Sales Tax Software Calculation Fraud: When a Known Backup Method Understates Liability

A retailer that knowingly keeps an inaccurate backup calculation in its sales tax software can leave the government short and face fraud allegations. In New York’s case against Fanatics, the attorney general alleged that a fallback supplied the tax calculation when the preferred service failed. If you work in tax, finance or software, you may know which calculation actually ran and when the company learned it was wrong.

This page follows the backup calculation, the company’s knowledge and the shortfall that reached its returns. The broader sales and use tax fraud patterns include hidden receipts, excluded charges and false exemptions.

What Did Fanatics’ Backup Sales Tax Calculation Do?

New York’s attorney general alleged that Fanatics kept its sales tax backup software in use after it knew the calculation was inaccurate. According to that account, the online seller of licensed sports merchandise and memorabilia launched a new third-party tax computation service for its websites in 2013. That service applied specific state and local rates and rules.

The attorney general’s account also describes the system Fanatics used when it first began collecting New York sales tax. It applied a single rate without accounting for varying local rates or exemptions. The company contracted for installation, configuration and testing of the more detailed service. The later fallback brought the single-rate approach back into the calculation whenever the primary service stalled or failed.

In the signed settlement agreement, the attorney general alleged that Fanatics used a less capable calculation when the preferred service stalled or failed. Fanatics had developed a backup table that applied a single statewide rate. It left out local sales tax rates and exemptions for particular items. The attorney general alleged that some transactions fell back to this less capable calculation and that certain sales consequently carried too little tax.

We expect a backup to catch a failure. In the attorney general’s account, the safety net was missing part of the tax.

Which Sales Reached the Backup Method?

The attorney general alleged that periodic stalls or failures sent some sales to the backup table. According to that account, the New York default started at 4%, changed to zero in July 2013 and stayed there until November 2015, when it returned to the earlier rate. That history makes the transaction date part of the calculation story.

A statewide rate could leave local tax out of a sale. A zero default could leave state tax out as well, including on purchases with no applicable exemption. The attorney general connected those shortcomings to particular transactions handled by the fallback.

For someone responsible for these systems, the useful comparison is between the rules intended for the sale and the rules the fallback actually used. We would want to understand the item, the applicable state and local treatment, the transaction date and whether the primary service completed its calculation. Those details connect a software exception to the tax the business collected from the customer.

The attorney general’s allegation then follows the money beyond checkout. According to the agreement, the fallback caused Fanatics to undercollect from customers and underpay New York state and local sales tax. The same account says returns filed with the state understated taxable sales. The missing tax traveled from the calculation into the return.

What Did Fanatics Know About the Backup Calculation?

By September 2014, the attorney general alleged, Fanatics knew the primary service periodically failed, the backup took over and the backup’s ability to calculate the correct tax was limited. The agreement also says Fanatics began addressing the backup’s issues that year but did not fully correct them until December 2017.

Changing the statewide default addresses one setting. Whether the fallback accounts for local rates and item exemptions is another question. We would examine what the business changed, what the change was meant to fix and which transactions still passed through the backup afterward.

Someone in finance may know when the undercollection first became visible in the company’s numbers. Someone working on the calculation may know what the attempted correction covered. Connecting those accounts helps explain the gap between recognizing the problem and correcting the sales tax calculation completely. An insider who can explain that knowledge gives us a much more specific starting point than a general complaint that the software produced the wrong answer.

What Records Show Which Sales Tax Calculation Ran?

The useful tax fraud evidence connects the calculation to the return and the company’s knowledge. For this kind of allegation, we work through the primary rules, the backup settings, the transactions affected and the response after the problem became known.

Calculation history and records of failed calculations can show which backup settings applied to a sale. We connect those records with you to the tax result and the company’s response, following the particular calculation that produced the shortfall.

In the Fanatics agreement, the attorney general expressly connected the backup to both underpayment and understated taxable sales. We would follow that connection into the returns and payment records, with your explanation of how the calculation entered those totals. You may also know why the same issue appeared again after work had supposedly addressed it.

What a Sales Tax Return Leaves Out About the Backup

A tax return can show the result while leaving the decisions behind it out of view. The 2014 Villanova Law Review paper Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States argues that even an agency already auditing a return may miss a transaction or misunderstand what the taxpayer has chosen to report. It connects missing knowledge to missing revenue:

For a backup-calculation case, that contribution is concrete. You may know why the fallback ran, which limitation was already understood and what a proposed fix left unresolved. We connect that operational knowledge to the transactions and returns, so the case explains how the underpayment happened inside the business.

What Did the Fanatics Settlement Require?

Against the nearly $1.4 million in underpaid sales tax alleged by the attorney general, Fanatics agreed to a $1,508,466 settlement resolving the investigation and the whistleblower case. The agreement credited $208,466 already paid to the New York State Department of Taxation and Finance toward that amount. It required a new $835,629 payment to the state and a separate payment to the whistleblowers.

The agreement also recorded Fanatics’ disclosure that it had previously paid $1,795,808 in taxes, interest and penalties for backup-table undercollections. Only the specified credit counted toward the settlement.

Where Does a Sales Tax Calculation Whistleblower Fit?

The New York attorney general’s Fanatics announcement says the investigation began after a whistleblower filed a case under the New York False Claims Act. The law allows private persons to bring civil cases on the government’s behalf and share in a recovery. A whistleblower case under the New York False Claims Act can pay 15% to 30% of what the government recovers.

The state tax whistleblower route depends on the tax and jurisdiction involved. We assess that with you alongside the facts you know about the calculation, the internal notice and the returns it affected.

You Know Why the Backup Ran

If you know a sales tax fallback kept understating liability after the company understood the problem, speak with our whistleblower experts about that calculation. We build the case with you around the transactions, the failed corrections and the people who knew, and bring in tax fraud whistleblower lawyers with state sales tax experience. Bring us the part of the story the return leaves out, and we will stand beside you throughout the case.