably be caught. I wouldn't do it myself 2 if I was doing it. 3 But what it is, is, the managers that are 4 running the restaurants aren't necessarily the 5 owners of the restaurants. 6 And that's the Celine Dion story. 7 She had 38 restaurants up in -- well, she had 8 36 in Canada and 2 in Florida. And the people that 9 installed the zapper in the restaurants was the 10 management company. 11 So, it wasn't the owner that was doing it. 12 You hire a third-party manager to come in, 13 and they manage the restaurant for you. And what 14 they do is, they start siphoning off money from you. 15 So, she was very upset that they were taking 16 it from her restaurants. 17 I called Florida, because that's where the 18 other two place -- where the Nickels restaurants 19 were, from Celine Dion, and they said: We haven't 20 seen it down here in Florida. 21 But if it's the same management company -- my 22 thoughts are: If it's the same management company 23 and the owners don't know about it, and, geepers, 24 it's the thing to look at. 25 And the whole idea of this comparative tax 1 work is, what you do is, you read somebody else's 2 newspapers, and you say: Darned, if this is 3 happening in Quebec, and it's right across the 4 border; or if this is happening in Florida, and it's 5 right across the border; or if this is happening in 6 Connecticut, and it's right across the border; or if 7 this is happening in Ohio, then maybe we should do 8 something, maybe, about it. 9 SENATOR MARCELLINO: Let me just interrupt 10 you for a second, because time is fleeting. 11 RICHARD T. AINSWORTH: Yeah. 12 SENATOR MARCELLINO: In your opinion, what is 13 the most effective remedy? 14 What do we do? 15 RICHARD T. AINSWORTH: What you do is -- 16 here's what you do: 17 You've got about 500,000 people that are 18 filing sales and use tax returns in the state of 19 New York. 20 About 10 percent of them are bad apples. You 21 either know they're bad apples, because their 22 records are poor, or, nah nah nah, or they cause 23 problems for you. 24 You put in, as a requirement of doing 25 business in the state of New York, that you've got 1 to give us some security that you have an efficient 2 and effective system in order to keep your books and 3 records. 4 If you don't have that kind of a system, 5 we'll help you. But, it's a condition of doing 6 business in the state of New York. 7 If you're going to do it in digital form, we 8 got to know the digital records are good. 9 If you can't convince us that your digital 10 records are good, we'll show you how to do it. 11 You attach one of these devices, either like 12 the German smart card, which probably isn't the best 13 one, or some of the other devices out there, that, 14 all they do is, they take every keystroke that you 15 put into the cash register, they encrypt it and put 16 it into a box, and then, under some versions, you 17 can have that sent to the Department of Revenue. 18 And they can do the audits in Albany, and 19 they don't have to go visit the store. They'll know 20 if there's a problem or there isn't a problem. 21 You pre-audit somebody before you go out 22 there. That's what they do in Rwanda. 23 Rwanda's a different place from New York. 24 But what you do is, you put the device -- you 25 put the encrypted device on the machine. It records 1 everything. You're not going to -- business secrets 2 aren't disappearing. 3 I don't know that you, Senator Krueger, came 4 in and purchased something, but I do know that there 5 was a purchase on a particular day. 6 So, I can't tie the purchase back to you, but 7 I can identify that there was a purchase, and that 8 it came in in cash, and it was for such-and-such 9 amount. 10 And if I'm sitting back in the 11 Tax Administration, I can find out, that: Yeah, 12 they were doing business that day. 13 And then, all of a sudden, I find out: Darn, 14 their busiest day of the week was Saturday, and they 15 weren't closed on Saturday, and I don't have any 16 data reports for Saturday. 17 Then I send out somebody, and I talk to them. 18 But, I send them out right away. I don't wait until 19 the end of the month to send them out. 20 I can send them out because I know it did not 21 happen right away. 22 You don't do this for every taxpayer, but you 23 do it for people that you have a reason to believe 24 might be a problem. 25 The problem could be, that they're -- got a 1 zapper in the system. 2 Or, the problem could be, they have a real 3 hard time with books and records. 4 Or, the problem could be, they're just too 5 busy doing something else, or the kids are running 6 the store, or something like that. 7 But you say: If you're going to keep your 8 records digitally, and when I come in and do the 9 audit, you're going to give me the Z report out of 10 your cash register, and say: This is what we did 11 for business. You got to believe it, because it's 12 by a computer. 13 And you say: I don't believe it because it's 14 by a computer. 15 But if it was encrypted, and I could -- I 16 knew I could confirm it right away, yes, I could. 17 In Norway, the problem is mutated a little 18 bit more. 19 There was a meeting over in Europe. It was 20 in Dublin. It happened about a year ago. And there 21 were present- -- I can't get the presentations 22 because they won't give them to me -- but, the U.K. 23 made a presentation, Portugal made a presentation, 24 and Norway made a presentation. 25 This zapper stuff used to only happen with 1 cash. Happens with credit cards now. 2 What happens is, you call the bank, you get a 3 new credit card reader. 4 And, so, you got a credit card reader for 5 your store. You get a second credit card reader 6 that goes to your kid's bank account. 7 So, when the person comes in and buys 8 something at the store, they slide the credit card 9 through the credit card machine. The credit card 10 processes the thing, the money goes off to the kid's 11 bank account, and then you instruct the zapper to go 12 back in and eliminate a credit card transaction, 13 which is normally what you did not do. You usually 14 eliminated the cash transactions. 15 But if now you're going to eliminate a 16 credit card transaction, the whole -- the whole area 17 is open to manipulation. 18 How do you solve it? You encrypt it. 19 You say: You want to do business in the 20 state of New York, you have one of these things that 21 are attached to your cash register, and it encrypts 22 it, if you're a bad business. 