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When will New York zap the tax zappers?

Tax suppression -- or "tax zapper" software --

Tax suppression -- or "tax zapper" software -- can be loaded on a memory stick, the silvery piece at left Credit: Courtesy of Richard Ainsworth

An expert on tax law says he’ll tell a State Senate committee in Albany on Monday that  some restaurants cheat the state out of about $1.7 billion a year by using computer devices called “tax zappers.”

At least four states have outlawed the devices and several more are considering doing so, says Richard Ainsworth, a key witness scheduled to speak at the hearing by the Standing Committee on Investigations and Government Operations.

Ainsworth is director of international government affairs for ADP Taxware Inc., a business-services company in New Hampshire, and an adjunct professor at Boston University.

He says he got the $1.7 billion estimate by examining data that showed more than $400 million in annual tax-zapper losses in Quebec, Canada, and extrapolating for New York spending habits and numbers of restaurants. The $1.7 billion figure represents about $87 per person in New York State.

The zappers work this way: Restaurants and others that do a significant number of cash transactions insert the device, often a memory stick, into their cash registers after a business day. Zapper software in the stick alters records of purchases. For example, revenue from the sale of a $20 meal is recorded as $15. A second set of books is produced to hide the fraud from auditors. This all lets businesses pocket some tax money already collected — and cheat taxpayers of millions of dollars.

State Sen. Liz Krueger (D-Manhattan) is sponsoring two bills to fight the scam. One would allocate $250,000 to study the problem statewide. The second would outlaw the manufacture, installation, sale and use of such devices, and set fines ranging from $2,000 for first offenders up to $500,000 for three-time offenders, and up to two years in prison in serious cases. An amnesty period would allow cheaters to pay up voluntarily when a law first takes effect.

It's a testament to the stealthiness of the devices that evidence of actual violations is hard to find. Ainsworth says Quebec officials found dozens of cases, but Krueger’s bill says in the United States, only a few people have been caught using zappers, including two in Michigan and one in Connecticut. A spokesman for the New York State Department of Taxation and Finance declined to discuss the issue ahead of Monday’s hearing, where an agency official is on the witness list. Testimony will also come from restaurant and retail-store trade groups.

Beyond banning zappers, Quebec began in 2010 to require restaurants to use sales recording modules. The devices, designed to be tamper-proof, record every transaction in an electronic cash register and generate a bill with a bar code for each. The aim is for provincial auditors to easily detect skimming.

Krueger says she supports such proactive measures, which have also been taken in Europe. For now, she is at a loss to explain why her anti-zapper legislation has gone nowhere in three years of trying. She modeled her legislation after that in Quebec, and laughs that despite her legislation’s failure in New York, other states call her for guidance on their own new laws. She speculates that some business owners would balk at having to buy devices -- reports say they cost about $500 -- to prove their books are clean.

Sen. Carl Marcellino (R-Syosset), who will preside over Monday’s hearing, has no position on the proposed legislation and is gathering information, committee director Debbie Peck Kelleher said.

Ainsworth estimates that laws against zappers might stop only 10 percent of cheaters. Still, 10 percent of $1.7 billion is $170 million -- serious money by any analysis. When cheaters steal from all taxpayers, including honest businesses, it’s time for cash-strapped New York to at least study the problem seriously. It’s time to zap the tax cheats.