A federal judge in Sacramento today sentenced two Las Vegas tobacco distributors to two years in prison for their role in a scheme to defraud the state of California of more than $24 million in state tobacco excise taxes.
U.S. District Judge John A. Mendez also ordered Ideal Tobacco Wholesale Inc. president Raed Mouri, 47, and executive vice president George Bittar, 53, to pay $1, 060,417 in restitution to the state of California, according to a federal Department of Justice news release.
Bittar and Mouri are the latest defendants prosecuted by the U.S. Attorney’s Office in collaboration with the California Attorney General’s Office in an ongoing federal and state investigation into tobacco wholesalers trading in “other tobacco products”, referred to as OTP, that evade California excise taxes, authorities said.
Involved are tobacco products other than cigarettes, such as cigars, chewing tobacco and leaf tobacco. During the time period relevant to the case, California imposed an average excise tax of 46 percent, based on the wholesale purchase price of the product. California-licensed tobacco distributors are required to collect the tax when they distribute the product within the state. The distributor must then submit to the California State Board of Equalization in Sacramento monthly reports reflecting the amount of untaxed tobacco products other than cigarettes sold in the previous month, the amount of excise tax owed and the payment.
According to court documents, for the calendar years 2006 and 2007, Ideal Tobacco reported on its Nevada excise tax return more than $24.4 million in “other tobacco product” sales to California customers. Such tobacco products sold to California customers are not subject to taxation in Nevada. As required by Nevada law, Ideal Tobacco listed the name and address of each of these California customers on the Nevada return, authorities said.
An investigation reveled that 94 percent of these reported sales, or approximately $22.9 million, were to companies or addresses that do not exist. An additional $500,000, or 2 percent, was reported to California businesses or locations that do exist but are not licensed by the state of California to receive untaxed OTP. The purpose of the subterfuge, authorities said, was to evade payment of the California excise tax.
They said Ideal Tobacco used a variety of shipping companies, from UPS to small trucking companies, and provided the same fictitious company names and addresses on the bills of lading as it listed on its Nevada tax returns. The tobacco products were delivered to a trucking terminal in Southern California where the real customers picked up their shipments. As a result, the shipping companies were not aware that the names and addresses on the bills of lading were fictitious. The customers typically paid for their purchases with cash or money order, further disguising their identities, authorities said.
Ideal Tobacco also under-reported sales to licensed customers in California, disguising the difference as sales to some of the fictitious companies. This permitted the real companies to under-report and underpay the taxes owed on the product.
Of the $22.9 million of the untaxed OTP, approximately $2.3 million was smokeless tobacco. Ideal Tobacco routinely sold this product to California customers in shipments in excess of 500 single-unit-sized cans or packages, or the equivalent, knowing that the California customers did not intend to comply with the state’s accounting, tax an payment requirements relating to smokeless tobacco, authorities said. The result was a tax loss of more than $1 million to the state of California.