23 If you're a good business, that's fine. 24 If you've got a record of really good 25 compliance, and your books and records are 1 marvelous, fine, no problem. 2 But you don't do it for everybody. 3 And I think that the Department of Revenue 4 will -- I think the -- what do you -- it's not the 5 ministry of taxation here, it's the -- 6 SENATOR KRUEGER: Department of Taxation. 7 RICHARD T. AINSWORTH: -- Department of 8 Taxation. 9 But -- that's what they call them in Quebec, 10 because they want to separate from the country. 11 They think they're their own country. 12 But, I'm sure they would want to do the same 13 thing. 14 They don't want this data coming in from 15 every darn business in the state of New York. 16 But they do darn well know that there are 17 5 to 10 percent of the businesses that have, 18 historically, been difficult for them. 19 Get good data. Get it encrypted. 20 SENATOR MARCELLINO: Is there data out there 21 on the states that have passed legislation as to 22 their effectiveness in collecting? 23 RICHARD T. AINSWORTH: Well, this is -- 24 [Laughter.] 25 RICHARD T. AINSWORTH: -- states? You mean, 1 like in the United States? 2 SENATOR MARCELLINO: Yeah. 3 RICHARD T. AINSWORTH: No. 4 SENATOR MARCELLINO: Because you list: 5 Connecticut, Florida, Georgia, Illinois, Indiana, 6 Louisiana. 7 RICHARD T. AINSWORTH: All they've have done 8 is, they passed the "Liz Krueger" law. They haven't 9 done anything yet. 10 SENATOR KRUEGER: It's all in there. 11 RICHARD T. AINSWORTH: They've just passed 12 the law that will -- 13 SENATOR SQUADRON: That's a big deal though 14 [unintelligible]. 15 RICHARD T. AINSWORTH: -- penalize if you 16 find an installer. 17 They haven't -- nobody's -- this is just 18 beginning. 19 Liz only -- what was it, two years ago? 20 SENATOR KRUEGER: Uh-huh. 21 RICHARD T. AINSWORTH: Yeah, Liz only did 22 this two years ago. And it took me, like, awhile to 23 show people what Liz did, and -- but has been no -- 24 no. 25 SENATOR MARCELLINO: We don't have any 1 statistics? You don't have data, or anything like 2 that, to show that there's been some noticeable 3 change or increase in collection or decrease in 4 thefts or -- 5 RICHARD T. AINSWORTH: In the states in the 6 U.S. -- 7 SENATOR MARCELLINO: Yeah. 8 RICHARD T. AINSWORTH: -- no. 9 In Quebec, yes. 70 percent recovery. But, 10 it's not a state in the United States. It's a 11 province. 12 SENATOR MARCELLINO: Why is the United States 13 so slow? 14 RICHARD T. AINSWORTH: Because there's a gap 15 between the federal government and states. 16 The federal government is not doing these 17 audits on sales and use taxes. 18 The federal government is doing income tax 19 audits. 20 That's how they found the ones in New York, 21 and they found the ones in Ohio, and they're finding 22 the ones in Connecticut, is because they're doing a 23 huge income tax audit, and they're saying: Wait a 24 minute, Stew Leonard, what is going on here, Stew? 25 And after that -- after they fiddled around 1 with Stew for a long time, they find out he's got a 2 zapper in the store. 3 So, the states are following the feds. 4 What the states -- what the feds are doing, 5 is they're looking for an income tax violation, and 6 they're looking at the store or the business itself. 7 What the states need to look for is not 8 necessarily the income tax violation. 9 Yes, it's a problem. 10 You want to look for the installer, because 11 if he installs it in one location, he's installed it 12 in fifteen locations. 13 Your problem is the cancer that spreads 14 through the sales and use tax system. 15 The feds are concerned about the big grocery 16 store or the big chain of restaurants that are 17 siphoning money off and paying illegal workers under 18 the table. They're not focused on the zappers. 19 And when I write to these people, and I say, 20 Did you find a zapper? it -- when the La Shish thing 21 happened in Detroit, I knew there was a zapper in 22 there, because I could sort of read it. 23 But, I have to write to the lawyers, and say: 24 Was there a zapper? 25 And he says: Yes, there was. 1 "Where was it?" 2 "It was in the bedroom." 3 They used a -- and there -- but it wasn't 4 part of the case, it wasn't part of the pleadings, 5 because the feds aren't interested in it. 6 They're interested in the illegal workers. 7 They're interested in other sorts of things. 8 SENATOR KRUEGER: Carl, can I ask a question? 9 SENATOR MARCELLINO: Sure. 10 SENATOR KRUEGER: Thank you. 11 RICHARD T. AINSWORTH: You did four stings. 12 You did four stings, according to "The Post." 13 SENATOR KRUEGER: And the Tax and Finance 14 Department testified before you were able to get 15 here this morning, and they said that they are 16 looking into this. And that they have done a 17 number. 18 RICHARD T. AINSWORTH: I gave them -- oh, 19 yeah. Oh, great. 20 Because I gave two presentations to the 21 Prosecutors Institute. 22 After the first one, when Quebec came down, 23 and they said: Do a sting. 24 When I went to the do the second one, some 25 guys came up to me from the United States, and said: 1 We did the thing sting. 2 I said: What's the result? 3 He said: 70 percent. 4 And I heard the "70 percent" number in 5 two other states, from other people, from -- Liz, 6 they did the sting without a stinger. 7 You gave them -- you can't do a sting without 8 a penalty. 9 SENATOR KRUEGER: No, you're speaking to the 10 converted. 11 RICHARD T. AINSWORTH: Okay, I'm sorry. 12 SENATOR KRUEGER: But -- so, you know, you 13 got me. 14 I agree completely, which is why, you know, I 15 had put in two bills: 16 One a study bill, which the Department 17 doesn't need a study bill to study, and I think they 18 are studying. 19 But I think, the more and more, that there 20 are the examples of the cases in other states, I 21 have to say, I -- when you were talking, I said to 22 my colleague Senator Squadron: Well, too bad I like 23 IHOP, because I guess I can't go there anymore, 24 because, I'm sorry, if they're cheating in other 25 states, they're cheating here too. And somebody 1 from Tax and Finance ought to take a note. 2 RICHARD T. AINSWORTH: It's only seven IHOPs. 3 SENATOR KRUEGER: Okay. But if there's 4 Stew Leonard's and IHOPs that have a patterns of 5 abuse in other states, I have to believe those are 6 worth taking a look at here. 7 And, I think you're absolutely right. 