According to the Revenu Quebec website, there were approximately 17,600 restaurants selling $9.5 billion of food and alcoholic beverages in 2007. As in most other provinces, the restaurant industry is a significant and vital sector of the economy. While the industry may not be particularly profitable, it does play a significant role in the collection of retail sales taxes on behalf of the federal and provincial governments. Rather than be appreciative of the taxes that are collected and remitted by the restaurant industry, Revenu Quebec (along with all of the other tax authorities in Canada, the US, and the OECD countries) believe that tax evasion in the restaurant industry is widespread. Studies in the US indicate that as many as half of all restaurants fail to report all sales revenue.
For the 2007-2008 tax year, Revenu Quebec estimates that it lost $417 million in uncollected taxes in the restaurant industry alone. Of this amount, about $133 million related to Quebec sales tax and $84 million related to unremitted GST. When it is considered that these are annual losses in tax revenues, it is no wonder that they have targeted the restaurant industry for additional audits.
As you go through the Revenu Quebec website relating to restaurant tax evasion, you will notice that it focuses almost entirely on the use of zappers. These are software programs that delete specific transactions in the POS system (i.e. cash sales) and renumber the remaining sales transactions for the day. This leaves the POS with a continuous transaction sequence, which looks normal under examination. It also allows the owner of the restaurant to pocket the cash from the deleted transactions. I first learned about zappers in the late 1990s, but I have never considered their use to be “widespread”. There have been very few cases of restaurateurs being caught using zappers, but when they are, they are treated harshly! Quite frankly, I believe this is a cover story to paint restaurateurs as tax cheats and justify targeting their operations for intensified audit and investigation efforts.
In addition to increased audits of restaurant operators, plans are underway that will require restaurant operators to install a Sales Recording Module (SRM) that records every sales invoice as it is generated and makes this information available to Revenu Quebec auditors during an audit. The primary purpose of this is to prevent the use of zappers that delete invoices after they have been issued to the customer.
I find this to be a very curious method of monitoring tax compliance by Revenu Quebec. To my knowledge, no other jurisdiction uses this method. The use of a SRM will, inadvertently, create a major problem for Revenu Quebec. This device will provide the restaurant with proof (or at least a very strong indication) that every sales invoice had been recorded, without exception. So long as the operator ensures that every sales invoice in the POS system matches one in the SRM, and all receipts are accounted for, it will be extremely difficult for an auditor to make a determination that the restaurant’s books and records are likely to contain errors or omissions with respect to the recording of taxable transactions. As it stands in most jurisdictions right now, the auditor must be able to “show” that the taxpayer’s records are likely to contain irregularities or omissions, before proceeding to carry out an indirect method of verifying sales.
In practice, almost every restaurant is found to have “inadequate” records for tax purposes. Once Quebec begins to use the SRM, it will be highly questionable whether there could be any reasonable cause to believe that the taxpayer had been under-reporting sales. With that piece of the puzzle missing, the auditor would not be able to resort to an indirect method of sales verification. At least for Quebec restaurants, this will provide an additional reason to appeal an unfair reassessment based upon the mark-up method.
It will be interesting to see whether Quebec actually follows through on their plans to implement the Sales Recording Module in restaurants. They may come to their senses and realize that their existing use of the indirect method of auditing restaurant sales results in substantially more tax revenues generated (not to mention the penalties and interest)! If they do proceed as planned, it may cost Quebec restaurants a bit more to install the SRM, but it will provide a healthy return in the form of fewer sales tax reassessments!