(FOX 9) - When people buy something and pay tax on it, they expect the money is going to the government. However, FOX 9 has learned hundreds of thousands, if not millions, of those dollars are vanishing as part of a high-tech tax fraud.
With its iconic lift bridge and killer view of the world’s largest freshwater lake, Duluth has transformed its industrial past into a tourism driven tomorrow.
Thanks to a special tax on lodging, food and beverages, the city has millions to spend on promoting itself as a got to-see-getaway.
Local businesses collect the tax from their customers and turn it over to city hall - at least that is how it’s supposed to work.
Never before in Duluth or in Minnesota, has anyone been convicted of a criminal tax fraud like the case that happened in the port city.
BLOODSTREAM OF COMMERCE
Professor Richard Ainsworth of Boston University is a tax scholar. Few people know as much as he does about a growing scheme used by some businesses to secretly siphon off sales taxes meant to fund a long list of government programs.
"It is in the bloodstream of commerce right now," Ainsworth said.
He estimates at least $30 million a year is being stolen from the state of Minnesota and other local governments. Nationwide, the estimate is $20 billion.
"Any kind of business can do this,” Ainsworth said. “We’re at the state where we’re trying to convince people that it’s really real.”
DULUTH RESTAURANT OWNERS BUSTED
It got real for the state of Minnesota when investigators from the Department of Revenue raided a restaurant in Duluth.
“It seems like such a simple way to cheat the government out of money,” said Chris Pinkert, the St. Louis County Prosecutor.
The state suspected the Osaka Duluth restaurant was underreporting its monthly sales totals, thereby shortchanging the government out of sales tax revenue. Investigators believed the owners were pocketing tens of thousands of dollars’ worth of sales taxes collected from cash transactions.
Electronic records stored in the restaurant’s cash register gave auditors the impression that everything was on the up and up.
However, Pinkert said the value of the sales they had hidden was in excess of a million dollars. A computer flash drive, found during the raid, revealed how it was done.
It contained a tax cheating software program. The program would delete transaction records from the cash register’s database, a way to fool auditors from detecting that sales taxes paid by customers were being kept by the business.
The value of the “city and state” sales taxes pocketed by Osaka Duluth on the hidden million dollars was $292,000, all of it in cash.
The owners pled guilty to felony tax evasion and paid restitution. The restaurant remains open for business.
FOX 9 wanted to know where they got the software, but they declined to speak with us.
"I think the most we know is that it exists here in Minnesota and we need to continue our efforts to identify it and address those patterns of noncompliance where we find them," said Jenny Starr from the Minnesota Department of Revenue.
OWNERS OF BURNSVILLE RESTAURANT CHARGED
In January, the owners of Shogun Sushi and Hibachi in Burnsville were charged with tax evasion.
State investigators found suspect software on the point of sale computer in the restaurant.
The owners did not respond to Fox 9’s request for comment.
FOX 9 asked if the Minnesota Department of Revenue knew if the businesses were part of a network, Starr said she would not comment.
Professor Ainsworth, who is tracking this fraud worldwide, said the problem is rampant.
A study by the Government of Canada found tax cheating software in 33% of the country’s restaurant cash registers.
In Germany, the estimate is 50%. Sweden it is 70%.
"Organized crime is clearly there because the money is easy to get." Ainsworth said.
Getting ahold of this software, according to Ainsworth, is easy.
In many cases individuals who sell the latest high tech cash registers will throw it in as part of the deal.
“The salesman will come and they’ll say, my machine's the best machine, plus, if you like, you can delete some sales. Because I have this thing here that you just stick it inside the cash register and off you go,” Ainsworth said.
The state's only conviction involving tax-cheating software so far is that one in Duluth, but prosecutors believe the fraud, like Lake Superior, runs deep.
"The software that they were using seemed very basic to me. Very easy to use and I'm surprised that this is the first case that we've seen like this," said Pinkert.
The Minnesota Revenue Department told FOX 9 it has active investigations currently happening but won't reveal how many or what types of businesses are under suspicion.
Possession and use of tax cheating software is a felony under Minnesota law.