The news broke in mid December 2008 - a provincial newspaper reported on its front page that an established point-of-sale software developer InfoSpec Systems, had been implicated by Canada Revenue Agency (CRA) in enabling tax evasion by manufacturing and making available to its customers so called “sales supression software” also known as “a zapper” (“Cooking the Books”, Vancouver Sun, December 11, 2008) . The Richmond, BC-based InfoSpec Systems has been developing and selling POS software under the market name Profitek since 1985.
The news sent shock down the spines of thousands of Profitek’s customers and resellers world-wide. According to the news release, four local restaurant owners were chanrged with 25 counts under the Federal Income Tax Act with hiding for the tax purposes over $3.8 million–worth of sales. The search warrants were executed in the head offices of Infospec Systems with seizing the client list, software code, sales notebooks, computer files and other documents.
It is obvious what is coming next: whether or not the CRA’s allegations regarding InfoSpec’s involvement in maufacturing the “zappers” are proved in the court of law, the CRA will perform swiping and, perhaps, potetntially devastating audits on as many Profitek’s customers as they can. With reported 5000 inspectors involved into the investigation there may be quite a few retail businesses receiving the dreaded letter or phone call around this Christmas.
What Are the Zappers
Wikipedia defines a “zapper” as: “An automated sales suppression device or zapper is a software that falsifies the electronic records of point of sale (POS) systems for the purpose of tax evasion.”
In plain English it means the following. In a software POS application all business data: the transactions, customer info, sales records etc. are kept in some sort of a database: a computer file (or a set of such) which allows organizing data for the purpose using it in intelligent way.
Most of the retailers collect taxes: local, federal, state etc., which they are to report and submit to the authorities. The collected taxes are recorded as part of the transaction. The cheating idea goes like that: if I can hide some sales transactions from the audit, I am able to under-report and therefore pocket the collected taxes.
The scam is not new. Some crafty technicians were able to alter sales data even in the old electronic cash registers, which were more difficult to tamper with. It was elaborate process prone to all kinds of flaws and easily detectable by a trained tax auditor. Nevertheless it had been popular with some unsavory retailers.
With data now conveniently located in a database on the computer’s hard disk, it is much simpler to write an intelligent computer program called a “zapper”. Such a program would automatically detect the most-convenient-to-erase sales records (normally, cash-only transactions) and balance the end-of-day report to hide the missing data.
Of course, not every POS program is vulnerable to tampering. Many have built-in tamper-proof features, e.g. Dynamics RMS keeps a binary image of each receipt it produces including the daily Z-Reports, which makes it much more difficult to alter data.
However, no protection is good enough if the very developer of the software decides to illegally “zap” the sales transactions through a “back door”.
World-Wide Problem
The problem is old and world-wide. According to an article in New Work Times (Aug 29, 2008), the zapper programs have been found not only in North America, but in Germany, Sweden, Brazil, Australia, France and the Netherlands.
In the Canadian Province of Quebec alone since 1977 the revenue agency had carried 713 searches and busted many zapper programs, including some in the 39-restaurnat chain Nickels, created by the singer Celine Dion. The Dutch equivalanet of the I.R.S. followed a customer zapper maker’s list to 1,200 stores.
In 1993 the owner of Stew Leonard’s Dairy in the United States was convicted of skimming over $17 million over 10 years. In the Detroit case in 2006 the I.R.S. alleged that the owner of 12 Lebanese restaurants had used a zapper to hide over $20 million in cash. The money hasn’t been recovered as it was sent to Lebanon in cashier’s checks in support of a terrorist organization Hezbollah. The businessman was indicted but never apprehended as he became fugitive in Lebanon.
Lessons Learned
Some countries voiced for a legislation requiring software vendors get their system certified with the tax authorities. For example, the Germany’s Minister of Finance demanded that a “control chip” must be installed at each cash store. Though such legislation may certainly be useful, it may also add overhead and increase the cost of retail operations, causing higher consumer prices - a bad idea during the economic slowdown. But there are few things an observant retailer should keep in mind:
- If you have been using zappers in your retail operations, it’s not too late to come forward. In the recent article in National Post the author reminds the readers that tax evasion is a serious criminal offence. In Canada, CRA offers the Voluntary Disclosure Program which promises no penalties or prosecution to those who chose to come forward. Similar programs have been offered by I.R.S. in the USA
- Purchase the POS software from a reputable vendor. Choosing wrong may not only lead to absence of the support and upgrades in the future, but also open doors to the unwanted audits and unnecessary harassment from the tax authorities, even if your organization is not involved in tax scheming.
- Don’t buy on price alone – cheap software and hardware have no place in the business environment. Remember that it is a investment – not a holiday gift, therefore the business systems should not be purchased at Best Buy. Carefully check out the software and hardware capabilities, warranties, available support options, customers references etc. before making the desicision.
- Consider contacting your local or national elected legislation representative in order to introduce a law requiring certification of the POS systems similar to PCI standards in credit card processing.
