In an effort to prevent tax evasion, the State of Texas enacted S.B. 529 which criminalizes the knowing sale, purchase, transfer, use, or possession of software that alters sales data. Nicknamed “zappers,” this type of software is uploaded onto USB drives or other devices capable of plugging into a cash register and modifying sales data. Since most point of sale systems are otherwise unalterable, some retailers use this software to falsify transaction data, enabling them to evade sales and income taxes by underreporting sales.
Typically, a retailer using a “zapper” first makes a sale and collects sales tax on the full sales price. Next, the retailer inserts a zapper into the cash register and accesses the transaction data recorded on the register. The software then either alters or completely erases sales data, resulting in a lower tax liability for the retailer. Afterwards, the retailer pulls the zapper out of the cash register, leaving no sign of tampering.
Not only do retailers manage to avoid paying their full tax liability, but zappers enable the retailer to still collect sales taxes on the full retail price from a customer. The register then reports a lower tax total to the state, and the retailer pays that lower total, keeping the remainder of the excess tax collected from the customer.
Small and medium sized businesses are generally the ones employing these devices, but in some zapper cases, the avoided taxable income has still been in the millions. In Detroit, for example, the owner of 12 restaurants was accused back in 2008 of hiding $20 million from the State of Michigan through the use of a zapper. Even with this level of tax evasion, critics allege that there is no way to enforce the law. Nonetheless, such critical positions have not stopped states like Texas from passing laws like S.B. 529 and making the offense punishable as a felony.
This law is just one part of the broadening and intensifying fight against sales tax evasion. Many states are enacting legislation to stop online retailers from avoiding collecting and remitting sales taxes on transactions with out-of-state customers. Also, Congress is in the process of deciding whether to pass the Marketplace Fairness Act, which would give states more power to collect sales taxes from online retailers. This bill in Texas, however, shows that sales tax evasion is not only an online issue, but a brick and mortar issue as well.
Click here to read the text of S.B. 529.