BOARD OF EQUALIZATION (BOE) SALES SUPPRESSION PILOT PROJECT PRESENTED BY: DAVID J. GAU CHIEF DEPUTY DIRECTOR

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1 BOARD OF EQUALIZATION (BOE) SALES SUPPRESSION PILOT PROJECT PRESENTED BY: DAVID J. GAU CHIEF DEPUTY DIRECTOR June 2015

2 History/ Organization Created in 1879 by a constitutional amendment, the BOE was initially responsible for ensuring county property tax assessment practices were equal and uniform. The BOE is the nation s only elected tax board. The board is comprised of five Board Members a member from each of the four equalization districts and the State Controller.

3 Board Members Senator George Runner (Ret.) - District 1 Fiona Ma, CPA - District 2 Jerome E. Horton District 3 Diane L. Harkey - District 4 Betty T. Yee State Controller Executive Director Cynthia Bridges

4 Overview In 1933, BOE began administering the sales tax program. The use tax program was established in BOE administers over 30 tax and fee programs.

5 Agency Snapshot, FY Generated revenue of $60.4 billion, representing more than 30% of all state revenue. Approximately 283,000 new permits, licenses and accounts issued. Over 1.9 million active Permits, Licenses and Accounts (as of June 30, 2014). Approximately 13,000 audits conducted.

6 Schemes for intentionally underreporting sales are not new and include: n Not ringing up all sales n Using a second cash register for which those sales are not reported The popularity of electronic Point of Sale (POS) systems has resulted in newer schemes appearing. POS systems are used by many businesses in a wide range of industries. Use of a POS system can make it easier for a business to suppress its sales and can make detection more difficult.

7 Sales Suppression Significant loss of tax revenue Vendors marketing sales suppression schemes to businesses Schemes are more elaborate Use is likely becoming more common because businesses believe they will not be caught

8 Evolution of Sales Suppression Common schemes Phantom-ware (internal) Zappers (external) Sales Suppression as a Service

9 Common Schemes Reusing the same invoice Void without delivery of invoice, no sale transactions, register drawer opened manually Training mode Cancellation/ refund/ discount/ no charge Invoice or bill credit (negative) Transfer of items Redistribution of invoices Reprinting invoices

10 Phantom-ware Software program already installed or embedded in the POS system. Zappers External software programs - Flash drives (USB), CDs, online (Internet). More difficult to detect since software is not on the POS during normal use.

11 Sales Suppression as a Service Manipulation of records is a service Can provide service remotely (Internet) Installer has access to the system and maintains the original data (second set of books) remotely

12 Pilot Project Pilot began in 2012 Pilot involved staff in both northern and southern California Pilot staff trained on various POS systems Focused on restaurant industry n Significant cash sales n POS systems commonly used

13 Warren Klomp is the lead of pilot project The project has several goals, including: Researching, studying, analyzing, and understanding POS systems and how BOE could use electronic data to perform audits. Understanding, communicating and upholding the sales tax suppression law (effective 1/1/2014). Networking and information sharing (Ainsworth, Canada, IRS, FTA, States, Industry, etc.). Creating a training program for those involved in the pilot program. Using the results of the pilot program to develop policies and procedures for consideration by the Board Members.

14 Criteria used to select audits for pilot project included: POS system used Cash sales Annual sales of at least $250,000 Low ratio of gross receipts to cost of sales and expenses Relatively low owner reported income Relatively low wage and tips claimed Low cash to credit card sales ratio Prior audit history

15 Program Results 173 businesses found to be suppressing sales (62 cases still in progress) For the 111 completed cases, overall average findings: n 28.18% reporting error n $904,000 additional taxable sales per case, which translates to an average of $82,000 in additional tax per case Total additional taxable measure has exceeded $100 million Development of BOE policies and procedures in process

16 Anecdotal Findings Regional hot spots Mostly cash Most built-into system (phantom-ware)

17 Challenges Refusal to supply data/records Deletion of data Claims that system has crashed Hiding backup files Cloud-based sales suppression Removal of POS system

18 Information Sharing BOE hosted a two-day symposium on sales suppression in April Representatives from 24 states, Canada, IRS, the Franchise Tax Board, and the Employment Development Department attended.

19 Training In October 2014, BOE offered training for trainers sessions for staff/managers from 23 other states and the IRS More than 80 people attended the training BOE continues to offer training on request

20 Taxpayer Outreach / Education Special Notices News Releases Tax Information Bulletin article California Restaurant Association newsletter article (April 2014) Sacramento Bee newspaper article (January 3, 2015) Publications Online industry guides Media Resources (online) blast

21 Contact Information David J. Gau Warren Klomp Chief Deputy Director POS Pilot Project Lead Board of Equalization Board of Equalization

22 End