Contraband cigarette scheme lost millions in taxes

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Published: January 6,2011

Tags: courts, law enforcement, taxes, tobacco

OXFORD — A multi-state contraband cigarette case that involves Mississippi cost the State of Kentucky millions of dollars in uncollected taxes, according to a federal investigator.

Lousiville, Ky., businessman 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, according to The Associated Press.

That move, a federal investigator said, allowed Chavez, 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 Jan. 4 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 Dec. 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.

No one tied to Chavez, Inc., including owners Israel Chavez of Louisville and his ex-wife, Pam Chavez of Stockton, Calif., has been charged.

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, Ky., 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 and Mitchell Sivina of Doral, Fla., have also pleaded guilty to taking part in a cigarette trafficking plot.

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