In Some Countries, Your Receipt Can Be A Winning Lottery Ticket And Can Help The Government Collect Sales Tax

Can a sales tax receipt lottery system work in the United States?

Of all the different types of taxes the government uses to raise revenue, one of the most ubiquitous and disliked is the sales tax. Customers don’t like to pay $1.10 for something advertised at 99 cents. And businesses don’t like to raise their prices in order to collect it.

While e-commerce is gaining popularity, cash is still king, particularly for small businesses and in immigrant communities where the locals believe that putting money in an oven is safer than putting it in a bank. Many businesses are cash only because they can’t afford the credit card processing machines and don’t want to deal with the gradually increasing transaction fees. And most of the time, the checks their customers give are worth less than the paper it’s printed on.

But businesses that accept only cash might be tempted to underreport their gross revenue in order to avoid paying sales taxes. This makes sales tax audits very difficult, both for the auditor and the business being audited. Most auditors rely on sales receipts, tape receipts from cash registers, and other documents that the business produces on their own with no verification from a disinterested third party. In more extreme cases, I have seen auditors coming to a business and staying there the entire day to record the daily sales.

Because of the difficulty in conducting sales tax audits, auditors have generally distrusted taxpayers’ positions. They use unreliable estimates and stiff penalties in the hopes that it will scare others into compliance.

But what if there was a different way to determine sales tax revenue which might help make the calculation more accurate? A way that would force or incentivize businesses to issue receipts and leave a paper trail.

A few countries have thought outside the box by turning a sales receipt into a lottery ticket.

In 1951, Taiwan started its uniform invoice lottery system. A sales receipt would contain a set of lottery numbers. Once every two months, there will be a drawing and the winner would receive prizes or cash awards. For those who don’t care about winning, they can drop the receipts into a box where the contents be donated to a charity.

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This system has been touted as the “fun” way to encourage tax law compliance. The theory was that customers would either purchase from businesses that issued receipts or demand receipts from businesses that do not give them. These receipts can be used to track sales revenue and determine the proper sales tax.

One year after implementing the uniform invoice lottery system, sales tax revenue in Taiwan increased from $900,000 to $1.6 million, a 75 percent increase.

China, the Czech Republic, Lithuania, Portugal, Romania, and Slovakia have also implemented a sales tax receipt lottery system. Latvia will implement one later this year. Slovakia has reported a modest increase of $11 million in annual revenue.

Can a sales tax receipt lottery system work in the United States? The first thing to consider is how to maximize consumer participation in the lottery, particularly in the underground cash economy. That would depend on the odds of winning and the types of prizes given. If there is a one in 20,000 chance of winning $6, then few people would play. But if there was a one in six chance of winning $20,000 many people would play but it would be expensive and would likely result in massive losses for the government. Governments will have to take survey their constituents to see what types of prizes would incentivize them to participate in the lottery and thus obtain receipts from businesses.

The next thing to consider is protection from counterfeiting. There has to be a system where receipts with winning numbers can be easily redeemed and verified. And they cannot be duplicated. This might involve purchasing special machines or cash registers that can print receipts and record the number in a central government server. These machines should be inexpensive or it will be a burden for small businesses resulting in continued noncompliance.

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Another thing to consider is whether e-commerce makes a sales tax receipt lottery system necessary. Nowadays, as more small businesses are setting up online stores and online transactions are more likely to be recorded in a server or the cloud, it is easier for auditors to figure out sales revenue and sales tax.

Since Taiwan began the sales tax receipt lottery system over 60 years ago, only a few countries have emulated it. But some of those countries have reported increases in tax revenues as a result. While it will not solve the sales tax gap completely, it could help by encouraging businesses to give receipts to customers who want a chance at the sales tax powerball jackpot. It sure beats using random and unreliable estimates or having an auditor stay in your business for the entire day to determine the amount of sales taxes due.


Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.