States Targeting Sales & Use Tax Suppression Software Scofflaws

States Targeting Sales & Use Tax Suppression Software Scofflaws

On October 4, Governor Brown of California signed into law Assembly Bill No. 781 (see 2013 Bill Tracking CA A.B. 781 and 2013 Bill Text CA A.B. 781), which creates a new criminal offense relating to the purchase, installation, use, transfer, or sale of any “automated sales suppression device or zapper or phantom-ware” with the intent to defeat or evade the determination of the state’s sales or use taxes. California joins Texas, North Carolina, Connecticut, Illinois, and other states in enacting a law targeting automated sale suppression devices, zappers, or phantom-ware. 

The California bill is aimed at protecting the collection of the state’s sales, use, and other taxes:

“This bill would . . . provide that a person who purchases, installs, or uses in this state any automated sales suppression device or zapper or phantom-ware with the intent to defeat or evade the determination of an amount due or collected pursuant to those laws is guilty of a misdemeanor, and would provide that any person who, for commercial gain, sells, purchases, installs, transfers, or possesses in this state any automated sales suppression device or zapper or phantom-ware with the knowledge that the sole purpose of the device is to defeat or evade the determination of an amount due or collected is guilty of an offense punishable by a fine, imprisonment, or both, as specified. This bill would also provide that the person is liable for all taxes, interest, and penalties due as the result of the use of an automated sales suppression device or zapper or phantom-ware. By creating a new crime, this bill would impose a state-mandated local program.” [2013 Bill Text CA A.B. 781].

The California Bill adds new Sections 7153.6 and 55363.5 to the California Revenue and Taxation Code. Sections 7153.6 and 55363.5 provide that a violation of the law is punishable by a fine, imprisonment, or both and further provide that any person who uses an automated sales suppression device, zapper, or phantom-ware will also be liable for all taxes, interest, and penalties resulting from their use.

Sections 7153.6 and 55363.5 provide that a person found guilty of the offense can be imprisoned in a county jail for not more than one year, or pursuant to Section 1170 of the California Penal Code, can be imprisoned for 16 months or two or three years.

Under Sections 7153.6 and 55363.5,  the sale, installation, transfer, or possession of  three or fewer automated sales suppression devices or zappers or phantom-ware is punishable by a fine of not more than $5,000.  The sale, installation, transfer, or possession of more than three such devicesis punishable by a fine of not more than $10,000. [2013 Bill Text CA A.B. 781].

The new law does not apply to a corporation that possesses any automated sales suppression device or zapper or phantom-ware for the sole purpose of developing hardware or software to combat the evasion of taxes by the use of automated sales suppression devices or zappers or phantom-ware.

Under Sections 7153.6 and 55363.5, an “automated sales suppression device" or "zapper" is defined as “a software program carried on a memory stick or removable compact disc, accessed through an Internet link, or accessed through any other means, that falsifies the electronic records of electronic cash registers and other point-of-sale systems, including, but not limited to, transaction data and transaction reports.” [2013 Bill Text CA A.B. 781].

Sections 7153.6 and 55363.5 define an “electronic cash register" as “a device that keeps a register or supporting documents through the means of an electronic device or computer system designed to record transaction data for the purpose of computing, compiling, or processing retail sales transaction data in whatever manner.” [2013 Bill Text CA A.B. 781].

Under the law, "phantom-ware" is defined as “a hidden, preinstalled, or installed at a later time programming option embedded in the operating system of an electronic cash register or hardwired into the electronic cash register that can be used to create a virtual second till or may eliminate or manipulate transaction records that may or may not be preserved in digital formats to represent the true or manipulated record of transactions in the electronic cash register.” [2013 Bill Text CA A.B. 781].

"Transaction data," per Sections 7153.6 and 55363.5, “includes information regarding items purchased by a customer, the price for each item, a taxability determination for each item, a segregated tax amount for each of the taxed items, the amount of cash or credit tendered, the net amount returned to the customer in change, the date and time of the purchase, the name, address, and identification number of the vendor, and the receipt or invoice number of the transaction.” [2013 Bill Text CA A.B. 781].

As noted above, Texas, North Carolina, Connecticut, and other states have enacted similar laws. In July 2013, North Carolina enacted Senate Bill 465,2013 Bill Text NC S.B. 465, which makes it a crime to sell, purchase, install, transfer, possess, use, or access any automated sales suppression device, zapper, or phantom-ware. In June 2013, Texas enacted its anti-automated sales suppression device law, Senate Bill 529, 2013 Bill Text TX S.B. 529, which makes it a crime to knowingly sell, purchase, install, transfer, use, or possess an automated sales suppression device or phantom-ware. Last year, in June 2012, Connecticut enacted Public Act No. 12-135 [See 2012 Bill Text CT H.B. 5421], under which any person who willfully and knowingly sells, purchases, installs, transfers or possesses any automated sales suppression device or phantom-ware is subject to a fine, imprisonment, or both and is also liable for all taxes, penalties, and interest resulting from the sale, purchase, installation, transfer, or possession of an automated sales suppression device or phantom-ware and is also required to forfeit all profits resulting from the sale or use of an automated sales suppression device or phantom-ware.

Illinois enacted its law in August 2013 [see 2013 Bill Text IL H.B. 49]. Vermont enacted its law in May 2013 [see 2013 Bill Text VT H.B. 511]. Washington also enacted its law in May 2013 [see 2013 Bill Text WA S.B. 5715], and West Virginia enacted its law in April 2012 [2012 Bill Text WV S.B. 411].

Florida [2013 Bill Text FL S.B. 7126], Kentucky [2013 Bill Text KY H.B. 185], New York [2013 Bill Text NY A.B. 7420], have similar bills under consideration, and it can be anticipated that additional states will enact similar laws targeting automated sales suppression devices, zappers, and phantom-ware.

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For more information on the state sales taxes, with a focus on the state taxation of digital content and cloud services, please see in our bookstore the new publication, the Lexis State Tax Guide on Digital Content & Cloud Services, authored by Carolynn Iafrate Kranz.

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