BILL ANALYSIS �
AB 781
Page 1
Date of Hearing: April 29, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 781 (Bocanegra) - As Amended: April 18, 2013
Majority vote. Fiscal committee.
SUBJECT : Sales and use taxes: fees: administration:
violations for noncompliance: sales suppression devices
SUMMARY : Provides 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, imprisonment, or both.
Specifically, this bill :
1)Specifies that a person who knowingly sells, purchases,
installs, transfers, possesses, or uses in this state any
automated sales suppression device, zapper, or phantom-ware is
guilty of an offense punishable by:
a) A fine of not more than $10,000;
b) Imprisonment in county jail for not more than one year,
or for 16 months, or two, or three years; or,
c) Both 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 "automated sales suppression device" or "zapper" as a
software program that falsifies the electronic records of
electronic cash registers and other point-of-sale systems,
including transaction data and transaction reports. These
devices may be carried on a memory stick or removable compact
disc, accessed through an internet link, or accessed through
other means.
4)Defines an "electronic cash register" as a device that keeps a
register or supporting documents through the means of an
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electronic device or computer system designed to record
transaction data for the purpose of computing, compiling, or
processing retail sales transaction data in whatever manner.
5)Defines "phantom-ware" as a hidden, preinstalled, 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.
6)Defines "transaction data" to include 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)Establishes the State Board of Equalization (BOE), which
administers sales and use taxes, excise taxes, special taxes,
and the state's fee programs. (California Constitution,
Article XIII, Section 17).
2)Makes it a misdemeanor for a person, required to make, render,
sign, or verify any report, to make a fraudulent return with
the intent of evading the determination of an amount due.
Each offense shall be punishable by a fine of at least $1,000
and not more than $5,000, or imprisonment of up to one year,
or both in the court's discretion. [Revenue & Taxation Code
(R&TC) Section 7152 through 7157].
3)Specifies that any person who violates the SUT Law 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
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discretion of the court. (R&TC Section 7153.5).
4)Provides that any person who knowingly or willfully files a
false return or report with the BOE, and any person who
refuses to permit the BOE or any of its authorized
representatives to make any inspection or examination, 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, punishable
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. (R&TC Section 55362).
5)Provides for the general administration and collection of
BOE-administered fees under the Fee Collection Procedures Law.
(R&TC Section 55001 et seq.).
FISCAL EFFECT : Based on BOE data for 2010, California's dining
and beverage industry reported taxable sales of $51.3 billion.
Using a 5% underreporting rate, California loses $214 million
annually due to these sales suppression devices. If enacted,
the BOE anticipates that these estimated losses will decrease.
However, the BOE has noted that the extent of the decrease is
unknown.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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
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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 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)The BOE, which is the sponsor of this bill, notes the
following in its staff analysis:
As the sponsors of this bill, the BOE Members believe that
California must be proactive and curtail the use of these
sales suppression devices. 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. The
Legislature has recognized, through its enactment of
criminal penalties for deliberate taxpayer fraud and
evasion, that criminal sanctions play an important role in
tax administration. Specifically, criminalizing and
punishing the sale, installation, and use of sales
suppression devices serve as a strong deterrent to
potential offenders.
3)Proponents of this measure state:
The California Retailers Association [CRA] is the only
statewide trade association representing all segments of
the retail industry including general merchandise,
department stores, mass merchandisers, fast food
restaurants, convenience stores, supermarkets and grocery
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stores, chain drug, and specialty retail such as auto,
vision, jewelry, hardware and home stores. CRA works on
behalf of California's retail industry, which currently
operates over 164,200 stores with sales in excess of $571
billion annually and employing 2,776,000 people - nearly
one fifth of California's total employment. The retail
industry in California represents one in every four jobs in
the State, a total of nearly 5 million jobs (2009), and
accounts for 17.8% of the State's GDP.
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.
4)Opponents of this measure state:
This legislation is absolute proof of the necessity of a
sentencing commission to examine California's penal
statutes and determine whether or not the sentencing
structure provides effective sanctions to prevent future
criminal conduct and punish those individuals who have
committed crimes. California can no longer afford
[piecemeal] sentence enhancements without considering the
need for acquiring, either through construction or out of
state housing, additional prison beds.
Today, the [California Department of Corrections and
Rehabilitation] houses 9,000 more inmates than allowed by
the United States District Court. The committee should
remain mindful of the fact that Coleman/Plata court has
ordered the Governor to provide a plan to reduce State
prison inmate population to 137,500 inmates by May 6. This
legislation, if approved, will increase the prison
population exponentially which could easily be
[interpreted] by the three federal judges as a rejection of
their April 11, 2013 order. This committee should require
this legislation provide a procedure to release an equal
number of inmates from State custody to make sure that
there is no net increase in inmate population to assure
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that there is no contempt order issued.
