April 25, 2011

NYC sues over Internet sales of tax-free cigs

By DAVID B. CARUSO   Bloomberg

New Yorkers hoping to avoid the nation’s highest cigarette taxes have long turned to the Internet as a source for cheap smokes, but few bought as often, or as much, as Roza Budansky, according to city officials.

Over a three-year period, the 64-year-old purchased nearly $1 million worth of untaxed cigarettes from an Internet retailer in Louisville, Ky., said a federal lawsuit filed Wednesday by the City of New York. In total, some 32,232 cartons were shipped to her modest apartment in Brooklyn, the suit claimed.

The city’s lawsuit accuses Budanksy and 31 other people of evading millions of dollars in taxes by buying heaps of cigarettes over the Web from Chavez Inc., which was raided and effectively shuttered by the Bureau of Alcohol, Tobacco, Firearms and Explosives in late 2009.

Lawyers for city said the variety and quantities of cigarettes involved made it clear that the cartons were being resold on the black market as part of a tax evasion racket.

Each of the defendants was listed in company billing records as having bought thousands of cartons — far more than they could smoke themselves. Budansky’s orders, the suit said, were for 22 different brands and were placed 10 to 15 times a month.

The suit seeks $6.5 million in unpaid taxes from Chavez and its major New York City customers, plus $13 million in penalties.

Attorneys who have represented the company’s principal owners, Israel and Pam Chavez, in past legal proceedings said Thursday that they hadn’t seen the complaint and didn’t yet know whether their clients would comment.

In January, the company lost a legal appeal in which it had challenged the seizure of its bank accounts and assets. In court, the company had acknowledged that it didn’t collect taxes on out-of-state cigarette purchases but argued that it wasn’t required to do so.

Justice Department lawyers said the company had $132 million in online sales over just a few years. They had argued that the company’s key sin wasn’t the failure to collect taxes, but its refusal to comply with a law requiring it to report purchases to state officials, so that customers could eventually be billed at their local tax rate.

Attempts by The Associated Press to reach Budansky by phone and through social networking messages were not immediately successful, but she told The New York Post in an interview published Thursday that she was innocent.

She acknowledged that she had, indeed, bought cigarettes over the Internet in the past for drivers at a limousine company where she once worked, but she claimed she stopped in 2006 after she was diagnosed with lung cancer. Budansky told the newspaper that someone at the limousine company must have continued placing orders under her name.

“There were, like, 30 people there,” she said. “They were all buying.”

The case is the latest in the city’s campaign to go after the legions of scofflaws and smugglers who go to great lengths to evade the $5.85 in state and local cigarette taxes charged on every pack sold in New York City.

Previously, the city has sued smoke shop owners on one of Long Island’s Indian reservations, accusing the businesses of supplying tons of untaxed cigarettes to street hustlers and convenience store owners who re-sell them in the city.

It has also collected more than $3.3 million since 2006 from residents who have purchased cigarettes over the Internet, based on records supplied by the retailers who are complying with the federal reporting requirement.

On Thursday, Queens District Attorney Richard Brown announced that he had formed a new unit that would be focused on tax crimes, especially ones involving cigarette trafficking.

“Cigarette smuggling to evade state and local taxes is a multi-million dollar industry,” Brown said. “It is a highly profitable tax-free cash business for those involved in it. However, it cheats taxpayers who must dip into their pockets to pay higher taxes. And it cheats the government as well by fueling an underground economy which does not pay much needed state and city taxes.”

He cited 12 recent arrests, including some cases where airline passengers arrived from foreign countries carrying cartons of untaxed cigarettes in their luggage, and others where city residents had received cartons through the mail.

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