In an effort to find extra revenue and cut down on tax dodging, several states across the nation have passed laws targeting the use of tax zappers, software that allows business owners to evade taxes by underreporting taxable revenues.

Tax zapping software is often used by businesses that deal primarily in cash. When installed on an electronic cash register, the software allows business owners to manipulate the amount of revenue recorded, essentially keeping two sets of books.

While creators of tax zapping software claim that the device leaves no electronic footprint, state and federal agencies can easily detect signs of zapper use through an electronic audit of a specific machine. When an audit is conducted, cash registers, hard drives, and other devices are typically confiscated an analyzed an sophisticated labs.

States are fighting back after losing a significant amount of revenue to tax zapping schemes. According one estimate, as many as 30% of cash-based businesses use tax zappers to avoid taxes. Heavy use of tax zappers in the restaurant industry, for example, cost California almost $3 billion in tax revenue in a single year, while New York estimates losses of almost $2 billion.

In a time of budget shortfalls, states facing billions in lost revenue are taking notice. So far Michigan, Florida, Georgia, Maine, Utah and West Virginia have passed laws targeting tax zappers. While cheating on taxes has never been legal, the new laws make it a felony for one to sell, possess, or use tax zapping software. In Michigan, for example, violating the new law comes with a one-year minimum jail sentence and harsh financial penalties.

Experts expect to see many more of these laws passed within the coming year. Five additional states have drafted bills targeting tax zappers, while at least three others are considering legislation. Soon, unethical entrepreneurs may be looking for a less risky way to put a few extra tax dollars into their own pockets.

-Andrew Bauer

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One Response to States Zap Tax Zappers

  1. Katharine Skinner says:

    I found this article really interesting because it sounds like it is potentially quite a pervasive problem, though it has not received much attention in the public eye. State legislation is a good first step in solving the issue, and it sounds like it deserves the attention of the legislature when the end result will be to increase tax revenue without actually having to increase taxes themselves. After doing some basic research on the subject, I agree with some commentators that, while legislative action is important, there may be a subsequent enforcement problem in actually finding these violations. As you mentioned, the software generally only works for cash transactions, and thus smaller, cash-heavy businesses are the ones that typically benefit from the programs. Auditors, especially in a strapped-for-resources economy, are likely to focus their efforts on larger companies, with larger tax implications, that will be too big to function on a cash-only basis, and thus probably would not be a user of the illegal software. Perhaps legislators should try to more aggressively seek out the creators of the software to prevent it from being made in the first place, or look to other preventative measures, like some foreign countries have done with tamper-proof registers.