Tobacco Importers Accused of Scheme to Avoid Federal Excise Taxes

Good Times USA LLC and its business partners have been accused of devising a scheme to avoid paying federal excise taxes (“FET”). The U.S. government gave a not so happy new year gift to Good Times and its partners on January 4, 2019, as it filed a Complaint in the U.S. Court of International Trade, accusing the companies of conspiring to avoid more than $750,000 in federal excises taxes on imported cigars. Essentially, the alleged scheme involved sales made pursuant to special arrangements between a manufacturer and purchaser, resulting in alleged false declarations of the prices at which the subject cigars were sold. The government specifically took issue with the belief that the tobacco importers failed to disclose this special arrangement under which it based the value of the tobacco for avoidance of federal excise taxes. The case is U.S. v. Karny Enterprises Inc. et al., case number 1:19-cv-00004, in the U.S. Court of International Trade. It is important to remember that the allegations in the complaint are not proven and are beliefs the government has based on circumstantial evidence.

In the United States, tobacco is taxed by federal, state, and local governments. Tobacco products are taxed in two ways: per unit tax, which is based on a constant nominal rate per unit (for example, per pack of cigarettes), and the percentage tax, which is based on a constant fraction of either wholesale or retail price. Currently, federal taxes on cigarettes, small cigars, and smokeless tobacco products are unit taxes and federal taxes on large cigars are percentage-based taxes. Federal Excise Taxes on tobacco are taxes paid when purchases are made on tobacco and/or imported into the country. Further, some states take the position that the state taxes apply to not only tobacco taxes but also the federal excise taxes, as they are typically passed down from the importer/wholesaler to distributor/retailer.

These taxes clearly decrease the profit when importing tobacco products. The three businesses involved in the case are Good Times USA LLC, Karny Enterprises, Inc., and Rolida Investments. The relationship between the three entities was that Good Times USA LLC would purchase cigars from Karny, which served as a pass-through entity that purchased cigars from Rolida. The FET for each transaction was the purported sales price between Rolida and Maverick, plus one dollar per carton of cigars, as opposed to the arm’s length transaction, the actual price of the tobacco. There have also been other complaints filed against tobacco importers that have been operating under similar tax avoidance schemes.

The alleged arrangement between Good Times and Karny was an interesting scheme, by which Karny would provide two invoices to Good Times for every shipment it received from Rolida.The first invoice itemized the tobacco product and its cost from Rolida, while the second allegedly included the FET, federal tobacco buyout payments, customs broker fees, harbor maintenance fees and other incidental charges made upon entry. Through this alleged arrangement the business partners schemed the government out of nearly $1 million in taxes.

It will be interesting to watch how these cases unravel. There are several planning tactics to take advantage of for reducing tax liabilities. If you are a tobacco importer and are hit with high federal excise taxes, contact us, as we may be able to help you reduce your tax liability and fight vigilantly on your behalf in the event of a tobacco tax audit. If you have been contacted by a government agency for operating under a similar tax scheme to avoid federal or state tobacco taxes, contact us.

About the Author: Paula Savchenko is an associate attorney at the Law Offices of Moffa, Sutton, & Donnini, P.A, based in Fort Lauderdale, Florida. Ms. Savchenko joined the firm in 2013 and practices primarily in the areas of Taxation and Administrative Law matters, as she counsels and represents businesses and individuals in their dealings with government agencies. More specifically, most of her work involves tax and regulatory matters, with an emphasis on state and local taxation.