8 And I assume Tax and Finance does things like 9 this: Track what the -- when the feds are going 10 after certain types of businesses on certain kinds 11 of tax fraud, then, are we looking at them, you 12 know, here at home, for either the same, or 13 different, types. 14 And, Carl, I mean, Richard said it, but I do 15 think it's so important. 16 The feds don't look at sales tax, because 17 they don't collect sales taxes. 18 It's our job to make sure that we're 19 collecting the correct sales tax, and that we're 20 having an even playing field. Because, I think as 21 Ted Potrikus said, from the Retail Council, it's so 22 unfair. 23 When businesses aren't paying their tax, 24 they're collecting it also. They're just not paying 25 it to us. And, so, the businesses who are following 1 the law, are put at a disadvantage, competitively. 2 RICHARD T. AINSWORTH: If I can get 3 five extra waitresses working in -- or waiters, 4 working in my restaurant, and paying them under the 5 table on money that's been zapped out, I am a huge 6 competitive at -- at advantage to the restaurants 7 across the street. 8 SENATOR KRUEGER: Right. 9 So it's not just that we are harming the 10 state of New York by not collecting the taxes we 11 need, but we are, I guess -- if we are failing to 12 enforce, and we're failing to go after the bad guys, 13 we're giving them a win over the good guys. 14 And, that's, should be untenable to us, as a 15 state. 16 Now, you talked about, in the Norway example, 17 and I hadn't heard this one: So, a company gets two 18 different credit cord -- credit card swipe 19 machines -- 20 RICHARD T. AINSWORTH: Yeah. You call up the 21 bank, and you say: Give me another swiping machine. 22 SENATOR KRUEGER: Right? 23 RICHARD T. AINSWORTH: And you say: Here's 24 the normal one that I use for the machine. 25 SENATOR KRUEGER: Yep. 1 RICHARD T. AINSWORTH: And I just -- I take 2 one of my cash registers -- 3 SENATOR KRUEGER: Right? 4 RICHARD T. AINSWORTH: -- and I connect it to 5 this one, rather than connect it to this one. 6 This one goes to a different bank account. 7 It doesn't go to the bank under the business. 8 SENATOR KRUEGER: And does the credit card 9 company have any obligation or liability for 10 tracking multiple machines going to different 11 accounts? 12 Is there any way to hold them responsible, or 13 for them -- 14 RICHARD T. AINSWORTH: The credit card 15 company? No, this is just the processing machine. 16 SENATOR KRUEGER: Just the processing 17 machine. 18 RICHARD T. AINSWORTH: If you want an extra 19 one, you call up the bank and ask them for one. 20 They'll give you one. 21 Any bank wants to get your business. 22 SENATOR KRUEGER: Sure. 23 RICHARD T. AINSWORTH: They want the money to 24 flow through their machines -- 25 SENATOR KRUEGER: Well, also -- 1 RICHARD T. AINSWORTH: -- instead of somebody 2 else's. 3 SENATOR KRUEGER: -- I'm from New York City 4 where stores tend to be big. So, they will have 5 multiple ones anyway, conceivably. 6 RICHARD T. AINSWORTH: Absolutely. 7 SENATOR KRUEGER: Is there some obvious way 8 to watch that? Either -- or, to have the bank watch 9 that? 10 If you're a business that has -- 11 RICHARD T. AINSWORTH: Well, this could be 12 [unintelligible] -- 13 SENATOR KRUEGER: -- credit card companies -- 14 credit card swipe machines going to multiple bank 15 accounts, is that something that can be watched? 16 RICHARD T. AINSWORTH: Oh, you would probably 17 audit for something. 18 If you were an auditor, going in and doing a 19 gumshoe audit -- 20 SENATOR KRUEGER: Right? 21 RICHARD T. AINSWORTH: -- you would then look 22 to see how many credit card machines that you had in 23 there, and you would try to tie them back to the 24 various accounts. 25 So, yes, you could find it. 1 Well, that's how Portugal and the U.K. found 2 it. That's how Norway found it. 3 But, there was a -- hard audits, Liz. This 4 is not easy stuff. 5 SENATOR KRUEGER: Right. 6 And that ties back to the other question I 7 wanted to ask you earlier: Are countries that have 8 gone down this road of technology, crossed-checks, 9 and anti-zapper laws, and devices, to spot things at 10 source, have they actually been able to decrease the 11 number of audits they do, or their auditing expense? 12 RICHARD T. AINSWORTH: Yes. 13 SENATOR KRUEGER: Do we know? 14 RICHARD T. AINSWORTH: Yes. 15 Yeah, honest to God, Liz, you just got to 16 go -- I brought those guys down from Quebec. They 17 will come back and talk to you again, but, they're 18 saying that the revenue recovery is 70 percent, and 19 the number of audits are down. 20 What Quebec is able to do, is when they -- 21 when you get one of these receipts from your 22 credit card machine, on the bottom of the receipt is 23 an encrypted -- is a bar code. And they sent kids 24 around. They don't -- they're not really auditors. 25 They're like "inspectors," they call them, and give 1 them one of these little scanners. And they go in 2 and buy something at the McDonald's. They scan it, 3 bloop, and the scanner says: Yep, the machine's 4 good. Everything is working fine here. 5 And then you go to the next one. 6 [Speaker knocks over a cup.] 7 SENATOR MARCELLINO: Don't worry about it. 8 SENATOR KRUEGER: Don't worry. 9 RICHARD T. AINSWORTH: So, you buy a 10 hamburger one place, and you buy a soda someplace 11 else, and, you just make this walk down the street. 12 But, then, when scanner finally says, bloop, 13 There's something wrong here, then the kid, who's 14 doing it for the summer, calls up an audit from the 15 State Revenue Administration, and says: There's 16 something wrong with this machine because, when I 17 scanned my receipts, the machine is telling me, 18 please call somebody. 19 Now, the business doesn't know it, but the 20 kid might not even know what he's seeing, but the 21 Revenue Administration does. 22 There's something wrong with the machine, and 23 the machine is telling me that, and it tells me that 24 on the bottom of the receipt. 25 So you could screen -- you could screen, 1 100 or 200 businesses with a -- not exactly a 2 well-paid person. 3 If you do one of these real intensive audits, 4 you're talking, Liz, about hiring some fairly 5 expensive computer people to rip apart some computer 6 programming. And I'm not 100 percent sure it's 7 cost-effective to do it that way. 8 There are better, more effective ways to use 9 the technology to facilitate the audits, to decrease 10 the costs, to increase the revenue. 11 It's there. 12 SENATOR KRUEGER: Thank you. 13 RICHARD T. AINSWORTH: You're welcome. 