In the first convictions of their kind in Minnesota, guilty pleas were made by two Duluth restaurant owners who dodged nearly $300,000 in taxes by using software that allowed the business to underreport sales and the taxes collected.
Osaka Sushi Hibachi & Steak House owners Dan Xu, 39, and Zhong Wei Lin, 38, each pleaded guilty in St. Louis County District Court and were allowed to avoid prison time in exchange for making immediate restitution. They also will each serve a year’s probation. The business itself was convicted as a corporation.
Two felony counts for a third person, Su Ling Cao, can be dismissed if she commits no similar offenses in the next year. Cao and Lin are married and live in Hermantown, as does Xu.
“These are first-of-their-kind convictions in Minnesota and highlight our investigators’ efforts to combat the growing use of sales-suppression software,” state Revenue Commissioner Cynthia Bauerly said Wednesday. “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.”
Revenue Department spokesman Ryan Brown said there is “no legal or legitimate use for this type of software. ... We are working with our counterparts in other states to identify the source of this software that is being used in Minnesota and elsewhere.”
The amount of restitution totals more than $292,000, with roughly $251,000 going to the state and about $41,000 to the city. The underreporting dates back to 2012 and involved the removal of 18,000 items sold, according to the charges.
During their plea hearing, Xu and Lin admitted to using “zapper” computer software in the point-of-sale system at the restaurant, located off Hwy. 53 near Burning Tree Road.
The software was in a thumb drive discovered by investigators during a search of the restaurant. The software automatically created a second set of accounting books that removed specific purchases from cash transactions, allowing the business to underpay sales taxes to the state and city of Duluth.
“Deliberately failing to turn over sales taxes collected increases the tax burden on all residents,” said St. Louis County Attorney Mark Rubin. “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.”
In 2008, a chain of 12 restaurants in Detroit skimmed more than $20 million over four years using the zapper software.
The New York Times contributed to this report. Paul Walsh • 612-673-4482