Zappers and Phantom-Ware at the FTA: Are They Listening Now?

Abstract:     
When the Federation of Tax Administrators (FTA) held a national Compliance and Education Workshop in Louisville, Kentucky (February 25-27, 2001) one of the invited speakers was Kevin Pratt, Manager, Underground Economy, Canadian Customs and Revenue Authority (CCRA). He spoke on Zappers.

To the best of anyone's present recollection, this was the first time zappers had been discussed with a large group of state-level US tax compliance professionals. However, most of the information that the CCRA presented to the FTA in 2001 was not its own - it was derivative. Zapper investigations were not an in-house specialty of the CCRA (although they were a matter of considerable concern).

Zapper investigations had been the specialty of the Quebec Ministry of Revenue (MRQ), and it was from the MRQ that the CCRA learned about zappers. Until recently, not much has changed in US state-level tax enforcement with respect to Zapper and Phantom-ware investigations. But, the US attitude is just now beginning to change. Zappers were discussed at the October 2007 FTA/MTC Audit and Technology Workshop, at the March 2008 FTA Compliance Workshop, and also at the 2008 Annual Meeting of the FTA.

This paper presents the case that zappers, or more generally automated sales suppression devices are a global problem. Zappers are everywhere because they have entered the blood stream of the commercial market-place. They are frequently the element that makes or breaks a deal for a new ECR or POS system. Businesses large and small are regularly offered opportunities to invisibly skim cash receipts with this technology, and many are taking advantage of it. Tax administrations are responding, and the US needs to join in this effort.

More specifically, this paper follows the development of a specific type of tax fraud - skimming cash sales. It considers the traditional manual skimming of double tills, and then the three generations of automated sales suppression technology: (1) self-help phantom-ware, (2) factory-installed phantom-ware, and then (3) zappers. The paper then indicates that there are signs in the market-place that we have begun to see a fourth generation of this technology in (4) internationally developed, distributed, and customized zappers.

Number of Pages in PDF File: 24

Keywords: Zapper, phantom-ware, cash register, skimming, tax fraud, ECR, POS system

JEL Classification: H20, H26, H71, H00, K34, K42, O23, O33

Accepted Paper Series