Stealing cash from retail businesses has been a problem since their inception with roots of this type of fraud far preceding our current concepts of e-commerce and advanced point-of-sale (POS) systems. It’s possible your jurisdiction is exempt from this problem. Or is it? In this blog series, we’ll examine the current state of sales suppression, how it can be resolved, and how you can recoup the fraud perpetrated against your revenue agency and constituents.
Let’s not get ahead of ourselves. Is this really a problem for your jurisdiction? We can find an answer by reviewing current research and cases. Professor Richard Ainsworth is an esteemed academic at Boston University who has studied this problem for over a decade. He’s been instrumental in estimating the size of the problem, identifying key perpetration methods, and guiding legislation for many states.1 Ainsworth estimates that the United States is losing over $20 billion of tax revenue every year. Some states are estimating over $1 billion in annual loses in just one retail sector. In the “SALT effect,” 2 Brian Strahle has provided additional insight and the background on how one Canadian province encountered this issue and responded with an extensive, yet costly solution.
The state of New York conducted a sting operation in 2009 to understand in greater detail how sale suppression is accomplished.3 They were researching the embedded sales suppression features in POS systems known as Phantom-ware. Shockingly, 100% of the 23 POS system vendors explained how they include the capability and would provide the retailers training on how to do it. At this point, those vendors must include the capabilities to remain competitive.
Professor Ainsworth estimates that 30% of retail businesses are perpetrating sale suppression fraud. According to XDS research, 24 states have passed legislation against the possession or use of a Zapper, one of many techniques used to perpetrate sale suppression; additional states have legislation in committee. In the past 12 months, other states have completed successful investigations, including Washington, Connecticut, and Illinois.
This is also a problem of international proportions. Over the past ten years, many countries have attempted to address sales suppression, including Canada, Rwanda, Sweden, South Africa, Norway, and Germany. In 2013, the Organization for Economic Cooperation and Development (OECD) commissioned a study on how to address sales suppression in their 34 member countries.
So let’s summarize the magnitude of this problem:
- Nearly half the states in the US have passed legislation banning the use or possession of a Zapper;
- Several states have prosecuted sales suppression cases;
- Experts estimate that 30% of retail businesses suppress sales;
- An international study involving 34 countries has studied the problem;
- 100% of POS software vendors involved in a sting operation admitted to providing the ability and offered training on how to suppress sales.
How can you be sure you don’t have this issue in your jurisdiction? Given the magnitude of the issue and estimated losses, let’s ask that question differently: How can your jurisdiction not be impacted? Is it worth the risk to turn a blind eye on this fraudulent practice?
XDS isn’t here simply to point to the problem. We are your partner to help resolve it. In our next blog post, we’ll cover the full extent of suppression methods and how you can respond.
For more information, please contact us at info@xds.us.com
1 Richard Ainsworth’s scholarly overview on the international dimension: http://www.bu.edu/law/faculty-scholarship/working-paper-series/
2 Brian Strahle’s SALT effect report on zappers: http://www.leveragestateandlocaltax.com/2013/11/ignorance-may-not-be-bliss-when-it.html
3 Richard Ainsworth’s scholarly overview on Sales Suppression as a Service: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2445991
