Cigarette retailers scammed Anchorage out of $1.3M in taxes, indictment says

casey.grove@adn.comJuly 23, 2013 

Eight tobacco sellers are charged with avoiding more than $1.3 million in Anchorage cigarette taxes over three years by exploiting a weakness in how the city collects the tax, one of its most lucrative revenue streams.

The defendants are charged in federal court with mail fraud, money laundering and conspiracy to make false statements regarding the distribution of cigarettes. They are:

- Michael Butler and Sun Sims, owners of Up In Smoke, Golden Eagle Tobacco, and Longmere Lake Grocery and Liquor;

- Kimberly Sims, daughter of Butler and Sims and manager of Up In Smoke;

- In Sook Baik, owner of two Shell gas stations in Anchorage;

- Kyong Hee Kim, owner of Mini Stop Grocery;

-Jae Ho Lee, owner of Cheap Smokes;

- Jae Gak Lee, owner of Party Time Liquor; and

- Jerry Lee, owner of Lucky Seven Foodmart.

According to the indictment, the defendants lied to wholesale tobacco distributors when buying cigarettes. The distributors are required to include the city's $2.20-a-pack tobacco tax on sales to Anchorage retailers, but they can also sell untaxed tobacco to retailers in communities that do not have such a tax.

From 2009 to 2012, the defendants allegedly told two wholesalers, which are not named in the indictment, that some of the cigarettes they bought were to be retailed at two shops owned by Butler and Sims in Kenai and Sterling, which do not have an excise tobacco tax. In exchange, Butler and Sims got a kickback from the Anchorage retailers they supplied, the indictment says.

"The defendants sold the cigarettes purchased through this scheme within (Anchorage) and charged the consumer a price that appeared to include the evaded cigarette excise tax, thus increasing their profit margin on the sale of cigarettes," prosecutors wrote in the indictment.

"Approximately every week during this time frame, Michael Butler, Sun Sims, and Kimberly Sims collected and received this fee plus the wholesale cost of the cigarettes, totaling approximately $3,600,000 in the form of cash or check, from In Sook Baik, Kyong Hee Kim, Jae Ho Lee, Jae Gak Lee and Jerry Lee."

According to the indictment, the total amount of city tax they avoided paying was more than $1,375,000, much of which federal prosecutors intend to go after through criminal forfeiture allegations. In a series of search warrant executions, federal agents in October seized more than $1.2 million in funds from the defendants, including hundreds of one-ounce silver coins and hundreds of thousands of dollars in cash kept in some of their homes, the indictment says.

Assistant U.S. Attorney Stephan Collins said Tuesday the coordinated searches, which law enforcement wouldn't comment on at the time, were related to the prosecution of Butler, Sims and the others.

"I can't comment on whether one was the ringleader or the others knew about their tax exempt status and approached them," Collins said.

Anchorage's tobacco tax, in place since 1989, is among of the city's top five revenue streams, bringing in an average of $22 million a year, according to the city's treasurer, Daniel Moore, and chief financial officer, Lucinda Mahoney. That is roughly 4.6 percent of all city revenue, not including state money for schools, Moore said.

"It's many, many millions of cigarettes imported into Anchorage every year," Moore said.

If what prosecutors say is true, the alleged tobacco tax evaders took a significant chunk from the city's tax revenue, Mahoney said. City revenue officials are looking at ways to make it more difficult to shirk the tax, she said.

"We do believe there is some room for improvement and we're working on that now," Moore said. "It's basically to address any type of loopholes that may have been used in the past."

Reach Casey Grove at casey.grove@adn.com or 257-4589.