14 SENATOR MARCELLINO: Mr. Ainsworth, we 15 appreciate your coming down. We appreciate your 16 taking the time, and your expertise. 17 We will be in touch. 18 We will be in touch. 19 RICHARD T. AINSWORTH: Sorry that I got 20 worked up about this. 21 SENATOR MARCELLINO: No, that's okay. 22 I appreciate passion. 23 RICHARD T. AINSWORTH: Okay. You're welcome. 24 SENATOR KRUEGER: Thank you very much. 25 SENATOR MARCELLINO: That's okay. 1 Thank you very much. 2 Scott Wexler, executive director of the 3 Empire State Restaurant and Tavern Association. 4 SCOTT WEXLER: Good afternoon, 5 Senator Marcellino, Senator Squadron. 6 I'm Scott Wexler. I'm here today on behalf 7 of the Empire State Restaurant and Tavern 8 Association, representing restaurants, bars, and 9 other independent operators in the hospitality 10 industry throughout New York State. 11 Our members are all sales tax vendors, giving 12 them a keen interest in today's hearing, and any 13 legislative, regulatory, or administrative actions 14 that follow. 15 I have to admit that the notice for this 16 hearing was only the second instance in which I was 17 made aware of the use of these automated sales 18 suppression devices. 19 The first instance was the media coverage of 20 this alleged behavior just a few weeks prior to 21 receiving the invitation to the hearing. 22 I've gotten quite an education this morning, 23 listening to the witnesses prior to me. 24 And don't get me wrong, I'm not surprised 25 that tax cheats continue to look for ways to steal, 1 or that technology is being deployed in pursuit of 2 ill-gotten gains. 3 But, other than these two instances, I've not 4 heard a word about this particular method of 5 avoiding taxes: not from our members, not from the 6 trade press, not from our suppliers, not from the 7 IRS, and not from the New York State Department of 8 Tax and Finance. 9 I'm not disputing the existence of the 10 software, but part of my message today is: Let the 11 buyer beware. 12 Such a device will not protect a business in 13 New York from their tax liabilities. 14 Perhaps the reason our circle of contacts is 15 not familiar with this scheme, is that, as active 16 members of the hospitality industry, we understand 17 the scrutiny under which retail businesses operate, 18 and the difficulty with which restaurant and tavern 19 owners can escape their sales tax liabilities. 20 The breadth and scope of State Tax 21 Department's reach into our member's businesses has 22 never been more invasive. 23 Alcohol -- and you've heard some of this this 24 morning from the Tax Department. 25 Alcohol-beverage suppliers provide the 1 Tax Department records of sales, that they can tie 2 into the audits. The financial-service institutions 3 provide -- are now providing credit and debit card 4 transactions as well. 5 So this data, along with other information 6 that's available to the Tax Department, is used 7 during the -- you heard them -- 35,000 sales tax 8 audits annually, to estimate retail sales of 9 business, project sales tax liability, and assess 10 alleged sales tax underpayments. 11 I believe we heard from Director Manion, that 12 the Department assessed a billion dollars in sales 13 tax audit assessments in the previous year. 14 So while the tax-zapper may alter the sales 15 receipts and create a second set of books, which 16 would then be used as the basis to file fraudulent 17 returns, the discrepancy would easily be 18 recognizable upon audit. 19 As you're well aware, both the IRS and 20 Tax Department are very active examining the books 21 and records of these businesses. 22 In addition to these new tools, the 23 Department here in New York has acquired, in recent 24 years, they have significantly increased their audit 25 staff, and implemented more efficient audit 1 techniques. 2 Again, Nonie spoke about the desk audit; 3 utilizing their staff from their offices, to contact 4 many, many more sales tax vendors, and get at many, 5 many more possible problems. 6 The increased level of activity by the 7 Department has resulted in increased contact from 8 our members. We received quite a few complaints 9 about the sales tax auditors' practices, and the 10 determination that resulted from these practices. 11 And there was a great deal of confusion over 12 this new desk-audit technique that the 13 Tax Department used. 14 I believe the Department will admit that they 15 could have done a better job communicating the new 16 procedures. 17 To their credit, once we brought these 18 concerns to their attention, they worked closely 19 with us, to more clearly articulate the new 20 procedures, what the taxpayers' expectations were, 21 and what they needed to do -- what the taxpayer 22 needed to do in response to the inquiry. 23 And while not -- while this is not the 24 subject of the hearing, I am obligated to explain, 25 that in spite of our good working relationship with 1 the Department, we do think that some of their 2 techniques can be fine-tuned. 3 And we've actually worked with Senator Young, 4 introduced three bills. I cited them in my 5 testimony. 6 Rather than talking with them specifically, 7 what I wanted to note from some of the conversations 8 that the Panel has been having this morning, some of 9 these would be vehicles like you've been talking 10 about. 11 We've suggested voluntary tactics, or 12 techniques, where business owners would agree to 13 have certain certified point-of-sales systems set 14 up, where they would agree to have segregated. 15 We've not yet proposed the system where the 16 money automatically goes to your account. 17 Ted Potrikus discussed with you some of the 18 real serious technical problems that we see with it. 19 But, we're very much in line with looking for 20 ways that we could focus on the small percentage, 21 whether it's 5 percent, or, 10 percent, as the 22 professor said, in the industry, focus on them 23 rather than the entire taxpayer basis. 24 We urge approval of this legislation because 25 we think these bills help ensure the Tax Department 1 makes fair and reasonable assessments, and they 2 result in more accurate sales tax collection. 3 We've supported efforts to ensure everybody 4 pays their fair share of taxes, because if some 5 businesses are underpaying their taxes, that gives 6 them an unlevel playing field. 7 We've had that discussion throughout the 8 course of the hearing today. 