BILL ANALYSIS �
AB 781
Page 1
Date of Hearing: April 23, 2013
Counsel: Stella Choe
ASSEMBLY COMMITTEE ON PUBLIC SAFETY
Tom Ammiano, Chair
AB 781 (Bocanegra) - As Amended: April 18, 2013
SUMMARY : Provides that a person who knowingly sells, purchases,
installs, transfers, possesses, or uses any automated sales
suppression device, as specified, is guilty of either a
misdemeanor or a felony. Specifically, this bill :
1)Specifies that a person who knowingly sells, purchases,
installs, transfers, possesses, or uses any automated sales
suppression device, zapper or phantom-ware is guilty of an
offense punishable by a fine of not more than $10,000, by
imprisonment in county jail for not more than one year, or in
the county jail for 16 months, 2 years or 3 years, or by both
a fine and imprisonment.
2)States that any person who uses an automated sales suppression
device, zapper or phantom-ware shall be liable for all taxes,
interest, and penalties due as a result of the use of that
device.
3)Defines an "automated sales device" or a "zapper" as a
software program carried on a memory stick or removable
compact disc, accessed through an internet link, or accessed
through any other means, that falsifies the electronic records
of electronic cash registers and other point-of-sale systems,
including but not limited to, transaction data and transaction
reports.
4)Defines "phantom-ware" as a hidden, pre-installed, or
installed at a later time programming option embedded in the
operating system of an electronic cash register or hardwired
into the electronic cash register that can be used to create a
virtual second till or may eliminate or manipulate transaction
records that may or may not be preserved in digital formats to
represent the true or manipulated record of transactions in
the electronic cash register.
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5)Defines "transaction data" as including information regarding
items purchased by a customer, the price for each item, a
taxability determination for each item, a segregated tax
amount for each of the taxed items, the amount of cash or
credit tendered, the net amount returned to the customer in
change, the date and time of the purchase, the name, address,
and identification number of the vendor, and the receipt or
invoice number of the transaction.
EXISTING LAW :
1)Provides that all property is taxable unless otherwise
provided by the California Constitution or the laws of the
United States. (Cal. Const., Art. XIII, sec. 1.)
2)Establishes the State Board of Equalization (BOE) which
administers sales and use taxes, excise taxes, special taxes,
and the state's fee programs. (Cal. Const., Art. XIII, sec.
17.)
3)States that it is a misdemeanor for any person required to
make, render, sign, or verify any report, who makes any false
or fraudulent return, with intent to defeat or evade the
determination of an amount due required by law to be made.
(Revenue and Taxation Code Section 7152(a).]
4)Provides that a violation of the requirements set forth in the
Revenue and Taxation Code related to sales and use taxes is a
misdemeanor, and each offense punishable by a fine of not less
than $1,000 and not more than $5,000, or imprisonment not
exceeding one year in the county jail, or both the fine and
imprisonment in the discretion of the court. (Revenue and
Taxation Code Section 7153.)
5)Specifies that any person who violates the requirements set
forth in the Revenue and Taxation Code with the intent to
defeat or evade the reporting, assessment, or payment of a tax
or an amount due is guilty of a felony when the amount of
unreported tax liability aggregates $25,000 or more in any
12-consecutive-month period. Each offense shall be punished
by a fine of not less than $5,000 and not more than $20,000,
or imprisonment for 16 months, two years, or three years, or
both the fine and imprisonment in the discretion of the court.
(Revenue and Taxation Code Section 7153.5.)
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6)Provides that any person who knowingly or willfully files a
false return or report with BOE, and any person who refuses to
permit the BOE or any of its authorized representatives to
make any inspection or examination for which provision is made
in this part, or who fails to keep any records prescribed by
the BOE, or who fails to preserve the records for the
inspection of the BOE for the time that the BOE deems
necessary, or who alters, cancels, or obliterates entries in
the records for the purpose of falsifying the records, is
guilty of a misdemeanor and shall be punished by a fine of not
less than $100 or more than $1,000, by imprisonment in the
county jail for not less than one month or more than six
months, or by both. (Revenue and Taxation Code Section
55362.)
7)Specifies that any person who willfully evades or attempts in
any manner to evade or defeat the payment of the fee imposed
by the BOE is guilty of a felony punishable by imprisonment in
the county jail for 16 months, two, or three years and a fine
of not more than $5,000. (Revenue and Taxation Code Section
55363.)
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Statement : According to the author, "California's
tax system is based on the principal of voluntary compliance.
Most taxpayers report tax liability to appropriate agencies
and generally comply with California tax law. However, there
are those who will try to evade paying their taxes. Such
evasion takes the form of failing to report sales, keeping two
sets of books, or even filing false tax returns. Newer and
more sophisticated products like automated sales suppression
devices, zappers, and phantom software have made this process
much easier and faster to accomplish. In general, these
devices electronically and systematically conceal and remove
sale transactions from recordkeeping systems. The use of
these modern devices also makes it much more difficult for
auditors to detect fraud.
"The Board of Equalization has estimated that California loses
$214 million in annual sales tax revenue due to these kinds of
devices. Not only do these kinds of devices place a burden on
state and local governments, they also place a burden on
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honest and hardworking business owners who pay and collect
taxes. A business owner that suppresses sales is able to
reduce the amount of income tax paid, and the amount of sales
tax collected. This provides a huge competitive disadvantage
for honest taxpayers."
