Ben Sopel. Director, Sales Integrity Program Ministry of Finance

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2 Ben Sopel Director, Sales Integrity Program Ministry of Finance 2

3 Electronic Sales Suppression Ben Sopel Director, Sales Integrity Program Ontario Ministry of Finance 3

4 Overview About the Sales Integrity Program The Challenge Background and Current State Problem Statement Desirable Outcomes 4

5 Sales Integrity Program Ontario s Ministry of Finance (MOF) has launched a sales integrity program to address the problem of electronic sales suppression (ESS) In June 2017, MOF established a project office to manage the design and implementation of the sales integrity program The program s focus is to increase the integrity of transactions at the point of sale and enhance the data analytical capability to identify ESS 5

6 Electronic Sales Suppression ESS is one of the most effective business-to-consumer sales suppression tactics which involves the manipulation of point-of-sale (POS)/electronic cash register (ECR) systems ESS is an underground economy (UE) activity that refers to the deliberate and illegal practice of underreporting income, primarily to avoid the payment of taxes When ESS is leveraged: Select items are deleted from the electronic transaction record, falsifying the number of taxable transactions and allowing an individual to retain the difference in cash The transactions are also reordered so that nothing seems amiss to the tax authorities, or business owner if ESS is undertaken by employees 6

7 Implications of ESS - Case for Change Un-level playing field Creates an un-level playing field for those businesses that choose to pay their fair share of taxes Reduced business income Reduces businesses income when employees use sales suppression schemes to steal money Reduced government tax revenue Reduces tax revenue used for essential government services Risk for businesses Creates a risk for business owners when employees use these schemes and are discovered by tax authorities 7

8 Times are Changing POS platforms are many, and constantly growing, e.g. Online POS, Mobile POS, Cashier-less POS etc. ESS technology is advancing, making detection more challenging, e.g. Phantom-ware, Zappers etc. Payment technology is becoming more and more advanced, e.g. EFT, Online etc. 8

9 Magnitude of the Problem UE activity for 2013 totalled $45.6 billion in Canada or about 2.4% of gross domestic product (GDP), by Statistics Canada Three industries (i.e. residential construction, retail and hospitality) accounted for more than half of the total UE where cash transactions are common The total value of the UE in Ontario was estimated to be $16.7 billion or about 2.4% of GDP, similar to national GDP ratio Quebec implemented tamper-proof secure recording modules in the hospitality sector to combat ESS; Revenue Quebec estimates the program will have recovered more than $2 billion in taxes by 2019 that otherwise would have been lost 9

10 ESS Solutions Multiple jurisdictions have designed and implemented solutions to combat ESS primarily focused on the certification of POS/ECR systems and/or the secure recording of sales transactions These solutions have largely been designed by tax authorities leaving an opportunity for innovative technology companies to determine if alternate solutions are feasible Electronic Tax Register Electronic Fiscal Printer Record Transmit Electronic Signature Device Sales Control Unit Prohibit Ban and prohibit sale and use of ESS software / devices Current state in Ontario Certify Require all POS systems to be certified against tampering Used in Germany, Netherlands, Greece Require all POS systems to record all sales transaction data Used in Quebec, France, Belgium, Austria, Sweden Require all POS systems to record and transmit all transaction data to tax authority Not widely implemented. Used in Rwanda, Slovakia, Italy, Hungary 10

11 Problem Statement Recognizing the importance of a fair and competitive market and to ensure the integrity of the sales tax system, there is an identified need for a cost-effective, user-friendly and secure means of ensuring sales transactions are recorded and sales taxes are being remitted in line with tax obligations 11

12 Desirable Outcomes The solution should: create a verifiable, tamper-proof record of completed taxable transactions enable transaction records to be accessed easily for audit purposes and to identify ESS be fully automated, with no manual processing and minimal process burden on businesses protect consumer privacy be easy to integrate into existing and emerging sales platforms/systems address evolving payment and business models be scalable 12

13 Additional Considerations To encourage adoption the solution may include end-user benefits such as: decreased sales tax reporting effort by automating accounting and reporting requirements provide increased protection against employee related theft simple integration with existing business accounting software 13

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