TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 3, 2015

Sales Suppression Software Is Taking A Bite Out Of NYC Taxes

Wall Street Journal op-ed, Waiter, There’s a Tax Dodge in My Soup, by Cyrus R. Vance Jr. (Manhattan District Attorney) & Kathryn Wylde (President, Partnership for New York City):

Sales suppression software in underhanded New York restaurants is lending a new meaning to prix fixe.

Independent eating and drinking establishments are the lifeblood of Manhattan. They infuse our neighborhoods with the character, artistry and economic activity that make people want to visit, live and work here. They also are one of the few remaining economic sectors driven by small- and family-run businesses, with 93% of New York City restaurants having fewer than 50 employees.

The ambitious men and women who run these establishments face many challenges, from skyrocketing rents, to volatile food commodity pricing, to new regulatory obligations. Now, according to a grand jury report released on Wednesday by the Manhattan District Attorney’s Office, they confront another emerging threat: unsavory competitors who use “sales suppression software” to underreport and underpay state and municipal taxes.

The software can be embedded into electronic cash registers and “point of sale” systems in a variety of ways, empowering unscrupulous merchants to automatically falsify their books and records. This makes it appear that their businesses engaged in fewer and smaller transactions—and thus had less revenue and profit—than they actually did. For example, a merchant can set the software to hide the restaurant’s transactions for a particular day, making it appear that the establishment was closed. Or the merchant can systematically reduce the recorded price that diners paid for particular menu items.

The result is an uneven playing field on which fraudsters who pocket diners’ sales-tax payments can offer lower food and beverage prices, and afford higher rents, than honest restaurants can. Moreover, state and municipal sales taxes fund schools, subways, sanitation and other services. When cheats fail to pay their fair share, the rest of the taxpayers, individuals and business owners have to make up the difference.

Skimming cash to avoid taxes is not new. In the past some merchants chose not to ring up certain transactions on their cash registers, or discarded certain paper receipts. Then, as now, these merchants hid their actual business records and presented tax authorities with a second set of books.

All of these practices are illegal. There is no legitimate reason why sales suppression software—which 20 other states have prohibited between 2011 and 2014—should be permitted here.

Among other recommendations, the grand jury report calls on lawmakers in Albany to criminalize the use, purchase, sale, creation or possession of software that deletes sales to evade taxes. We also recommend new conspiracy crimes for those—such as point-of-sale vendors and others—who collude with or coach merchants on how to defraud the government. 

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Comments

When I read the headline, I thought the article was describing suppression of actual sales. You know, like the NY Times and the LA Times have done by running editorials on their front pages.

Posted by: AMT buff | Jun 3, 2015 5:03:16 PM

Well said, AMT.

Posted by: Mike Petrik | Jun 4, 2015 8:21:50 AM