Small Business Owners Snared in Tobacco Tax Evasion Scheme

For many small business owners, the numerous tax obligations related to selling products with excise and use taxes, like cigarettes, smokeless tobacco, and alcohol can feel burdensome and onerous. However, aside from the potentially overwhelming paperwork, the taxes owed on the sale of these products can begin to feel like they are cutting into the convenience store or other company’s bottom line. In any case, the business owner may begin to think that he or she would be much better off if he or she could simply avoid paying the tax on sales of these products.

The line-of-thought described above can represent a major temptation for business owners and business managers. This temptation is only amplified when the individual has the means to obtain untaxed tobacco products. However, it must be resisted. The failure to pay tobacco taxes is aggressively investigated and prosecuted. Unfortunately, two Massachusetts businessmen recently discovered the high-stakes of tobacco tax fraud. However, it is important to note that whether you are in California or in Massachusetts, penalties are harsh and activities that take place across state or national borders can also result in federal criminal charges.

Businessmen Plead Guilty to Fraud, Tax Crimes

Raza Ali, 56, of Hopkinton, and Kaleem Ahmad, 47, of Sharon, along with a third individual operated a scheme to avoid paying tobacco taxes. The individuals operated a wholesale business that sold cigarettes, dip, snuff, cigars, and other tobacco products to area gas stations, convenience stores, and other retail businesses. Prosecutors claimed that Ali and the third alleged conspirator frequently and repeatedly traveled to a nearby state where no taxes are imposed on smoking tobacco, smokeless tobacco, and cigars. They would carry tens of thousands of dollars in cash to make the purchases and arrange for the products to be secretly transported back to their home state. Prosecutors stated that at no time did these individuals file the reports or pay the taxes required by state or federal law.

Further compounding their crimes, the individuals repeatedly structured transactions to avoid U.S. Treasury cash reporting laws. The individuals would break large cash deposits up across multiple deposits just under the $10,000 reporting threshold.

Ali and Ahmad recently pleaded guilty to federal charges in connection with this scheme. They each pleaded guilty to one count of conspiring to commit wire fraud and launder money and one count of making a false statement on a federal income tax return. The conspiracy charge could result in a maximum potential sentence of five years in prison. The individual is also responsible for providing restitution for the damages and losses caused by the conspiracy. The punishment for a conviction for making a false statement on a tax return can include up to a three-year prison sentence. In addition to the prison sentence, a fine of up to $100,000 and restitution can also be ordered.

California Cigarette Tax Evasion Is a Serious Crime

In California, alleged tobacco tax fraud is an extremely serious matter. Alleged violations of the law are investigated and prosecuted by the California Board of Equalization (BOE). The California BOE also oversees the licensing of businesses that sell tobacco and other covered products. California businesses that purchase tobacco products from sources other than licensed sellers are in violation of the law and are subject to seizure f the goods along with fines and other penalties. To protect themselves from harsh consequences, business owners must be sure to always request, receive, and maintain records of a Receipt for Tax Paid to Distributors along with a legally sufficient invoice and proof of payment. Under Regulation 4092, every cigarette and tobacco products distributor in California is required to provide a Receipt for Tax Paid to Distributors to purchasers. If your business has failed to keep these records, failed to receive these records, or made questionable purchases from potentially unauthorized distributors a California BOE investigation could create expensive and potentially fatal problems for your business. If you engaged in a scheme to avoid paying taxes on these products, you could face state or federal tax charges.

David Klasing is a dually certified California tax attorney and CPA with more than 20 years of experience. He can assist California convenience stores, gas stations, liquor stores, and other businesses comply with their state excise and use tax obligations. To schedule a reduced-rate consultation at the Los Angeles or Irvine offices of the Tax Law Offices of David W. Klasing, call 800-681-1295 today or contact us online.