'Zapper' in crosshairs as taxman targets high-tech tax evasion

The federal government is hoping that new rules will help fight the shadowy problem of electronic tax evasion in restaurants and retail stores across the country.

Software known as a "zapper" orphantomwareallows businesses toerase or modify sales transaction records in electronic cash registers, which often run on commonly used operating systems like Microsoft Windows.

Zappers areusually housed on a USB key that can be plugged into the register while phantomware tends to be installed directly onsales terminal software.

Small enterprises, particularly restaurants, in Canada and many other countries have been known to use both types of technology to help skimcash from the register,robbing the government of tax revenue by making it appear they sold less than wasactually the case.

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The federal government is trying to crack down on the use of such software, saying that it "undermines the competitiveness of businesses that abide by the rules"and "offers an unfair advantage to those who fail to comply with Canada's tax laws."

New federal rules that came into force this January mean businesses or individuals caughtusing, developing or sellingzappers can facea fine of between $5,000 and$1 million. A criminal convictioncould result ina prison sentence of up to five years.

Growing problem

Electronic sales suppression has been a growing problem for more than a decade, according to a 2013 report by theOrganizationfor Economic Co-operation and Development (OECD). Investigations areunderway in a number of countries to determine whether sales-suppression software has become sophisticated enough to manipulate credit card and debit transactions as well as cash sales, theOECDsays.

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But it's hard to say just how prevalent the problem isor how much it's costing governments.

"Countries find it difficult to put a precise figure on what the risk is, because potentially, it is a very, very significant number," said Mark Johnson, a policy adviser with the OECD'scentre for tax policy. "Every country the OECDknows of,where governments have thought, 'OK,we're going to look at whether or not this risk is present,' have ultimately found out that it is."

One of the largest legal cases in the United States involving electronic sales suppression centred onTalalChahine, a restaurateur inDearborn, Mich.In the mid-2000s, the U.S. Department of Justice accusedChahineof skimming more than $20 million US from his restaurant business using sales-suppression software. The money was allegedly transferredvia cashiers cheques to Lebanon,whereChahineis believed to still beon the lam.

Countries find it difficult to put a precise figure on what the risk is, because potentially, it is a very, very significant number.-Mark Johnson, OECD policy analyst

Legal cases have cropped up north of the border as well. One of the earliest court casestook place inQuebecin 2000,whena judge granted an absolute discharge toStephaneMercier, who had admitted to devising zapper softwarein themid-1990s.

Merciertestified that he was employed at a restaurant at the timeand that his bosses had asked him if it would be possible to create such a program. He saidittook him less than two days to devise oneand that he waspaid$700 and given a dozen free meals for his trouble.

One of the most recent Canadian cases came to a close lastyear, when tworestaurantspleaded guilty in a Manitoba court to hiding more than $150,000 in sales by using zappers.

Search for solutions

Governmentshavetried a range ofapproaches in recent years to get a handle on the problem.In Portugal, software is now installed on sales terminals to encryptdata on transactions thathelps to verify their authenticity. In Sweden,the government has passed strict rules governing which functions a sales terminal must haveand which functions are forbidden.

InQuebec, the governmentmade it mandatory in 2011 for most restaurants to outfit cash registers with so-called sales-recordingmodules, or "black boxes,"which record data on sales transactions that businesses are then required to relay regularly to the provincialtax agency. The Quebec government saysthe black boxes helpedgenerate$160 million in additional tax revenue in the first year.

Businesses have to pay for the devices, but the province has offered subsidies to help them cover the cost.

The Canadian Restaurant andFoodservicesAssociation has criticized Quebec's approach, saying that it creates "ongoing costs and red tape for the province's restaurant owners, including the vast majority who are already complying with the law."

However, the province says the project has been so successful that it's being expanded. By 2015, Quebec bars will be required to install the devices, which the provincesays will help generate tensof millions of dollars more in tax revenueeach year.