AUGUSTA, Maine — Some Maine lawmakers are hoping to outlaw so-called zapper software that allows businesses to skim sales-tax revenues from customers while hiding it from tax officials.
The software is a modernized method for a business to manipulate its sales records so that only a portion of actual sales taxes are reported. Zappers have been increasingly problematic in European countries and Canada, where governments have reported massive losses of revenue.
Tax officials in Quebec Province recently reported $425 million in lost revenue from restaurants. An investigation by the Canadian government estimated $2.5 billion in losses nationwide.
More recently, states have adopted laws to prohibit the possession, use and manufacture of sales-suppression devices amid increasing concern from lawmakers. Some of that alarm has been sounded by Boston University Professor Richard Ainsworth and the nonpartisan National Conference of State Legislatures.
State officials aren’t sure whether sales-suppression software use is widespread in Maine, or whether Maine Revenue Services has the capacity to detect it and enforce a ban.
Zappers are often thumb or USB drives that plug into an electronic cash register. Because the units are so small, and sometimes built into the point-of-sale operating system, the software can be difficult to detect.
The software works by linking to a cash register system and modifying its sales records at the end of the day. An oft-cited example is that a customer will purchase a $5 cheeseburger and the software will modify the sale to become a $4 hamburger. Whatever amount that is deleted is pocketed by the business owner. The state loses out on the tax revenue because of unreported sales.
The issue was highlighted by the New York Times in 2009. The report focused on a 12-restaurant chain in Detroit that used a zapper to skim more than $20 million over four years.
The bill, LD 1764, is modeled after a law recently enacted by the Georgia Legislature. It is sponsored by Rep. Seth Berry, D-Bowdoinham, and co-sponsored by Rep. Gary Knight, R-Livermore Falls.
As written, the proposal would make the use of zappers a Class C crime.
Berry said Tuesday that while tax evasion is illegal, it is currently legal to use and possess the zapper software.
He acknowledged that Maine businesses might not be using sales-suppression software. However, he said, like bath salts, the problem could arrive in Maine.
“The losses will come not only in sales tax, but also in other taxes and business profits,” he said.
He added, “Let’s take action now and close the door on this emerging threat before it’s too late.”
The bill would also order Maine Revenue Services to study the use of sales-suppression software and to report its findings to the Legislature in 2013 and 2014.
In a memo to the Legislature’s Taxation Committee, Maine Revenue Services acknowledged that the agency lacks the capacity to detect and control zapper use.
The bill has bipartisan sponsorship. However, it will likely see some amendments following comments during Tuesday’s public hearing.
The Maine Restaurant Association testified in support of the bill during the public hearing. However, Ralph Pears, representing the group, said that some language in the bill could cast aspersions on Maine businesses.
The Maine Merchants Association testified neither for nor against the bill. Curtis Picard said his association’s board of directors wanted to support the measure but worried that enacting a law might not have the intended effect.
“We could not take a supportive stance with the bill as drafted, nor did we want to oppose the bill because we do not condone illegal behavior,” Picard said.
He said the MMA had seen no evidence that zappers, also known as phantom-ware, was being used in Maine.
The Maine Grocers Association had similar concerns.
Both groups indicated they could support the bill if it simply outlawed the use of sales-suppression software.
Berry and Knight said the bill would inevitably undergo amendments reflecting those concerns.
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