Public Auditor: GovGuam conspired with tax-owing cigarette company to stay in business despite the law

Guam’s public auditor – Benjamin J. Cruz – is calling out the Guam Department of Revenue and Taxation for breaking the law and designing a so-called tax settlement with a cigarette company that never actually will be paid.

The company is MidPac, owned and operated by the Calvo family. Guam DRT during the administration of former Gov. Eddie Calvo signed a settlement with the Calvo company to allow MidPac to pay only a fraction of the cigarette taxes it owed to GovGuam. That fraction originally was $14.7 million, according to the 2015 agreement.

”In addition to an initial million dollars, the company has been making monthly payments of $75,000 per month since about July of 2017,” then-deputy director of revenue and taxation, Frank Leon Guerrero, wrote to Kandit on July 14, 2021.

”The annual payment barely covers the interest due on the promissory note,” Mr. Cruz told Kandit. “The original lien agreed to in 2015 was $14 million. Because the annual payment is so inadequate, the lien is now $15.2 million.”

MidPac’s tax debt to the government is growing.

”This ‘arrangement’ was designed to allow the taxpayer to continue to operate though there is no expectation of the original principal ever being paid,” Mr. Cruz said.

That original principal is a fraction of an undisclosed amount in cigarette taxes that smokers already paid to the company but was never remitted to the government of Guam. According to Guam’s tax code, for every pack of cigarettes a smoker buys, $4 of the price tag is supposed to pay the tax on it. The cigarette distributors – if they are bonded-warehouse licensees – are supposed to pay the tax on every one of those packs of cigarettes that leave their warehouse for sale in Guam’s stores. But, GovGuam isn’t counting the number of cigarettes that either enter the island, or leave the bonded warehouses, creating an environment of fraud and tax evasion.

Several audits by the previous public auditor, Doris Flores Brooks, and Mr. Cruz have revealed evidence and further suspicion that one or more cigarette distributors are importing more cigarettes than they are reporting, collecting the taxes smokers pay, and not paying tens of millions in cigarette taxes. Those taxes are primarily meant to support Guam Memorial Hospital through the Healthy Futures Fund.

In an audit released last month, Mr. Cruz confirmed that a cigarette company against which the government placed two tax liens and owes $15.2 million in taxes, continues to be licensed to do business on Guam despite the law clearly stating it is illegal for DRT to do so.

Kandit asked director of revenue and taxation Dane Shimizu, “According to a recent audit by the OPA on tobacco tax collections, DRT has continued to license a tobacco wholesaler identified only as Taxpayer 2 even though that company is in significant arrears. According to the OPA, this is against the law. May we know why DRT continues to license this company, despite the law?”

Ms. Shimizu, who has recused herself from the matter, had her deputy director, Marie Lizama, respond to our inquiry. Two days ago she wrote to Kandit:

”In response to your inquiry on the OPA’s recent audit on tobacco, please note that as indicated in the report, ‘Guam Business License Law and DRT policy dictate that no person may renew a business license without clearance that all taxes due thereon have been paid or arrangements have been made with DRT and that such arrangements are current.’”

Kandit followed up the response, asking, “Has this taxpayer been current throughout the term of the arrangement/settlement? Was the taxpayer current as of the audit period?”

She has not replied.

But Mr. Cruz did, when we asked him whether DRT answered to the audit finding that the agency is violating Guam law by continuing to license MidPac:

“Yes. That was their response to my office. My response is that the ‘arrangement’ is not sufficient to insure that the initial tax liability will ever be fully repaid and recovered by the government. The annual payment barely covers the interest due on the promissory note. The original lien agreed to in 2015 was $14 Million. Because the annual payment is so inadequate the lien is now $15.2 Million. It has grown because the annual payment is so inadequate. A promissory note should have payments to assure that the note will be fully repaid in a fixed number of years. This ‘arrangement’ was never designed to ever be fully repaid. In the first year of the Note the Government did not object, in fact [they] supported the taxpayer in petitioning the court to temporarily lift the lien so that a sale of real property could be finalized and the proceeds of the sale in excess of $1 Million could pass to the taxpayer rather than be garnished by the government pursuant to the note. Under the Note as written the taxpayer can make their annual payment and be ‘current’ and receive a renewal license to continue operation for the next 30 years and the principal will never have been recovered by government and the taxpayer can continue to operate and make a profit. A reputable bank would have designed annual payments sufficient to cover the interest and reduce the principal so that the loan will eventually be repaid within the agreed to loan period. This ‘arrangement’ was designed to allow the taxpayer to continue to operate though there is no expectation of the original principal ever being paid.”

While the settlement occurred during the Calvo administration, the current administration of Gov. Lou Leon Guerrero, which has continued to allow the licensing, also has significant conflicts of interest. Ms. Leon Guerrero has close family ties to another cigarette distributor company, and according to her final campaign finance report to the Guam Election Commission, members of the Calvo family and top executives of their companies donated thousands of dollars to her reelection campaign.

Kandit asked her director of communications, Krystal Paco-San Agustin last week: “Has the governor or anyone at the governor’s office given any instruction or even suggestion to the Department of Revenue and Taxation to continue allowing the licensing of MidPac as a tobacco-distribution company?”

She replied Monday, “The Office of the Governor is not involved with the issuance of business licenses, including those of tobacco wholesalers. That is a statutory and regulatory process that is held by DRT. The Governor has the fullest confidence that DRT is fully complying with the applicable laws and regulations.”

We followed up with the questions:

”So, directly to the question of whether anyone at the governor’s office got involved in the determination to renew MidPac’s business license since 2019… the answer is ‘no?’”

”How does the governor reconcile her confidence DRT is following the law against the express statement in the OPA audit that says DRT did not follow the law?”

She has not replied to the follow up questions.


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