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Duluth restaurant guilty of tax fraud

A Duluth restaurant and its owners have pleaded guilty to tax fraud and will be required to pay nearly $300,000 in uncollected sales taxes.

Authorities said Osaka Sushi Hibachi Steak House used illegal computer software to erase cash sales from its records, removing thousands of line items from receipts in order to under-report monthly sales.

That led to them filing at least 15 false state tax returns in 2015 and 2016, the Minnesota Department of Revenue and St. Louis County Attorney's Office alleged in charging the restaurateurs criminally in September.

Court records show that the business, operating as Osaka Duluth, Inc., pleaded guilty to 17 felony charges last month in State District Court. Also pleading guilty to felonies were owners Zhong Wei Lin and Dan Xu.

Osaka, Lin and Xu were jointly ordered to pay $251,666 in restitution to the Department of Revenue and $41,094 to the city of Duluth.

“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.”

Although charges were filed for 15 months beginning in February 2015 through August 2016, the criminal complaints alleged that investigators found evidence that the defendants' use of the sales suppression software dated back 35 months.

According to state officials, automated sales suppression devices and software, sometimes known as zappers, delete parts of cash transactions after the fact, creating a second set of books that allows a business to report smaller sales and illegally keep some of the tax that the customer paid.

Minnesota's sales tax is a "trust tax" — customers pay the tax at the time of the sale with the expectation that businesses will remit it to the government on their behalf.

"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."

Lin, 38, and Xu, 39, were each granted a stay of imposition under their plea agreements with county prosecutors. That would allow their felony convictions to be deemed misdemeanors if they pay restitution and successfully complete a year of unsupervised probation.

A third person charged in the case, 39-year-old Su Ling Cao, will see both of her felony charges dismissed if she does not have any same or similar offenses in the next year.

The owners were not available for comment when the News Tribune contacted the restaurant on Tuesday.