New federal legislation is now in place to punish users of electronic sales suppression software.
The federal government is getting tough with businesses that use electronic sales suppression (ESS) software (commonly called “zappers”) to delete or modify point-of-sale (POS) transactions for the purpose of evading taxes. Effective January 1, 2014, zapper users will, of course, not only have to pay the unremitted taxes plus interest but will also face substantial fines and even imprisonment if they manufacture, sell or possess these devices. These sanctions have been introduced through amendments to the Excise Tax Act and the Income Tax Act.
The Old Days
The old cash register system was fairly simple: it recorded sales in five or six basic categories as well as any applicable taxes and produced a summary for bookkeeping purposes. At the end of the day, the cash in the till was expected to equal the total dollar amount of the sales. If sales were not recorded, it was easy to pocket the funds and no one would be the wiser. This has always been a concern of retailers since they could never be certain that employees had entered all sales.
Then Along Came POS
The advent of computerized POS systems with bar code scanners and radio-frequency identification (RFID) tags was a blessing for most retailers because the system permitted:
- accurate recording of overall sales as well as the ability to categorize the type of sale
- automatic breakdown of the required HST/GST and PST
- the use of sales data to re-order items as required (i.e., inventory management)
- better security since all individuals using the cash register were required to log on when entering the system
- the reduction of labour-intensive data entry by linking sales transactions directly to the accounting software
- the reduction of cash or inventory theft by employees
The Zapper Facilitates Tax Evasion
The introduction of POS systems made it difficult to skim money from the till because all transactions were recorded within the system. The zapper was developed to falsify the electronic records of a POS system in order to evade paying not only income tax but the various sales taxes. The zapper software program is temporarily introduced into the POS system from a USB flash drive to modify records so that fewer transactions are recorded than have actually been processed. The use of the USB flash drive means the program can be removed from the computer without leaving any trace for the auditor to find.
Tax evasion by using zappers is a worldwide problem.
An International Problem
So extensive is the use of zappers that the Organization for Economic Cooperation and Development (OECD), of which Canada is a member, has been working with member nations to determine the
potential loss to economies and develop procedures to reduce the loss to government coffers. The
OECD produced a report entitled Electronic Sales Suppression: A Threat to Tax Revenues in 2013. (http://www.oecd.org/general/searchresults/?q=electronic%20sales%20suppression) The Canada
Revenue Agency has more than 5,000 employees dedicated to finding unreported income and ensuring
the appropriate taxes have been remitted.
For those taxpayers that may have interfered with their POS, CRA advises that they may wish to consider coming forward with full disclosure now, before any investigation of their business is started. It would be advisable to seek the advice of a tax advisor familiar with the workings of the voluntary disclosure process
to ensure that the requirements are met. Expert assistance could reduce or eliminate the penalties or prosecution.
The new legislation has created both administrative and criminal penalties. Anyone found in possession of, or using, a zapper will be fined $5,000 for the first infraction; subsequent infractions will bring a $50,000 fine. Any person or company that manufactures, develops or makes a zapper available for use will be fined $10,000 for the first infraction and $100,000 for any subsequent infraction. A summary criminal conviction could bring a fine of not less than $10,000 and not more than $500,000 and/or not more than two years in prison. Conviction by indictment could bring a fine of not less than $50,000 and not more than $1 million and/or imprisonment for not more than five years.
In rare circumstances the vendor may be unaware a zapper is being used on the company’s POS system. Penalties will be avoided if the vendor establishes that reasonable prudence was exercised to prevent the use of the zapper (e.g., by having the system examined by an expert).
Zappers Do Not Pay Off
As of January 1, 2014, businesses are on notice that CRA will not tolerate electronic manipulation of POS systems to evade the payment of HST/GST and PST, corporate or personal income taxes. The cost of paying past taxes, penalties, fines and the time and money spent to defend a defenceless position will dwarf the dollars squeezed out of the business by trying to avoid paying the fair share of taxes due.
The preceding article is reprinted from the April 2014 newsletter Business Matters with the permission of the Canadian Institute of Chartered Accountants. Business Matters is a bi-monthly newsletter, the full version of which can be obtained on request.
This post deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this letter, no individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.