Don’t Get Zapped: Enforcement against Businesses That Use Sales Suppression Software Is on the Upswing

Jed M. Silversmith

State and federal authorities are ramping up civil and criminal enforcement efforts against merchants who use electronic sales suppression (“ESS”) software, also known as zappers and phantom-ware (collectively “zappers”). These devices are usually software patches that retailers apply to their Point of Sale (“POS”) software. POS software is designed to record every transaction, and its internal records usually cannot be altered by the retailer (or its employees). When zappers are installed (usually by a USB flash drive), some percentage of the business’ transactions are never recorded, thereby permanently altering corporate books and records from the outset. Given that zappers are usually only operational when a flash drive is plugged into the POS software, it is next to impossible for outside auditors to detect their use. Obviously, in a cash-intensive business, the use of a zapper makes recreating a paper trail impossible.

In the last few years, state governments have placed a greater emphasis on identifying merchants that use zappers. Their concern is real. In 2011, the province of Quebec began ordering certain retailers to install “black boxes,” which served as a state-controlled backup to the POS software. Boston University Professor Richard Ainsworth compared the sales data in Quebec from before and after black boxes were in effect. Extrapolating this data to the United States, he concluded that there has been a $21 billion annual loss for state taxing authorities, including a $1.8 billion shortfall for New York, $799 million shortfall for New Jersey, and $922 million shortfall for Pennsylvania.1

Authorities Are Fighting Back 

On August 9, 2018, the U.S. Attorney for the Northern District of Illinois indicted five Chicago-area restaurants for under-reporting their gross receipts with the aid of zappers.2 One restaurant owner also was prosecuted by the Illinois Department of Revenue.

Zapper enforcement has been on the upswing in Pennsylvania, too. On May 9, 2018, Governor Tom Wolf presented the Governor’s Award for Excellence to seven employees of the Pennsylvania Department of Revenue for their efforts in abating pervasive use of zappers throughout the Commonwealth.4 In his announcement, Governor Wolf stated that the team collected over six million dollars in unreported sales tax revenue, much of which was concealed using zappers.

During a May 16, 2018, presentation to the Pennsylvania Restaurant and Lodging Association, employees of the Department of Revenue provided additional statistics. The Department reported that, between 2014 and 2017, it conducted 176 audits and uncovered $78 million in unreported sales. It also reported that over 40 percent of the companies that it audited used some type of zapper software.

In 2016, Pennsylvania enacted Bill 84 (codified at 72 Pa. Cons. Stat. § 7268), which makes it a misdemeanor to “purchase[], install[] or use[]” zappers. Pennsylvania joined at least 26 other states that have enacted similar anti-zapper statutes.5 New York is considering Senate Bill S5852A, a similar law, which makes it a felony to knowingly “purchase, possess, install, update, maintain, upgrade, transfer, or use” a zapper. Washington state requires businesses found to have used this technology to adopt “…electronic monitoring of the business’s sales, by a method acceptable to the department [of Revenue],” if they want to remain in business. R.C.W. 82.32.290. See also R.C.W. 82.32.670.

Possession or use of zappers is per se evidence of tax fraud. Businesses that use these devices will be subject to heightened penalties. Because sales tax is collected by the merchant for the state, it is usually considered a trust fund tax (i.e., the merchant holds the tax on behalf of the state). In a number of jurisdictions, including New Jersey, New York, and Pennsylvania, individuals are personally liable if they fail to pay the company’s state sales tax.

These five Illinois cases against Chicago-area restaurants appear to be the first federal cases against businesses that use zappers.6 This is surprising, because businesses that evade state income taxes usually evade federal income taxes, as well. Just by way of example, if a Pennsylvania business “skims” $100,000 in cash receipts, it is failing to pay about $5,660 in Pennsylvania state sales tax. If the skim is used to fund a cash payroll, then the employer is also liable for $15,300 in FICA (i.e., Social Security and Medicare) taxes. State revenue departments and the Internal Revenue Service (“IRS”) share information—if an individual is audited by one governmental entity, the results are available to the other entity. Thus, individuals who use zappers and are caught by state taxing authorities may ultimately have to face the IRS.

Don’t Get Zapped! 

Businesses that use zappers do have an opportunity to come clean. The IRS and state authorities, including New Jersey, New York, and Pennsylvania, have voluntary disclosure programs. Individuals and businesses who enter the program are immunized from criminal prosecution and generally pay a penalty (usually less than the penalty assessed during civil audits).

If you are involved in operating a business that uses or used a zapper, you may wish to contact a lawyer. If you are a tax return preparer whose client uses or used a zapper, you should also determine whether you and/or your client needs counsel.

  1. See Tax-Zapping Software Costing States $21 Billion, Bloomberg, Sept. 15, 2017.
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  6. In 2016, the U.S. Attorney’s Office for the Western District of Washington prosecuted a defendant for wire fraud and conspiracy to defraud the government, based upon his sale of zapper software. See