Keeping two sets of books to avoid paying taxes is a tradition nearly as old as selling. “Zappers” offer but a modern twist. Also known as electronic sales-suppression software, they enable users to modify or erase transactions recorded by an electronic cash register or point-of-sale system. This allows the retailer to pocket the sales tax and also report lower income on their tax returns. Restaurants are regarded as the main offenders; the Canadian Restaurant and Food Services Association itself estimated 2009 volume of suppressed sales in its industry to be $2.4 billion. However, zappers are endemic across the retail sector, from mom-and-pop shops to major chains. A recent OECD report claimed they “result in massive tax loss globally.”
Though governments have obvious motives to eradicate zapping, few have much to show for their efforts. Quebec is a notable exception. After uncovering the extent of the problem in 1997, “they went ballistic,” says Richard Ainsworth, director of the graduate tax program at Boston University’s School of Law. Revenu Québec has ferreted out thousands of zapper cases since then; it recovered $238.5 million and racked up 2,200 convictions in fiscal 2011–12 alone. That’s partly owing to a 2011 decision to compel the province’s more than 19,000 restaurants to install sales recording modules (SRMs) in cash registers. SRMs independently record transactions and greatly simplify audits. “Quebec paid for all of these systems,” Ainsworth says. “The return on investment was nine months.”
The Canada Revenue Agency’s record pales by comparison. In 2006, it learned that InfoSpec Systems, which sells point-of-sale software to restaurants and retailers, also distributed complementary zappers, leading to its first enforcement actions. Last year the Richmond, B.C., company was convicted of fraud in connection with selling zappers to two Winnipeg restaurants. But that was overturned on appeal, mainly because CRA couldn’t prove the restaurants actually used the software. Unlike equipment used to counterfeit money or forge documents, there’s no prohibition on possessing or distributing zappers. Another CRA case against an InfoSpec customer, Sushi Man, fell apart after B.C. courts found the CRA unlawfully seized information.
In September, National Revenue Minister Kerry-Lynne Findlay unveiled stiffer penalties for convictions stemming from manufacturing, selling or using zappers. Vendors found possessing zappers can now be fined up to $5,000 for their first infraction. Ainsworth says Ottawa’s approach lacks creativity, and the penalties are too low. But perhaps the weakest link is CRA’s continued reliance on the courts—a venue where its record is mixed at best.