Sales Suppression Software Cases on the Rise - Taxation Legal Blogs Posted by Joseph M. Callahan - Lawyers.com

Sales Suppression Software Cases on the Rise

Sales suppression software cases are becoming more and more common. The use of sales suppression software, aka tax zapper software, involves software that modifies the reports generated by a point of sale, or POS, software system.

Washington v. Sahagun

The case we want to look at today involved a Washington State restaurant owner named Salvador Sahagun. Sahagun was accused of using sales suppression technology in at least three of his restaurant chain locations. According to the State, his motive was to significantly under-report sales and thereby pay less sales tax. Also according to the State, this under-reporting ultimately led to an unpaid taxes of approximately $5.6 million. If the allegations were true, the Sahagun case would be the largest sales tax liability stemming from sales suppression software in Washington state, and possibly the whole country.

In this post, we will discuss the details of the Sahagun case. As we’ll see, the criminal charges against Sahagun were eventually dropped. As a consequence, we may see tighter filing requirements for tax fraud charges, especially those involving sales suppression technology.

Background of the Case

Salvador Sahagun owned a number of taco restaurants in Snohomish and King Counties, Washington. Prior to his sales tax fraud case, Mr. Sahagun had no criminal record, nor had he or his businesses ever come under suspicion for criminal wrongdoing. In fact, he first came to the attention of the State when an auditor for the Washington Department of Revenue (DOR) began a routine audit of his books. it was only when inconsistencies were discovered between Sahagun’s books and his tax returns that the State took a closer look at his business.

Audit Leads to Investigation and Criminal Charges

The DOR auditor determined that the POS system run by Sahagun didn’t match the sales tax returns Sahagun filed with the State. The auditor also found that sales receipts were seemingly missing altogether. These findings led to a more formal investigation involving several additional DOR employees.

Specifically, DOR employees went to each of Sahagun’s location and paid cash for meals. The auditor then used the receipts generated by these employees to determine the accuracy of Sahagun’s books (generated by the point-of-sale system). The auditor concluded that Sahagun was using sales suppression technology at three of his locations. The State then launched a criminal case against Sahagun, alleging that he had defrauded the State out of nearly $5.6 million. As a result, the state ended up filing six counts of 1st degree theft and three counts of use of sales suppression software against Sahagun (three counts because the technology was allegedly used at three separate locations).

Criminal Charges Eventually Dropped Following Alford Plea

Mr. Sahagun promptly hired counsel to represent him. Sahagun’s lawyers contended that the DOR made critical mistakes in its investigation. Accordingly, they contended, the allegations didn’t have an adequate evidentiary basis. Ultimately, after more carefully reviewing its case against Sahagun, the State agreed to drop the criminal charges in exchange for an “Alford plea” from one of Sahagun’s restaurants. That is, the defendant pled guilty while also asserting innocence.

Basis for the Alford Plea

Sahagun stated that a former manager may have made a mistake when balancing his books, and that, as a consequence, he may have understated his tax burden from a previous year. He agreed to pay a penalty of $800, a far cry from the original $5.6 million underpayment asserted.

Lack of Evidence

The reason for the dramatic decrease? Prosecutors were simply unable to substantiate the discrepancies which led to the supposed unpaid debt of $5.6 million. Sahagun’s businesses ultimately lost revenue as a result of the investigation, however. Time will tell whether Sahagun decides to bring a suit against the State for its case against him.

If it had been successfully prosecuted, the Sahagun case would have been the largest in Washington history involving sales suppression software. As of now, it’s only the second criminal case in Washington involving such technology.

Reach Out to MC&C to Learn More!

We will continue to feature material on tax “zapper” software in future articles. We will undoubtedly continue to see more and more cases involving sales suppression technology as business owners attempt to hide sales and minimize their sales tax burden. This will happen most often with businesses which frequently transact in cash, such as restaurants.

Staying on top of cutting-edge tax topics, such as zapper software, is one of the ways Mackay, Caswell & Callahan, P.C., stands apart from the competition. We know how to handle a wide variety of cases. We also do copious research to ensure that we do things correctly. In addition to sales tax matters, we handle federal and New York State income tax, voluntary disclosures, and other tax matters as well. Call one of our top New York City tax attorneys today if you’d like to learn more!

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Joseph M. Callahan

Licensed since 1986

Member at firm Mackay, Caswell & Callahan, P.C.

AWARDS

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