Washington’s 'Cutting-Edge' Technology Solution to Combating Sales Tax Fraud: Real-Time Data (Now), Real-Time Remittance in the Future

94 State Tax Notes 717, Forthcoming

17 Pages Posted: 13 May 2020

See all articles by Richard Thompson Ainsworth

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Robert Chicoine

Independent

Andrew Leahey

Independent

Sunder Gee

affiliation not provided to SSRN

Date Written: April 19, 2020

Abstract

Globally, consumption tax compliance (value added tax and retail sales tax) has gone digital – digital invoices are becoming mandatory, centralized monitoring of transactions and tax payments are increasingly common, and artificial intelligence is assessing fraud risks in real-time. When tax is collected, it is increasingly being remitted in near-real-time. This is the trajectory for the modern retail sales tax (RST) imposed by most states in the US. While this may appear to be revolutionary to the average American, it is a well-worn path among global nations using the value added tax (VAT). The RST will eventually be following suit. Washington has taken the first step on this journey with the help and cooperation of a small business owner who admitted to using an Electronic Sales Suppression (ESS) device when operating a highly regarded Asian restaurant in Seattle.

To address sophisticated tax fraud in the digital age, the Washington State Legislature commissioned a world-wide study, conducted by Gartner, Inc. was delivered April 22, 2019, to the Washington Department of Revenue (DOR) which in turn “... completed [its] review of relevant research into technology trends; Point of Sales (POS) solutions, the ecosystem of integrated retail software solutions, cloud technologies, [and] other underpinning technologies ...” The Gartner research effort was practical, market-driven, and encapsulated in a set of “... scenarios represent[ing] the full set of reasonable solutions for DOR’s consideration, ...”

Gartner’s scenarios in the commissioned study were distilled to four. In each instance the scenarios were numbered, characterized with a single word, differentiated by their primary focus, and then made more concrete by identifying (what Gartner considered to be) a representative country for each scenario.

• Alternative #1: Foundational – Internal Focus (“Like UK”) (more properly Japan)

• Alternative #2: Targeted – External Focus (“Like Netherlands”)

• Alternative #3: Broad – External Focus (“Like Belgium”)

• Alternative #4: Cutting Edge – External Focus (“Like Fiji”)

Unfortunately, the report has major deficiencies. Notably, it makes no reference to an ongoing pilot project conducted by the DOR as a result of a plea agreement in the State of Washington v. Wong, that initially followed an Gartner’s Alternative #2 approach, and then shifted to Gartner’s Alternative #4 to improve data monitoring scope and accuracy. This paper largely corrects the focus and the conclusions of the Gartner report, which (at some cost) completely missed an opportunity to contribute substantively to this field of endeavor.

The State of Washington’s pilot program on preventive technology for monitor electronic sale suppression is extraordinary, both in its design and in its implementation. As pilot programs go, this is a uniquely marketplace-driven effort controlled by self-interest and achievement not by fiat. This is not a top-down pilot. It is a DOR hands-off, but outcome-controlled effort that forces the parties (POS providers, third-party security firms, and businesses/taxpayers) to explore the data security options that promise to counter suppression, and select the best.

For example, there is no POS manufacturer or standardized file format, no third-party provider of security systems recommended or even suggested by the DOR (not in person, in regulation, nor on a DOR web site). The desired outcome is very clear, but the means each taxpayer will employ to achieve that outcome is not dictated. It is entirely up to the taxpayer to find an acceptable solution, pay for it, present it to the DOR and then convince the authority that this solution solves sales suppression, as the DOR sees it.

There is no rule, regulation or other guidance provided by the DOR on what constitutes “a method acceptable to the department.” It is up to the taxpayer to find an acceptable method.

In a very real sense, the State of Washington’s electronic monitoring pilot project has been designed, developed, and paid for by Ms. Yu-Ling Wong. Without her sincere efforts to try one solution after another, the State of Washington would not have an electronic monitoring pilot. Washington would not be on the “cutting edge” without her.

Keywords: Zapper, Phantomware, Electronic Sales Suppression, Ess, Vat, Value Added Tax, Rst, Retail Sales Tax, Gartner, Inc., State of Washington, Yu-Ling Wong, Fiji Vat Monitoring System, Tax Core, Fiscal Invoice, Blockchain, Mini-Blockchain, Proof of Audit

Suggested Citation

Ainsworth, Richard Thompson and Chicoine, Robert and Leahey, Andrew and Gee, Sunder, Washington’s 'Cutting-Edge' Technology Solution to Combating Sales Tax Fraud: Real-Time Data (Now), Real-Time Remittance in the Future (April 19, 2020). 94 State Tax Notes 717, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3579818 or http://dx.doi.org/10.2139/ssrn.3579818

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Robert Chicoine

Independent

Andrew Leahey

Independent ( email )

Sunder Gee

affiliation not provided to SSRN

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