Crack Down on Tax Fraud

Summary of specific provisions

Section 1 adds section 195.22 to the penal law, creating a first degree offense for defrauding the government through an automated sales suppression device, defining automated sales suppression devices, and extending defrauding government in the first degree as a class D felony;

Section 2 adds subdivision 4 to section 105.10 of the penal law, expand- ing the definition of conspiracy in the fourth degree to include felony of defrauding government in the first degree;

Section 3 amends subparagraphs 7 and 8 of paragraph (a) in section 1801 of tax law and adds subparagraph 9, expanding the definition of tax fraud acts to include the use of automatic sales suppression devices.

Section 4 amends subparagraphs 7 and 8 of paragraph (a) of section 11-4002 of the administrative codes of the city of New York and adds subparagraph 9, expanding the definition of tax fraud acts to include the use of automatic sales suppression devices.

Section 5 states the effective date.

Legislative history

2017-18: S.4377 - Codes

Existing law

None.

Justification

For years, foreign countries with national sales taxes have struggled to combat technology that enables retailers to skim sales taxes and under report other tax liabilities (e.g. personal income tax, corporate income tax) by concealing from auditors their actual sales data. This technolo- gy, which includes automatic sales suppression devices, such as "zappers" and "phantom-ware," automatically suppresses digital sales figures recorded at electronic cash registers and Point of Sale systems.

It is difficult for auditors to detect the use of automated sales suppression devices through the traditional process of cross checking transaction documents because the technology conceals almost all traces of the digital manipulation. Countries such as Germany and Greece have required retailers to install technological countermeasures that make it easier for auditors to detect the use of automated sales suppression devices. In September 2010, the Canadian province of Quebec began requiring all restaurants to install in their electronic cash registers anti-sales suppression devices. This cost Quebec an estimated $425 million ($410 million U.S.) in 2007-2008. Richard T. Ainsworth, a Boston University school of Law tax professor and a leading expert on zappers and other automated sales suppression devices, estimates that New York has faced a loss of $1.7 billion annually due to these devices.

Because the United States lacks a national sales tax, there is no feder- al initiative to combat this tax fraud and most states are ill-prepared to deal with this issue. Nationwide, only a handful of people have been caught using this technology, including two in Michigan and one in Connecticut. Over 20 states have already enacted legislation to prohibit and criminalize automated sales suppression devices. Ainsworth has published several papers documenting the spread of zappers and phantom- ware in Quebec, Greece, Germany, the Netherlands and other European nations. Given that the first zappers were made in the United States and that this technology is widely used in the Canadian province just above of New York's northern border, it is imperative for the State to address this issue.

The legislation would establish prohibitions and penalties related to the manufacture, sale, purchase, or use of automated sales suppression technology, creation of conspiracy for those who defraud the government, and the liability of those who perpetrate tax fraud. Additionally, this legislation would increase tax revenue by over $1 billion annually.

Fiscal impacts

Estimates increased tax revenue as high as $1 billion annually.

Effective date

This act shall take effect on the first November next succeeding the date upon which it shall have become a law.