9 But because we have proposed these 10 initiatives to protect business owners from the 11 overzealous activities on occasion, the 12 Tax Department, it does give us pause as we look at 13 new additional powers we may see. 14 At first blush, we do not believe the 15 Department needs additional authority as it relates 16 to auditing the actual business owners. We think 17 they have exhaustive authority. 18 They might need authority as it relates to 19 the promoters of this software, particularly if 20 they're not subject to the Department's scrutiny. 21 And we certainly think that any point-of-sale 22 systems that the Department ought to be 23 recommending, or allowing to be used by the retail 24 business community, ought to be certified to the 25 Department, that can't be zapped. 1 It's somewhat concerning to me to hear that 2 these systems we've been promoting to our members, 3 in an effort to make them better taxpayers, because, 4 by having these -- this software, they can do a 5 better job of collecting the data, may actually 6 leave them subject to the kind of altering of their 7 tax records. 8 So, on behalf of our members, we're -- we 9 appreciate you taking the time this morning to bring 10 attention to this subject. 11 We certainly look forward to educating our 12 members on this problem, in a way that it -- in a 13 way that we did not know before we came here this 14 morning, so they could be better protected: 15 Protected against themselves. Perhaps against 16 unscrupulous managers they might have. And, against 17 point-of-sale-equipment sellers that might be trying 18 to help them steal from the government, at the end 19 of the day, is not good for any of us. 20 So, we're happy to answer any questions, and 21 look forward to working with you and Committee to 22 address this problem going further. 23 24 25 1 SENATOR MARCELLINO: I gather one of my 2 questions would have been: Do you think the 3 Tax Department should have more details in their 4 regulations? 5 I think you might have a problem with that? 6 SCOTT WEXLER: Well, it's not so much a 7 problem. 8 I actually the Tax Department, while -- 9 and -- while, from time to time, we disagree with 10 the Department, I think they do a pretty good job. 11 We've been encouraging the Department to take 12 their guidelines and regulations, and make them more 13 user-friendly for the retail community. 14 In a recent meeting with the Commissioner, I 15 said that the documents that the Tax Department 16 publishes are really good for our members' CPAs and 17 tax attorneys, but they're not really good for the 18 typical retail business owner. 19 And we're working with them, to take that 20 information and make it -- make it more 21 consumer-friendly to the business owners and their 22 managers. 23 If we're talking about -- about greater 24 detail, in terms of what's required of owners, much 25 like Ted, I would like to wait and see the specific 1 proposals, to see what thoughts you have or others 2 might have for what's missing. 3 We think the records, the guidelines, 4 regulations, are fairly exhaustive, but would remain 5 open to ideas that would make us better taxpayers. 6 SENATOR MARCELLINO: See, I would be looking 7 for something coming from the other direction. 8 If you have thoughts on that issue, rather 9 than waiting for the State to come up and tell you, 10 and then you say, Well, that's not so great, that's 11 not so great, but, give us more -- 12 Why don't you give us something? 13 SCOTT WEXLER: I'll be happy to take the 14 ideas that we've heard you discuss this morning, 15 look at the ideas that we've been advancing, and see 16 how they could work together, Senator. 17 I think that's a -- 18 SENATOR MARCELLINO: Well, I think that would 19 be more, you know, effective. 20 I mean, if there are thoughts out there, if 21 there are ideas out there, that would make the 22 process better for your people, so that they can do 23 business in a better way, in a more efficient way, 24 and a more effective way, which might preclude some 25 of these audits coming down on them, which, 1 obviously, nobody wants. Even the Department would 2 prefer not to, if they didn't have to. 3 So, it would make some sense if there was 4 give-and-take on this issue. 5 What did you think of the -- you heard the 6 professor's testimony, where he discussed the fact 7 that he believes we're losing from the state of 8 New York, about a billion-plus in tax revenue 9 annually? 10 What do you think about that? 11 SCOTT WEXLER: I thought it was curious, and 12 coincidental, that the amount of money that the 13 Tax Department is assessing on audits, on an annual 14 basis, is roughly the same amount as -- that the 15 professor's analysis came up with. 16 I think that the professor's analysis, for 17 what it is, is fine. But, it had no detail. It -- 18 it had -- it was not a univariate examination. 19 It didn't examine any of the other variables 20 that might lead to tax avoidance. And it didn't 21 count any taxes that the Tax Department might be 22 catching on audit. 23 So, I don't know if that number is a right 24 number or not. 25 I suspect, you know, I think I said in my 1 testimony, that sales -- that sales tax suppression 2 has been something that the retail community has 3 been dealing with for a long time. 4 I have no idea whether his estimate is 5 accurate or not. 6 SENATOR MARCELLINO: But we would agree that 7 it exists? That there are two sets of books? 8 SCOTT WEXLER: Absolutely. 9 SENATOR MARCELLINO: There are some places 10 where, like I said earlier, a set of books for me, a 11 set of books for my partner, and a set of books for 12 the government. 13 I mean, that's -- we understand that that 14 does occur. We're not denying that. 15 SCOTT WEXLER: Oh, absolutely. 16 But, again, much like the professor said, in 17 the universe of taxpayers, it's a small percentage. 18 I've always used the rule of, 5 percent. 19 That many industry -- 5 percent of the 20 industry, you know, whether it be -- whatever the 21 industry might be. 22 The professor said 10 percent of sales 23 taxpayers in New York might be bad taxpayers, and 24 that need to be focused on. 25 I don't know whether it's 5 percent, 1 10 percent, 4 percent, or 12 percent, but we do 2 agree that a portion of the universe that's supposed 3 to be paying taxes, isn't. And that we ought to 4 focus on that portion; the ones that we know, 5 through various observations, the various analyses, 6 and -- rather than approaching all taxpayers as if 7 in criminals. 8 SENATOR MARCELLINO: Anybody? 