Duluth Restaurant Owners Convicted for Using ‘Zapper’ Software to Hide $290K in Sales Tax Revenue
Two Duluth restaurant owners were convicted of felony tax crimes Tuesday by the St. Louis County District Court and were ordered to pay nearly $300,000 in restitution.
After entering guilty pleas, Zhong Wei Lin and Dan Xu were convicted of one count each of failing to pay sales tax and aiding in the filing of false tax returns, respectively. The crimes were committed at Osaka Sushi Hibachi Steak House, located in the Burning Tree Plaza in Duluth.
The owners were using a software program that automatically created a second set of books which removed transactions from official records of the restaurant, allowing the owners to underreport the business’s monthly sales.
This lessened the amount of taxes owed, effectively depriving the state of Minnesota and city of Duluth of more than $125,000 in total tax revenue.
“These are first-of-their-kind convictions in Minnesota and highlight our investigators’ efforts to combat the growing use of sales suppression software,” said Revenue Commissioner Cynthia Bauerly. “These convictions demonstrate our determination to level the playing field so that businesses who report and pay their fair share of tax don’t have to compete with those who break the law.”
Wei Lin was initially charged with 17 felony counts, while Xu originally faced two counts of aiding. Ultimately, both men plead guilty to their crimes to avoid jail time. The charges were slimmed, and they received one year each of unsupervised probation instead. The case of a third person, Su Ling Cao was granted a stay, per an alternative of a year of probation.
The restaurant itself, under the corporation of Osaka Duluth Inc., also plead guilty and was slapped with two counts of the same felony conviction that Xu received.
The condition of the plea deal was that $292,760 in restitution – plus administrative fees – in full, was paid on the day of the court decision. The owners obliged, and the restitution will be distributed between the state and city.
Charges were filed after an investigation found the restaurant owners were using the sales suppression software at the restaurant between February 2015 and August 2016 – with some evidence indicating the illicit activity began even earlier. The proof for conviction was found on a thumb drive discovered during the investigation.
The software used at Osaka Sushi was called Happy World, but “zappers,” as the technology is commonly referred to, are a wider problem. One previous case involving zappers was brought in 2008 when a chain of 12 restaurants in Detroit were found to have used it to skim more than $20 million over four years.
When the initial charges against Osaka Sushi and its owners were announced, Bauerly noted that the use of sales suppression software – which she said has “no legitimate business purpose” – is growing, but that recent legislation allows authorities to pursue anyone involved in the creation or utilization of the software.
“Deliberately failing to turn over sales taxes collected increases the tax burden on all residents,” said St Louis County Attorney Mark Rubin in a statement. “We hope this case sends a message to others engaging in this kind of behavior that it will not be tolerated, and you will be prosecuted when caught.”