PHOENIX – Saying some retailers are cheating, a proposed new state law would make it a crime to possess software or equipment that, in essence, can lie about the sales that they are making.
SB 1386 would make it a felony to purchase, install or use any “automated sales suppression device or service’’ with the intent of cheating the state. The offense carries a presumptive sentence of 18 months in state prison for a first offense.
Those found guilty also could face not only having to repay what they owe, with interest and penalties, but also fines of up to $100,000 – and $500,000 for corporate offenders.
But that pales in comparison to the estimated $350 million that Ed Greenberg, spokesman for the state Department of Revenue, says the National Conference of State Legislatures estimates Arizona loses every year to this kind of cheating. That’s close to one dollar out of every eight the state actually collects now.
Arizona technically does not have a “sales tax’’ which, at least on paper, is the responsibility of the purchaser, even though retailers collect it. Instead it has a “transaction privilege tax,’’ with the legal burden on sellers to collect the 5.6 percent state levy on all sales as well as any applicable local taxes.
All that is based on retailers accurately reporting their taxable sales. The frequency depends on the volume, with the taxes owed submitted with the reports.
In general, Greenberg said, the only thing the Department of Revenue gets and requires is the report submitted on a state-prepared form. But his agency is allowed to ask deeper questions and audit a company’s books and equipment if there is reason to suspect something is amiss.
That’s why the legislation targets what are known as “zappers’’ or “phantom ware,’’ devices and programs that can mask cheating.
“Sales suppression software is designed to enter a business’s point of sale system and delete and/or modify selected sales,’’ Greenberg explained.
It’s not complicated.
“You may purchase a $10 item,’’ he said. “It’s deleted and then it comes up (on the official store records) as a $2 item.’’
Meanwhile, the customers has paid the addition 45 cents in state sales tax on the $8 difference.
But the store pockets that rather than forwarding it to the state. And a cursory check by state tax auditors of the store’s books would detect no problem, showing only that $2 sale.
“I see this as a deterrent,’’ said Sen. David Farnsworth, R-Mesa, who is the sponsor of the legislation. He said that some businesses, perhaps looking for a way to boost the bottom line, “might think twice.’’
It’s not only the stiff penalties and the possibility of prison time.
The legislation gives half of any fines collected to the Department of Revenue to develop new “analytics,’’ essentially software programs designed to examine the sales tax returns of companies and alert auditors to those which appear to have anomalies that might indicate a tax cheat. That, in turn, could trigger auditors to go out and have a closer look, including into a company’s computer.
Greenberg said the state Tax Code gives his agency the authority to review the books and records of companies that are supposed to be collecting the sales tax.
And the other half of anything found goes to the Attorney General’s Office to prosecute tax fraud cases.
Greenberg said that legitimate businesses should have no problem with the legislation and the Department of Revenue ferreting out the things that allow businesses to cheat.
“It reduces the tax revenue collections and places more of a tax burden on our honest, law-abiding taxpayers of our state,’’ he said.
The measure is not yet set for a hearing.