9 Thank you. 10 SENATOR SQUADRON: Thank you very much. 11 And, I appreciate your testimony, and I do 12 have questions. Sorry. 13 And, I actually know, from personal 14 experience, what a tough industry it is, and can be. 15 And I thought I heard you say, and I just 16 want to confirm, that you would welcome it, and I 17 would expect you would, some sort of certification 18 process, so that if folks had certain systems in 19 place, acting in certain ways, they would know: 20 Look, this is the way to do this, and we're more 21 likely to not have sort of onerous actions, 22 et cetera. 23 And, you know, if you don't, you know: Look, 24 the truth is, that that raises real red flags. 25 You talked about a relative to, sort of, 1 which systems were certified, or recommended. That 2 the goal should -- all be certified to not have 3 zappers. 4 I just want to make sure that I heard you 5 correctly. 6 SCOTT WEXLER: Absolutely. 7 And perhaps it would be helpful if I kind of 8 explained how we got that proposal, because it might 9 also complete an answer to Senator Marcellino. 10 Some of our members that are involved in 11 sales tax audits are involved because they are 12 actively trying to suppress sales payments. 13 We know that. 14 Some of them are involved in problem because 15 they failed to keep good records. They've not 16 intentionally, at least in my view. 17 We're trying to work to provide a mechanism, 18 whereby, those who want to do the right thing will 19 have a better chance of doing the right thing. 20 We know that a point-of-sales system is one 21 of those mechanisms that can, when properly used, 22 and used lawfully, and deployed the way it's meant 23 to be deployed, can actually maintain many of the 24 records that would otherwise be a challenge for a 25 small-business owner to do. 1 Now, they're not inexpensive. You know, 2 the -- you know, it's several thousand dollars, to 3 over $10,000, for these systems. 4 But as you have been talking earlier, 5 avoiding the sales tax audit, avoiding an assessment 6 that's not fair and appropriate, might make such a 7 system worthwhile. 8 So we've actually been talking with the 9 Tax Department about whether they would do such a 10 system. 11 And I know they've been working with several 12 of the point-of-sales-system providers to do so. 13 The last I was aware, they had not yet 14 reached a conclusion of that process, and have not 15 yet been able to say, even without the protection 16 that the legislation we support, just to say, if you 17 use this system. 18 The gentleman from Micros was here. 19 I heard very positive things about them 20 through the course of the hearing. 21 But, the Tax Department is not willing to say 22 to a business owner: Senator Squadron, if you use 23 this in your tavern, this is going to do a good job 24 for you. And, you still have to do all the things 25 you're supposed to do, but we're comfortable with 1 it. 2 And, so, we look forward to them continuing 3 that dialogue. 4 We look forward to putting those 5 recommendations forward, so that our members have 6 that, as well as other systems, that might help them 7 avoid this kind of problem. 8 SENATOR SQUADRON: And exactly right. 9 You know, being able to say, up front: Look, 10 I'm investing in something more. I'm doing 11 something, I believe in doing it right. 12 And that should mean something, I think is an 13 important piece here. 14 SCOTT WEXLER: And tax credits, some 15 discussion of the Panel. But we have even -- 16 haven't even approached it in that regard. 17 [Unintelligible] -- 18 SENATOR SQUADRON: [Unintelligible] -- 19 benefit well before you get to the tax credit. 20 I mean, the truth is, not to, you know, 21 because the State, we shouldn't, probably, negotiate 22 against ourselves. 23 [Laughter.] 24 SENATOR SQUADRON: There's the benefit of 25 having folks voluntarily get -- come into a system 1 that the State knows, is overwhelmingly more likely 2 to lead to compliance. 3 SCOTT WEXLER: And at no point has the 4 Department said to us: And if we certify these 5 systems, that will be the -- you know, the golden 6 check. 7 And -- but it will be -- it will be a -- it 8 will be symbolic of the types of things we're 9 looking for in compliant retailers. 10 Other ideas that we put forward, are a 11 separate account. 12 You know, if you're a lottery agent, you have 13 to have a separate account. And, on occasion, you 14 have to move the receipts from your regular account 15 to the lottery account. And, once a week, you know, 16 depending, the lottery sweeps your account. 17 We've suggested a separate, segregated 18 account as another positive step a business owner 19 could took -- so it can take -- so that the sales 20 tax isn't co-mingled. 21 From my perspective, I'm protecting the 22 business owner against him or herself. 23 You know, that money is sitting in that 24 account, while not having to make a payment for 25 two months, I might use it to make payroll, or I 1 might use it to pay for the repair that -- the 2 unexpected repair. 3 So, that's another idea that we've come up 4 with. 5 We're open to other ideas. 6 We believe that the vast majority of sales 7 tax vendors are honest, hard-working New Yorkers, 8 and could use help being compliant. 9 We've been strong advocates of this 10 [unintelligible] voluntary compliance. 11 I was glad to hear Director Manion talk about 12 that throughout her testimony this morning. 13 SENATOR SQUADRON: Thanks. 14 SENATOR MARCELLINO: Liz? 15 SENATOR KRUEGER: Thank you. 16 I'm sorry I ran out, but I read your 17 testimony, and then circled back. 18 All the doors lock in here. 19 You know that? 20 You have to work on that. You get trapped 21 out that side, and then out that side. 22 So, I think a lot of us have heard today, and 23 I commented earlier, that, you know, audits are very 24 expensive and very painful. 25 Do you have any experience in your own 1 association? 2 Do people who have actually gone down the 3 road of having a computerized type of point-of-sale 4 system, find themselves with less headaches when 5 they're dealing with Tax and Finances than those 6 businesses that are still in the, you know, manual 7 cash-and-carry, paper, books? 