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Cyrus R. Vance, Jr.

District Attorney, New York County

For Immediate Release
June 03, 2015

DA VANCE RELEASES GRAND JURY REPORT ON SALES TAX EVASION BY CITY MERCHANTS

20 States Ban Sales Suppression Software; New York Does Not

Joint Op-Ed by DA Vance and Partnership for NYC’s President and CEO Kathryn Wylde in Today’s Wall Street Journal Details the Problem Affecting Restaurants, Small Business Owners

Manhattan District Attorney Cyrus R. Vance, Jr., today announced that a New York State Supreme Court Grand Jury has issued a report outlining a series of recommendations to prevent fraud related to sales suppression software programs. These programs – which include “Phantom-ware” and “Zappers” – can be used by businesses to automatically falsify financial records by giving the appearance of fewer and smaller transactions and, as a result, less taxable revenue. The Manhattan District Attorney’s Office initiated an undercover operation last year which revealed systematic abuse over the course of the months-long investigation. The evidence presented to the Grand Jury included several instances totaling an aggregate of more than $2 million in unreported sales tax. The Grand Jury’s report also recommended a series of reforms to prevent this type of fraud in the future, including making it a crime to manufacture, sell, purchase, possess, install, or use this software to defraud taxpayers. 

“Sales tax evasion is nothing new, but software that helps unscrupulous merchants commit fraud is,” said District Attorney Vance. “The use of electronic sales tax suppression software has cropped up in New York at a time when at least 20 other states have moved to ban it. The pressures on the City’s restaurant industry – skyrocketing rents, labor costs, food commodity pricing fluctuations, and intense competition – make it especially vulnerable. The goal of today’s report is to level the playing field for honest restaurant owners. Let’s keep New York’s restaurant cuisine innovative, not its bookkeeping methods.”

Today, most retailers use electronic hardware to track sales activity, including electronic cash registers and Point of Sale (“PoS”) systems, which record sales transactions through a computer and track what product is sold, the sale price, the quantity sold, and the total amount due, including sales tax. Sales tax suppression software programs, however, are designed to be used by business owners to manipulate sales records in various ways, including changing the type of transaction to make it appear as if the customer purchased a less expensive item, or eliminating the transaction from the records completely. The goal is to reduce the amount of revenue that appears on the books, and therefore, allow these businesses to underpay state and municipal sales taxes. These sales tax suppression devices come in several forms, including:

  • “Phantom-ware,” which is embedded into the operating system of electronic hardware.
  • “Zappers,” which are maintained on an external device such as a USB memory stick. 
  • Internet links, which allow merchants to remotely manipulate information off-premise. 

The Grand Jury empanelled in this case received evidence which included several recorded conversations between undercover investigators and a PoS system provider in which they discussed concealing true sales transactions through the use of a sales suppression system. The Grand Jury also received evidence about owners of eateries who concealed sales by deleting them or diverting them from their PoS system, thereby reducing their tax obligations. 

The Grand Jury received evidence related to several merchants who admitted to underreporting an aggregate of more than $2 million in sales tax principal by deleting or not reporting sales in the PoS system. Some software providers removed cash sales from customers’ PoS systems, in one instance, reducing one week of recorded cash sales by $10,000. In another instance, one month of recorded cash sales was reduced by over $100,000. The investigation into these cases is ongoing.

This type of fraudulent activity has a significant impact on New York City and State, where the combined sales tax rate is 8.875 percent. Merchants are required by law to collect these taxes in the proper amount from customers, and then remit the collected taxes to the State, along with a sales tax return. For every dollar removed from the sales records, the cheating merchant is able to keep the collected sales tax for themselves, rather than remitting the funds to the public coffers. This form of deceit forces City and State taxpayers to shoulder a heavier tax burden. Furthermore, honest business owners that fulfill their tax obligation are forced to compete against businesses participating in this scam, thereby creating an uneven playing field. 

As a result of the investigation, the Grand Jury recommended the following reforms in an effort to eliminate this type of fraudulent activity in New York State:

  • Enact a statute making it a felony to manufacture, create, sell, buy, possess, install maintain, enhance, or use software that deletes sales to evade taxes. This offense should apply to software that aids in the evasion of any type of tax -- including sales tax, personal income tax, corporation tax, city business tax, and withholding tax, and to any form of suppression software. The Grand Jury also recommends that the statute make it a felony to engage in the criminal activity as well as any attempt to do so. 
  • Create a felony-level conspiracy crime for those who conspire with merchants to defraud the government through suppression programs and devices. Individuals who collude to shirk tax obligations (including both software providers and merchants) through sales suppression software programs would be candidates for higher criminal penalties.
  • Amend Tax Law section 1801 and the New York City Administrative Code section 11-4002 to include a new “tax fraud act” targeting those who aim to commit evasion through the use of sales suppression software programs. This new provision should encompass the purchase, possession, installation, maintenance, or use of an automated sales suppression software program.
  • Enact a special monetary sanction requiring those convicted of technology-rooted tax crimes to reimburse the government for the cost of experts and equipment needed in the investigation and prosecution of such crimes. These cases often require computer specialists and forensic financial investigators with sophisticated analytical tools, not only to detect the presence of a suppression software program, but also to compute the amount of the evaded tax. 
  • Fund merchants with devices that must be used to record sales in a uniform and electronically accessible manner. Capturing the data in a uniform and tamper-resistant form should more than pay for itself by deterring tax fraud, as well as decrease the duration and the cost of an audit, and maximize the efficiency of auditors.  

Jacques Jiha, New York City Commissioner of Finance, said: “It is unfortunate that some people don’t realize that cheating the system hurts everybody – those who are law abiding and those who rely on how tax dollars contribute to our City. We will continue in our efforts with the Manhattan District Attorney’s Office to be vigilant in uncovering these types of crimes.”

Kathryn Wylde, President & CEO, the Partnership for New York City, said: “New York City businesses largely play by the rules when it comes to paying taxes, but even a few bad actors who skim from sales tax receipts can cause very big revenue losses to the city and state. We support the initiative of District Attorney Vance and his team to stop illicit practices that hurt honest businesses as well as the public at large.” 

The Manhattan District Attorney’s Office has sent the report to City and State elected officials and agencies, as well as private entities, asking for their support adopting the recommended reforms.

Today’s report follows other recent Grand Jury reports released by the Manhattan District Attorney’s Office aimed at reforming various industries and practices that have been historically subject to fraud and abuse, including the workers’ compensation insurance system, the City’s Real Property tax system, and programs providing assistance to minority- and women-owned businesses.  

Assistant District Attorney Gilda Mariani, Senior Investigative Counsel, presented the investigation to the Grand Jury, under the supervision of Assistant District Attorney Jodie Kane, Chief of the Rackets Bureau, and Executive Assistant District Attorney David Szuchman, Chief of the Investigation Division. 

Benjamin Rosenberg, General Counsel of the Manhattan District Attorney’s Office; Walter Alexander, Chief of the Investigation Bureau; Assistant District Attorney Amyjane Rettew, Counsel to the Investigation Division; and Paralegal Devon Rettew provided valuable assistance.