5)Committee Staff Comments:
a) Background: Zappers, automated suppression devices, and
phantom-ware . Software programs like zappers or
phantom-ware can be used to siphon cash from electronic
cash registers and cheat tax officials. These kinds of
devices and software illustrate the technological
advancement of an old fraud - skimming cash from the
register. According to Electronic Sales Suppression: A
Threat to Tax Revenues, the use of electronic sales
suppression devices has been steadily growing for more than
a decade. Modern cash registers in the retail sector
operate as comprehensive sales and accounting systems,
often using standard business software. These systems can
be manipulated to permit "skimming" of cash receipts just
as much as manual systems, but can facilitate far more
elaborate frauds once equipped with suppression software by
systematically reconstituting records matching the skimming
activity.
In the old days, before electronic registers became the
norm, this kind of work was much more difficult to
accomplish. Additionally, any discrepancies between sales
and cash would be easily detectable. However, advances in
technology have streamlined the way in which money is
skimmed from the cash register. Zapper programs can create
a virtual second cash register, simultaneously creating two
sets of books. The physical need to separate cash and
receipts is no longer needed, and the need for manual
recordkeeping is also eliminated.
b) The use of high tech devices . Phantom-ware and zapper
programs are considered to be a serious problem in Canada,
Germany, Brazil, Australia, Sweden, and the Netherlands.
(Richard Ainsworth, Massachusetts Zappers - Collecting the
Sales Tax that has Already Been Paid, Boston University
School of Law, Working Paper No. 09-28, 2009). However, in
2009, it was not yet considered to be a serious problem in
the United States (U.S.). At the time, only two cases had
been found in the U.S.; a $17 million skimming fraud at
Stew Leonard's dairy in Connecticut, and a $20 million
skimming fraud by the LaShish restaurant chain in Michigan.
Id. Steadily, the use of zapper and phantom-ware has
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increased. On April 23, 2013, the Assembly Committee on
Public Safety heard testimony from the BOE on the use of
these kinds of programs and devices. As of that date, the
BOE had found 20 different cases of zapper and phantom-ware
use, and six different types of devices.
On May 3, 2011, Georgia became the first state to take
action against zappers and phantom-ware. The Georgia law
made it a crime to willfully and knowingly sell, purchase,
install, transfer, or possess any automated sales
suppression device, zapper or phantom-ware. (Richard
Ainsworth, An American Look at Zappers, Boston University
School of Law, Working Paper No. 12-14, 2012). In 2012,
Utah, West Virginia, and Maine each passed similar
legislation. Id. One of the most compelling factors
pushing states to enact anti-zapper legislation is a report
of a successful sting operation for zappers. Id.
Specifically, the New York State Department of Taxation and
Finance opened up false restaurants and solicited venders
for new electronic cash registers. Out of the 24 venders,
approximately 70% to 80% offered sales suppression software
and devices that worked with their machines. Id.
c) Detection . Detecting zappers, phantom-ware and other
sales suppression devices is never easy, and depends, in
large part, on the software or device being used.
Phantom-ware programing is generally part of the operating
system for an electronic cash register. (Ainsworth,
Massachusetts Zapper). On the surface, phantom-ware is
difficult to detect. However, if use of the software is
suspected, a computer specialist may be able to find the
embedded program in the operating system. Zappers, on the
other hand, work a little differently. Unlike the
phantom-ware, which is generally imbedded into the
operating system, a zapper is usually found on an external
drive, removable CD, or is accessed through an internet
link, making its detection much more difficult. Id.
Clearly, detecting sales suppression devices and software
is incredibly difficult. This makes studying the scope of
the problem that much more challenging. However, as noted
earlier, some electronic cash register vendors actively
promote the use of sales suppression devices, making it
very likely that the use is widespread. As a way of
dealing with these vendors, AB 781 makes it a misdemeanor
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or felony for an individual to sell or possess such
devices.
6)Double-Referral . This bill was referred to the Assembly
Committee on Public Safety on April 23, 2013, and passed out
of the Committee on a vote of 6 to 0.
REGISTERED SUPPORT / OPPOSITION :
Support
State Board of Equalization (Sponsors)
California Retailers Association
American Federation of State, County, and Municipal Employees
Opposition
Taxpayers for Improving Public Safety
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098