Texas Scammed Out of $10 Million in Tobacco Revenue, Authorities Reveal

Published December 1, 2007

Five people may have cheated Texas out of more than $10 million in tobacco tax revenue, according to indictments alleging the accused were engaging in cigarette tax fraud.

The Travis County indictments were announced in September by Texas Comptroller Susan Combs, who said it is the first prosecution for tobacco tax fraud since a tobacco tax increase took effect January 1.

“When the state cigarette tax increased from 41 cents to $1.41 per pack, we anticipated an increase in tax evasion attempts,” Combs said. “We continue to closely monitor sales of tobacco products and cigarette tax stamps, and we will investigate all suspicious activity.”

False Records

The biggest bust by far involved Mike Kimzey and Richard H. Russo of Louisville, Kentucky. They were charged with 12 counts of tampering with a government record.

According to the indictments, Kimzey and Russo purchased an unusually large number of cigarette tax stamps between August and December 2006, before the tax hike took effect.

They allegedly falsified records of their company’s cigarette purchases and the number of Texas tax stamps they placed on packs of cigarettes.

The Texas Comptroller’s office recovered $9.8 million worth of cigarette tax stamps in Kentucky and southeast Texas. In addition, unpaid taxes on seized cigarettes and unpaid inventory tax that was due at the time of the tobacco tax increase added up to $320,400.

Underreported Inventory

The grand jury also indicted Mohammed Khawar Jamshed, a convenience store owner, on two counts of tampering with a government record. The indictment alleges Jamshed falsified cigarette inventory reports to underreport inventory worth $69,900 in state tobacco tax.

A fourth man was found to have had $5,646 worth of tobacco products on which tax had not been paid. Authorities found the untaxed tobacco products while conducting an unrelated investigation at his business. The tax value of those items totaled $1,988, according to Combs.

A fifth man was indicted for having 300 packs of “gray market” cigarettes at his store and no records to account for them. Gray market cigarettes are labeled “U.S. TAX EXEMPT, FOR SALE OUTSIDE U.S.,” and are tax-exempt as long as they are exported to foreign markets. The cigarettes sometimes make their way back into the Unites States and are illegally sold, often at discount prices because no tax has been paid. Those cigarettes had a tax value of $427.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News and a research fellow at The Heartland Institute.