Kentucky Agent says state lost $2.3M in taxes to cigarette dealer

By Brett Barrouquere

Associated Press

LOUISVILLE, Ky. (AP) -- Israel Chavez sold cigarettes online and didn't make an attempt to hide that he wasn't making an effort to see that sales taxes were collected.

That move, a federal investigator said, allowed Chavez, a Louisville businessman who ran Chavez, Inc., to run a business that sold $132 million in cigarettes online while avoiding paying a variety of taxes to states, including $2.3 million in excise taxes to Kentucky.

The business is now closed after federal authorities seized the company's bank accounts and assets -- a move validated by a federal appeals court, which ruled there's no way for Chavez to get his property back without a civil trial or being charged criminally and fighting the forfeiture.

The U.S. 6th Circuit Court of Appeals on Tuesday upheld the preliminary seizure of the company's assets, a move that shut down Chavez, Inc., which went to court to try and get the property back. The appeals court upheld a judge's decision not to dismiss the seizure, even though no criminal charges had been filed.

The case is tangled with a series of ongoing criminal proceedings in Mississippi and in the arcane world of tax law.

John Black, a special agent with the federal Bureau of Alcohol, Tobacco, Firearms and Explosives wrote in an affidavit backing a search of the business in December 2009, that Chavez, Inc., sold more than $132 million of cigarettes online, but allowed purchasers to avoid paying taxes on them by not reporting the sales to at least a half-dozen states.

The business also kept $2.3 million in excise taxes away from the state of Kentucky, Black wrote.

The appeals court decision concerns the Jenkins Act, which requires companies that sell cigarettes online to report the sales to the purchaser's state so sales taxes may be collected.

Chavez Inc. sold cigarettes online to buyers outside the state of Kentucky and through a toll-free number. Chavez, Inc., which operated call centers in California and Colorado, included on its website the warning that sales taxes needed to be paid by the buyer, but also notified buyers that it wouldn't report sales to the buyer's state, even though the federal Jenkins Act required it to do so.

"Indeed, Chavez, Inc., has never filed a Jenkins Act report with any state," Judge Gordon J. Quist wrote for the court.

Quist said Chavez, Inc., and the owners could fight the seizure either at a civil trial or, if they were indicted, during the course of the criminal case, but they could not preemptively seek to have the property returned.

No one tied to Chavez, Inc., including owners Israel Chavez of Louisville and his ex-wife, Pam Chavez of Stockton, Calif., has been charged. Kent Wicker, the attorney for Pam Chavez, said the court's decision gives the government wide powers in taking private property.

"The Sixth Circuit Court of Appeals ruled that the government may seize all of a person's assets, shut down a business, and throw its employees out of work without notice or a hearing, no matter how weak the government's case may be," Wicker said.

Christie Moore, the attorney for Israel Chavez, said the ruling was a disappointment and that the seizure cost more than 20 employees their jobs.

"Mr. Chavez has been stripped of his business as well as his life savings, with no recourse," Moore said. "The government took his money, his equipment and his company more than a year ago, without ever charging him with a crime or even giving him a hearing."

Black's affidavit indicates that Chavez, Inc., and the owners were under criminal investigation, but the status of any investigation was unclear Tuesday. A spokeswoman for the U.S. Attorney's office in Louisville, Stephanie Collins, said she could not confirm or deny an investigation into Chavez, Inc., or the company's owners.

The federal government has cracked down in recent years on contraband cigarettes -- smokes sold by people and businesses through illegitimate channels to avoid paying local, state and federal taxes. The Department of Justice, the ATF's parent agency, estimates that federal, state and local governments lose out on $5 billion annually in tax revenue from cigarettes sold through illegitimate channels.

Black's affidavit and plea agreements of three other people in Mississippi lay out what investigators describe as a multi-state scheme to sell cigarettes over the Internet, while avoiding millions in state and federal taxes. Black wrote that Chavez shipped untaxed cigarettes to New York, New Jersey, Pennsylvania, Michigan, Montana and Indiana.

Charles Wells, the owner of H&W Wholesale in Hopkinsville, told federal investigators he sold $14 million in tobacco products to Chavez, but falsified the invoiced to make it appear the sales were being done through Piedmont Wholesale Inc., a North Carolina company, to avoid paying Kentucky taxes. Piedmont Wholesalers had no knowledge of the deal or that its name was being used.

Wells pleaded guilty in federal court in Mississippi in May to fraud, trafficking in contraband cigarettes and money laundering. He has not been sentenced. Two other men, Jerry Burke of Tupelo, Miss., and Mitchell Sivina of Doral, Fla., have also pleaded guilty to taking part in a cigarette trafficking plot.

Published: Thu, Jan 6, 2011


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