Sheriff’s Office accused of tax avoidance

A recently unsealed court document shows the Shenandoah County Sheriff’s Office paid no taxes on cigarettes obtained for use in an undercover operation aimed at out of state cigarette smugglers.

The document from the Virginia Department of Taxation is being used to defend two men charged with more than 60 counts of buying, transporting and selling untaxed cigarettes. The defendants’ attorney, David Downes, is accusing the Sheriff’s Office of violating the same law by selling millions of dollars of untaxed cigarettes to his clients as part of the undercover operation.

Each conviction carries a sentence of five to 40 years under state law.

Downes argues that the entire undercover operation was conducted like a money-making venture for the Sheriff’s Office instead of the criminal investigation Sheriff Tinothy C. Carter insists it was.

Downes says it all adds up to a form of entrapment that lured the defendants, John Charles Taveras and Thaer Nimer Khashman, both of New York City, into dozens more illegal transactions than would have been conducted in a typical undercover investigation targeting drug dealers.

A recent amendment to the state’s cigarette tax law is fueling Downes’ claims that the cigarette law should have applied to the Sheriff’s Office as well as his clients.

The amendment, sponsored by Del. C. Todd Gilbert, R-Woodstock, passed the General Assembly in March. The legislation exempts federal, state and local law enforcement agencies from cigarette tax stamping laws “when possession of unstamped cigarettes is necessary in the performance of investigatory duties.”

The undercover investigation that led to the arrests of Taveras and Khashman was conducted between February 2011 and Aug. 1, 2013, well before the cigarette tax exemption for law enforcement agencies took effect on July 1, 2014.

“How convenient,” Downes said in an interview. “You’ve got the sheriff from Shenandoah County conducting this big undercover operation, and you’ve got the delegate from this area moving this bill.”

Downes subpoened the state Department of Taxation asking the agency to provide records showing that the Sheriff’s Office, the U.S. Department of Alcohol, Tobacco, Firearms and Explosives, Carter and two other law enforcement officials paid a $3 tax on each of the tens of thousands of cigarette cartons sold to Taveras and Khashman.

An affidavit filed by an agency employee replied to Downes: “I have made a diligent search of the records of the department and found no responsive documents related to this request.”

The Northern Shenandoah Valley has been the site of several massive investigations into cigarette smuggling over the last four years, and the Shenandoah County Sheriff’s Office has played a key part in several of them. Some cases have been assembled by federal agents and filed in U.S. District Court. Others have been prosecuted in Shenandoah County courts using local law enforcement.

The enormous sums of money involved in the federal-led investigations – more than $20 million in one case – echo in court documents filed in the case of Taveras and Khashman.

Downes wrote in one affidavit that Taveras alone is accused of conducting 46 transactions with undercover officers and paying them more than $2.4 million for 73,610 cartons of unstamped cigarettes, each of which carries an excise tax of $3.

Cigarette smugglers make their money by obtaining large numbers of cigarettes in Virginia, a state with the nation’s second lowest cigarette taxes, and transporting them to New York City and other mid-Atlantic states with much higher cigarette taxes. The subsequent sales of low tax or no tax cigarettes generate enormous profits for the sellers.

Many in law enforcement defend the crackdown on illegal cigarette sales as necessary for curbing other illegal activities associated with the trade. A report from the Virginia State Crime Commission cited cigarette smuggling as a contributor to money laundering schemes, credit card fraud, burglaries, robberies and homicide (and) murder for hire schemes.”

The origins of the amendment to the state law that exempted law enforcement agencies from having to pay cigarette taxes are murky.

Gilbert, the principal sponsor of the legislation, was tight-lipped when asked about it.

“I don’t want to comment on it,” Gilbert said.

Carter described the amendment as a “clarification” to existing law.

Carter said he spoke to the state crime commission about creating the exemption before Gilbert, who is a member of the commission, introduced it as legislation. The commission issued a report that listed the exemption among several recommended changes in state law pertaining to illegal cigarette sales.

Carter said it is a normal practice for law enforcement officials to handle contraband — a term applied to street drugs and other items that would be illegal for ordinary citizens to possess — during the course of an investigation.

“Untaxed cigarettes, dirty money, stolen property, it’s all contraband and it’s illegal to possess,” Carter said.

Carter said he was eager to have the Taveras and Khashman cases brought to trial. He added that Downes is confused when he equates an undercover investigation of cigarette trafficking with a business venture.

“I don’t think he quite understands that, but if we go to trial, he’ll understand it better,” Carter said of Downes.

Carter refused to comment on the amounts of money that changed hands between undercover officers and the targets of the investigation. He said he did not want to undermine the prosecution’s case by going into detail about how undercover officers gathered evidence against Taveras and Khashman.

In the meantime, Downes is building his case around a theory of entrapment that he summed up in a memorandum filed in circuit court: “The defendant’s opportunity to purchase unstamped cigarettes did not exist but for the conduct of the police.”

Jimmy Gurule, a law professor at the University of Notre Dame and an expert on entrapment law, said such a defense is generally a long shot, although he is not familiar with the details of the Taveras and Khashman case.

“It’s very seldom raised and even more rarely successful,” Gurule said of entrapment. “You have to prove the defendant was not predisposed to commit the crime.”

Downes said he is determined to press his arguments in preparation for a trial that has yet to be scheduled. Judge Dennis L. Hupp has said he hopes to set a date soon.

Downes is trying to obtain a complete listing of expenses and revenue obtained by the Sheriff’s Office during the undercover operations against Taveras and Khashmnan. Hupp recently ordered Carter to file “an accounting of all undercover cigarette transactions between Jan. 1, 2011 and Dec. 31, 2013” that pertain to the case. Hupp will review the records in private before deciding how much of the information can be introduced as courtroom evidence.

“They’re making millions of dollars,” Downes said of the Sheriff’s Office. “That’s not only a business, it’s a pretty profitable business.”

An investigation earlier this year by The Northern Virginia Daily found that the Sheriff’s Office had collected more than $4 million in the previous three years through cash and property seized as a result of investigations into drug trafficking and illegal cigarette sales.

The money – dubbed asset forfeiture funds – comes from the U.S. Justice Department. Agency records showed that Shenandoah County received the highest amount of asset forfeiture money among all law enforcement agencies in the state in 2011 and the second highest amount in 2013.

In a legal brief, Downes accused the Sheriff’s Office of using cigarette tax stings to obtain money for the construction of a new Sheriff’s Office headquarters and, years earlier, for a new jail when the county Board of Supervisors was debating the issue and the current regional facility in Front Royal had yet to be built.

Downes argued in his brief that the Sheriff’s Office “has made tens of millions of dollars of profit through the sale of unstamped cigarettes during the course of the subject undercover operation, which was the primary objective all along.”

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Contact staff writer Joe Beck at 540-465-5137 ext. 142, or jbeck@nvdaily.com