8 SCOTT WEXLER: I think the answer is yes. 9 But, I need to make sure that I share with 10 you, the fact that, for our members, who are all in 11 dependents -- we used to call them "mom and pops," 12 but we don't use that term anymore -- the 13 point-of-sale system sometimes becomes the -- the -- 14 and I'm lost for the term, but it's like the golden 15 answer, and it's not. 16 Depending on what reports you keep, depending 17 on what training you get -- forget about even any 18 fraudulent activity -- as Nonie well knows, the 19 Tax Department well knows, very frequently, 20 small-business owners get before the Tax Department 21 with a -- used point-of-sale system, thinking 22 they've got almost a painless examination. And the 23 records they've maintained don't meet the 24 Department's requirements. 25 Not because the Department didn't publish 1 them, but because the business owner, somewhere 2 between the sales presentation about the system they 3 were buying and the utilizing of the system, they 4 didn't understand everything they had to do. 5 So, yes, it's a tremendous solution. And, 6 they're not inexpensive. 7 I said, you know, they're three to 8 five thousand dollars to get anything that's useful. 9 Ten to fifteen thousand dollars before you get 10 anything that really will do the kinds of things. 11 But to your point, Senator, absolutely, we 12 encourage that kind of use of recordkeeping for our 13 members. 14 SENATOR KRUEGER: And what percentage of your 15 members do you think have made that shift already? 16 SCOTT WEXLER: It's probably less than half 17 of our members. Roughly, half of our members. 18 Now, again, our members, in the overall 19 industry, are the smaller members. But it shocks 20 me, how many times I see a member operating in a 21 methodology, including not using technology, that I 22 think is from days gone by. 23 SENATOR KRUEGER: And how many members do you 24 have -- 25 SCOTT WEXLER: We have about 3,000 members 1 statewide. 2 SENATOR KRUEGER: About 3,000 members. 3 Thank you very much. 4 SCOTT WEXLER: Thank you. 5 SENATOR MARCELLINO: Thank you for your 6 testimony. 7 Appreciate it. 8 And last, but not least, Jim Calvin, New York 9 State Association of Convenience Stores. He's the 10 president. 11 Come on down. 12 JAMS CALVIN: Chairman Marcellino, 13 Senator Krueger, thanks for the opportunity to 14 testify on behalf of our 1,600 member convenience 15 stores, all of which are registered sales tax 16 vendors. 17 I have to confess, that until I received the 18 notice of this hearing, I had never heard of 19 tax-zapper software. 20 SENATOR MARCELLINO: Neither had I. 21 JAMS CALVIN: And I was embarrassed. I -- 22 and I thought I should have been aware of this 23 fast-spreading, scandalous tax-cheating software. 24 So, quickly, I tried to get up to speed. And 25 I went on the IRS website, I went on the 1 Tax Department website, I couldn't find any 2 reference to automated sales suppression devices, or 3 tax-zappers. 4 I spoke to some of the suppliers, that are 5 members of ours, of cash registers in upstate 6 New York. They didn't know about it. 7 Talked to our leading chains of convenience 8 stores, and they did not know about it. 9 And I guess I was somewhat relieved to know 10 that I wasn't the only one in the dark, but at the 11 same time, I began to wonder: Why the sudden focus 12 on a previously obscure issue? 13 But, nevertheless, NYACS appreciates the 14 Committee shining a spotlight on this sales tax 15 administration concern. 16 As you examine this topic, I would caution 17 against starting from the assumption that all 18 cash-based retailers cheat on their sales taxes; nor 19 should you assume that all convenience stores are 20 primarily cash-based businesses. 21 For instance: Motor fuel accounts for 22 two-thirds of the total sales of the typical 23 convenience store that sells gas, and around 24 80 percent of those gas transactions are paid for 25 with plastic rather than cash. 1 Now, among our members, motor fuel and 2 cigarettes, combined, can account for as much as 3 three-quarters of total taxable sales. We prepay 4 the State most of the sales tax on gas and most of 5 the sales tax on cigarettes, hence there's not much 6 to be gained, monetarily, by trying to fudge your 7 sales tax records on those two high-volume products. 8 Now, I'm not so naive as to think that tax 9 cheating does not occur in the convenience store 10 trade, but I'm not aware of any such willful 11 activity among our retail membership. 12 In fact, over the past 20 years, NYACS' 13 members have taken a strong position against tax 14 evasion in New York, and that's because tax-dodging 15 competitors have cost our industry billions of 16 dollars in sales, crippling countless mom-and-pop 17 businesses. 18 I'm speaking of Native American enterprises, 19 which continue to sell enormous quantities of 20 cigarettes and gas to non-Indian customers, 21 tax-free, in violation of state tax law. 22 These outlets don't charge any New York State 23 sales tax whosoever, don't register as sales tax 24 vendors; and, thus, never have to worry about a 25 sales tax audit. 1 In our view, all retailers engaged in 2 commerce with New Yorkers should collect and remit 3 the applicable amount of sales tax, period. 4 Mistakes do happen, because the list of what 5 is and isn't taxable is so convoluted. But 6 deliberately underreporting taxable sales is unfair 7 to law-abiding businesses that play by the rules, 8 and it defrauds the state and local governments of 9 tax revenue. 10 To that end, NYACS would welcome legislation 11 making it illegal to knowingly possess, install, or 12 use any device designed to generate false sales tax 13 records. 14 It would also make sense to ban the 15 programming, marketing, and/or production of such 16 software. 17 However, we would respectfully ask you not to 18 allow tax-zapper concerns to be used to justify 19 legislation further expanding the Tax Department's 20 snooping powers, or legislation enabling the State 21 to electronically tap our bank accounts on a daily 22 basis to capture sales tax receipts. 23 We view those as overreactions, and would 24 penalize the vast majority of store operators who 25 dutifully comply with their tax obligations. 1 Over the past several years, the Legislature 2 has armed the Tax Department with hundreds of 3 additional audit positions and advanced auditing 4 tools to root out tax fraud. 5 They now have our bank account number, 6 routing number, credit card-processing account 7 number, and beer and lottery license numbers. 8 They know how much tobacco and beer and 9 motor fuel excise tax we collect, and how much of 10 those products we buy, because they force our 11 wholesalers to disclose it. 12 They've got us coming and going. 