Lessons From DOJ Prosecution Of Tony Hu For Sales Tax Fraud

On Oct. 18, 2016, a federal judge sentenced a well-known Chicago restaurant owner to prison for carrying out an extensive scheme to avoid paying state sales tax collected from customers of his establishments. Two important lessons may be drawn from this criminal case. First, criminal prosecutions of business owners for avoiding payment of state sales tax, which historically have been pursued by state authorities under state law tax statutes, may now be brought by federal prosecutors using the federal fraud and money laundering statutes. Second, the sentence imposed reflects the growing tendency of judges to impose sentences in tax cases that are below the applicable range as calculated under the United States Sentencing Guidelines.

Factual Background

The defendant in the case, Hu Xiaojun (also known as Tony Hu), owns and operates nine restaurants in the Chicago area. He was charged with federal wire fraud and money laundering offenses arising from his failure to pay sales tax to the state of Illinois on nearly $10 million in cash transactions occurring at his restaurants over a four-year period. Earlier this year, Tony Hu pleaded guilty to one count of wire fraud and one count of money laundering.1

According to the guilty plea agreement, between January 2010 and September 2014, the defendant failed to pay sales tax on transactions in which customers paid cash. To conceal cash sales, he instructed restaurant managers and employees to provide him with daily summaries of restaurant sales, which he would in turn alter to conceal cash sales. Hu and others would destroy the daily summary reports and cash transactions receipts, replacing them with incorrect reports that omitted the bulk of each restaurant's cash sales. To hide cash sales from the state tax authorities, the defendant instructed employees to withhold cash generated from the restaurants from the corporate bank accounts to avoid creating financial records for those cash sales. Specifically, the restaurants in question discarded cash receipts until the reported amount was approximately 15 to 20 percent of credit card sales. The "discarded" cash was used to pay restaurant employees and suppliers without recording those expenses in the corporate books and records. The defendant also deposited a portion of the cash into his personal bank account, which he then used to pay personal expenses.

During the 2010 to 2014 time period, Hu instructed others to submit fraudulent sales figures to the Illinois Department of Revenue on monthly sales tax returns. Each month, the defendant directed his employees to provide false sales figures to his accountants, who in turn provided those figures to the state. In all, the defendant underreported his sales to the state by nearly $10 million, resulting in his underpayment of sales taxes by more than $1.1 million.

The wire fraud charge to which the defendant pleaded guilty is based upon his sending...