Sales tax collection gone wrong
Sales suppression software, which is used by dishonest merchants to escape sales tax collectors, is understandably a target of state tax authorities, but when they don’t understand the software involved, the consequences of a false allegation against businesses can be devastating -- and accountants and tax professionals will want to be sure they have the knowledge to protect them.
Consider Salvador Sahagun, who was charged by the State of Washington with pocketing more than $5.6 million in state sales taxes through the use of sales suppression software at his six Tacos Guaymas restaurants in the Seattle area.
Sahagun was charged with using the prohibited software to hide receipts at his taco shops, when in fact, none of them had used suppression software, and none of the receipts identified as “missing” by undercover Department of Revenue purchases at the restaurants were, in fact, missing. Sahagun was the subject of widespread media coverage not only due to the size of the alleged fraud, but also for the sophistication of the technology that he allegedly employed. Although the State of Washington eventually dismissed all charges against him, between the initial filing of charges on March 10, 2018, and Nov. 12, 2018 when they were dismissed, both he and his businesses suffered.
At the time charges were filed, the state claimed that it was the largest sales suppression software case in Washington state history, and potentially the largest in the country. Although the claims of tax fraud by sales suppression technology were ultimately shown to be untrue, the extensive media coverage cost Tacos Guaymas sales, and unfairly damaged Sahagun’s reputation, according to Robert Chicoine of Robert Chicoine Law, a Seattle-based tax attorney who represents a number of restauranteurs accused of electronic sales suppression tax fraud.
The defense team was able to show the trial prosecutors that many of the DOR audit conclusions were flawed and that the DOR agents did not fully understand the technology involved.
“We got down in the technological weeds with this case, and helped the state see that Sahagun’s stores were following the rules in terms of reporting sales,” he said. “It’s unfortunate that the charges were brought in the first place, but we are thankful that the prosecutors reviewed all of our evidence, and with the Attorney General’s approval, did the right thing in dismissing the charges.”
“The sales tax is just under 10 percent,” said Chicoine. “That means if Sahagun underreported $5.6 million of sales taxes, he had over $56 million in sales at his six small tacos shops – that’s a lot of tacos. Allegations of this amount simply don’t make sense, but would have very significant sales and income tax repercussions for Mr. Sahagun.”
“The case started with ‘undercover revenue agents’ buying tacos at each of the six locations, and collecting 31 total receipts – about five per store,” said Chicoine. “Then on audit they looked at the downloaded POS software reports, and decided that the 31 receipts were suppressed because they couldn’t find them, and therefore fraud was involved. They couldn’t match the numbers on the tickets they collected with the software, so they estimated a discrepancy for each store. For example, they might have seen the number 80,000 on a ticket but only saw the number 10,000 in the downloaded data, so they concluded that 70,000 were missing and multiplied that by the average price of a taco.”
“But it’s not that simple. There are different kinds of reports with different ways of numbering,” Chicoine explained. “There were all kinds of technical problems that the government never analyzed. They didn’t appreciate how the system worked, and they were so anxious to show how aggressive they were on sales suppression software that they were blinded by the light.”
“The government has an obligation to do what is right before they make accusations,” he continued. “They didn’t even preserve the digital evidence consistent with good forensic practice. They either couldn’t find, or had deleted, some of the data they had downloaded from the POS backup. Who does that? And who draws up an assessment based upon this kind of evidence, and makes a criminal referral based on it?”
“They made erroneous assumptions because they didn’t understand the technology,” Chicoine said.
Still pending are tax assessments and a civil penalty that Chicoine hopes to get dismissed.