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Taking hard look at businesses that use tax-cheating software; States begin to target double-entry 'zapper'

Cash-strapped state governments that are searching every crevice for money have found a new target: computer programs that enable businesses to keep two sets of books simply by plugging a flash drive into their cash registers.

The "tax zapper" software lets businesses, especially those that deal heavily in cash, underreport taxable sales and pocket money that should go to the government.

Five states -- Florida, Georgia, Maine, Utah and West Virginia -- have enacted laws cracking down on the programs, and about a dozen others are considering similar proposals. One expert says states are losing billions of dollars to the software.

"Maine, like all of the other states, has revenues that should be coming in but are not," said State Rep. Seth Berry, a Democrat who sponsored one of the measures. "It's our job to make sure that everyone's pulling their weight."

It's always been illegal to cheat on taxes, but the new laws are the first to specifically target tax zappers, making it illegal to possess or install any devices designed to falsify a cash register's electronic records.

The software, which sells for about $500, can be installed directly in registers or through small memory devices that plug into them.

The system works like this: During business hours, cashiers record the true sales and give customers accurate receipts. A log of real sales can also be stored electronically.

But after hours, a memory stick that contains the zapper is inserted to remove a given amount in sales from the day's receipts, say, $500. For each altered transaction, the zapper will also retotal and recalculate the receipt. That changes the tax due and produces a second set of books.

Tax law expert Richard T. Ainsworth, a lecturer at Boston University, estimates that 30 percent of the predominantly cash businesses in the nation are using tax zappers.

The programs are most likely to be found in businesses such as restaurants, where cash volumes are heavy, because transactions using credit or debit cards leave a paper trail. Even by nipping off just a few of the actual sales per day, businesses can reap a considerable illegal reward over time, Ainsworth said.

In some cases, restaurants end up with so much extra money that they dispose of it by buying produce or by paying employees in cash "under the table," Ainsworth said. In the latter case, employees sometimes show so little income that they qualify for welfare programs, another burden on states, he said.

There have been successful prosecutions in the United States. Last year in Detroit, a self-employed computer software salesman who sold a program called Journal Sales Remover was sentenced to a day in jail and two years of probation after pleading guilty to conspiracy to defraud the federal government. Authorities said the program was sold to Detroit-area strip clubs.

A $17 million tax fraud case involving zappers was also uncovered in Connecticut, where authorities found suitcases stuffed with cash while investigating a decadelong scheme at a supermarket chain.

In the restaurant industry alone in California, the loss from zappers was estimated at $2.8 billion three years ago, and in New York at $1.7 billion, Ainsworth said.

Honest businesses take a dim view of competitors who cheat and therefore get an unfair advantage, said Jeff Lenard of the National Association of Convenience Stores, whose constituent stores collect $162 billion per year in various taxes.

"It's about illegal businesses getting a disadvantage over legal businesses," Lenard said. "I don't see many law-abiding retailers who would object" to laws aimed at tax zappers.

In New York, a series of sting operations in the last couple of years revealed a scheme in which cash register vendors were invited to pitch their equipment to phony restaurants. In most cases, the vendors offered ways for the restaurants to underpay their taxes, said Max Behlke, a policy specialist for the National Conference of State Legislatures.

By Ainsworth's count, at least five other states -- New York, Tennessee, Michigan, Indiana and Oklahoma -- have drafted bills to address tax zappers. Massachusetts, Connecticut and Alabama are among others considering such measures, and Behlke expects more states to move in that direction.

Next year, he said, "we're going to have a huge inundation of these bills."