"Making things worse is the fact that these kinds of devices
and software are incredibly difficult to detect. Even when an
audit is conducted, there are no guarantees of finding
criminal activity. AB 781 addresses this problem by
criminalizing not only the use, but the sale and possession of
these devices and software. Instead of simply going after the
user, this bill also goes after the seller and developer."
2)Background on "Zappers" : "Thanks to a software program
called a zapper, even technologically illiterate restaurant
and store owners can siphon cash from computer cash registers
and cheat tax officials.
"While zappers are most likely to be used by medium and small
businesses, the take is anything but small change. A 12-store
restaurant chain in Detroit used a zapper to skim more than
$20 million over four years, federal prosecutors say.
"Zappers - also known as automated sales suppression devices -
are a new twist on an old fraud. 'The technology is new and
getting newer, but the concept is as old as having two sets of
books,' said Verenda Smith of the Federation of Tax
Administrators, the association of state tax administrators.
"Zappers alter the electronic sales records in a cash register.
To satisfy tax collectors, the tally of food orders, for
example, must match the register's final cash total. To hide
the removal of cash from the till, a crooked business owner
has to erase the record of food orders equal to the amount of
cash taken; otherwise, the imbalance is obvious to any
auditor.
"With paper, one keeps two sets of books. Or throws away the
paper receipts. Because cash registers make automated
records, hiding the theft requires getting into the machine's
memory and changing that record. With no physical paper
trail, it is easier to hide tampering. And it is easiest for
businesses that handle untraceable cash, like restaurants,
grocery stores and hair salons.
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"The more sophisticated zappers are easy to use, according to
several experts. A dialogue box, which shows the day's tally,
pops up on the register's screen.
"In a second dialogue box, the thief chooses to take a dollar
amount or percentage of the till. The program then calculates
which orders to erase to get close to the amount of cash the
person wants to remove. Then it suggests how much cash to
take, and it erases the entries from the books and a
corresponding amount in orders, so the register balances."
[Furchgott, "With Software, Till Tampering Is Hard to Find,"
New York Times (Aug. 29, 2008).]
3)"Wobblers" : This bill creates an alternative
misdemeanor/felony crime, often called "wobblers." This gives
the prosecutor discretion to charge a defendant with either a
misdemeanor or a felony. [Penal Code Section 17(b)(4).] Even
if the prosecutor decides to file the charge as a felony, the
court has the discretion to reduce the charge to a misdemeanor
at the preliminary hearing. [Penal Code Section 17(b)(5).]
Reduction of a felony to a misdemeanor can be done on the
court's own motion, or on that of defense counsel.
Legislative intent behind allowing courts to reduce certain
felonies to misdemeanors was to unburden superior courts from
cases that were likely to be given misdemeanor sentences,
saving time by eliminating unnecessary felony prosecutions,
and encouraging guilty pleas because of reduced sentencing
exposure. [Henry v. DMV (1972) 25 Cal.App.3d 649, 553.]
4)Argument in Support :
a) The State Board of Equalization , the sponsor of this
bill, writes, ". . . [T]his bill makes it a crime to
knowingly sell, purchase, install, transfer or possess
software programs that falsify reported sales under
specified BOE tax and fee programs. As proposed to be
amended, AB 781 makes the crime punishable by a fine up to
$10,000 and/or three years imprisonment.
"Sophisticated Tax Fraud. The BOE has recently become
aware of an electronic method to skim sales that allows
retailers to conceal or remove sales transactions from
recordkeeping systems and underreport their tax or fee
liabilities. When retailers use this technology, detecting
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understated sales in tax or fee audits is difficult.
"Unfair Competitive Advantage. Use of this technology not
only defrauds the state, but provides users an unfair
competitive advantage over taxpayers who comply with the
law and pay their fair share of taxes and fees.
Accordingly, the BOE Members believe that California must
be proactive and curtail the use of these sales suppression
devices.
"No Legitimate Use of this Software. Current law imposes
criminal penalties for deliberate taxpayer fraud and
evasion and criminal sanctions play an important role in
tax administration. Specifically criminalizing and
punishing the transfer, installation, and use of sales
suppression devices serves as a strong deterrent to
potential offenders."
b) According to the California Retailers Association (CRA),
"CRA's membership operates in compliance with the state's
tax laws. Devices such as 'the zapper' that enable
businesses to manipulate their sales records in order to
evade paying taxes put our members, who are acting in
accordance with the law, at a competitive disadvantage. AB
781 proposes an important deterrent that would level the
playing field for our members."
5)Related Legislation : AB 576 (V. Manuel Perez) establishes a
pilot program to create the "Centralized Intelligence
Partnership" consisting of the Employment Development
Department, Franchise Tax Board, and the BOE to collaborate in
combating those engaged in the underground economy. AB 576 is
pending hearing by the Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
State Board of Equalization (Sponsor)
American Federation of State, County and Municipal Employees,
AFL-CIO
California Retailers Association
Opposition
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Taxpayers for Improving Public Safety
Analysis Prepared by : Stella Choe / PUB. S. / (916) 319-3744