13 And, they cross-check, and they compare this 14 data with industry averages, in order to spot 15 deviations that may make a particular store a 16 candidate for audit. 17 Thus, retailers who cheat, whether manually 18 or electronically, through whatever means, can 19 expect to get caught, and should face the 20 consequences. 21 Once again, New York's convenience stores 22 appreciate the chance to speak with you today, and 23 look forward to continuing to work with the Senate 24 on issues of important -- importance to government 25 and business and consumers. 1 SENATOR MARCELLINO: I appreciate you coming 2 down. I appreciate your comments. 3 And I think you have just about -- you've 4 answered just about everything I had to talk about. 5 JAMS CALVIN: All right. 6 SENATOR MARCELLINO: Liz? 7 SENATOR KRUEGER: Thank you. 8 I also appreciate you testifying. 9 Actually, it's so interesting, because, I 10 confess, as you were testifying, I realized: All 11 right, the convenience stores, you're right, you're 12 a slightly different animal. 13 If gas, cigarettes, lottery, and beer are -- 14 all add up to a disproportionate amount of the sales 15 that take place at convenience stores, those, each, 16 already have a unique tracking. Right? 17 You're absolutely right, gas and cigarettes, 18 disproportionately, the taxes are collected before 19 they get to the retail outlet. 20 Lottery is a completely different animal, 21 which I have to believe the lottery system -- the 22 lottery agency is tracking correctly. 23 Does Tax and Finance even audit lottery? 24 I'm looking behind, and they're shaking their 25 head no. 1 And beer goes through, as other alcoholic, 2 completely different tracking system, although I 3 guess we do want to make sure that sales tax is 4 being collected on alcohol. 5 So, it's almost like your -- 6 You represent 1,600 stores? 7 JAMS CALVIN: There are a total, Senator, of 8 about 7,700 convenience stores across New York 9 State. 10 Our membership is about 1,600. 11 And, in reality, very few of our members are 12 in the five boroughs of New York City. 13 In New York City, only a very small 14 portion -- or, proportion of the convenience stores 15 and bodegas have gas. 16 So, it is a different dimension there, and I 17 would speculate that more of those businesses are 18 more cash-based than the statewide average. 19 SENATOR KRUEGER: So, almost, my questions 20 aren't for you, but perhaps for Tax and Finance at 21 another time. 22 Is there a recognition that there are 23 different kinds of business models in the state of 24 New York, that lend themselves, so to speak, or 25 don't lend themselves, to as much concern about tax 1 fraud? 2 NONI MANION: And it's true, because we have 3 the third-party information. And that's where we 4 would really like get at, because, even with any of 5 these zappers, with any point-of-sale systems, if 6 they don't put the information in, we're not going 7 to know about it. 8 So, we need that independent source to tell 9 us how much they have purchased, so we know how much 10 to expect that they sold. 11 SENATOR KRUEGER: Uh-huh. 12 NONI MANION: And, so, as Mr. Calvin said, 13 they do have a lot of controlled items. 14 We actually have a beautiful database that 15 identifies all of their fuel, cigarettes, alcohol 16 beverage, right there. And we look at it in their 17 return, to see, and referring to an analysis, and 18 find out who falls outside of the norm. And those 19 are the people that we audit. 20 And that's the direction in which we would 21 like to get -- 22 SENATOR MARCELLINO: Nonie, I would expect 23 that beauty is in the eye of the beholder. 24 [Laughter.] 25 SENATOR KRUEGER: All right. 1 So the good news is, Tax and Finance already 2 has so much information about the kinds of products 3 you sell, that, they might argue, it's not that hard 4 to find a problem there. 5 You, as representing these kinds of stores, 6 might argue, they're collecting way too much 7 information as it is, thank you very much. 8 But, you probably -- I don't know -- you -- 9 your type of members probably wouldn't find that 10 there was a whole new problem for them, if the State 11 went down this road of exploring how to, you know, 12 more easily catch the bad players without having to 13 do 35,000 more audits per year. 14 JAMS CALVIN: It would depend on the 15 specifics, Senator. 16 I think we're open-minded. But, at the same 17 time, I think, in our industry, which is dominated 18 by entrepreneurs, and they're very 19 independent-minded, there would be a fundamental 20 philosophical resistance to letting the State of 21 New York get into the cash register. 22 SENATOR KRUEGER: And just one last question, 23 and I'm sorry, I just don't know this. 24 So, are the stores actually owned by the 25 gas stations themselves; or there's, the gas-station 1 owner, and the store at the gas station? 2 JAMS CALVIN: There are many different 3 permutations. 4 Typically, the store -- the store and the gas 5 are either owned by or operated by the same 6 individual or company or partnership. But, there 7 are those locations where, if you've a store 8 operator, who leases out his gas operations to 9 someone else. 10 SENATOR MARCELLINO: Or vice versa. 11 JAMS CALVIN: Uh-huh. 12 SENATOR KRUEGER: That's right. 13 I currently have the only State Senate 14 district in the state of New York with zero gas 15 stations. 16 JAMS CALVIN: We've got to work on that. 17 SENATOR KRUEGER: We had one, and they left. 18 They closed down. That's it for us. 19 Thank you, Carl. 20 SENATOR MARCELLINO: Thanks very much. 21 JAMS CALVIN: Thank you for having me. 22 SENATOR MARCELLINO: Appreciate you coming 23 in. 24 And, that closes the hearing. 25 And I want to thank the Senators who 1 attended, Liz, and Senator Squadron, for their 2 participation. 3 Also, I would like to thank the camera people 4 here; 5 And, the people in the back who are keeping 6 us going: Debbie Kelleher, from my Committee, and, 7 Rob Parker, from our -- the Investigations 8 Committee; 9 And, the people who came in to testify. 10 We hope it was informative. 11 Certainly was to us. 12 Thank you, and, the meeting is adjourned. 13 SENATOR KRUEGER: Thank you. 14 SENATOR MARCELLINO: Thank you. 15 16 (Whereupon, at approximately 1:15 p.m, 17 the public hearing held before the New York State 18 Senate Standing Committee on Investigations and 19 Government Operations, concluded.) 20 ---oOo--- 21 22 23 24 25