Sam Woo Gets 3 to 9 Years In Prison

Of course there isn’t anybody really named Sam Woo running all those Sam Woo restaurants.  Rather Sam Woo is one of those Chinese businesses that are given lucky or propitious names, Sam Woo equating to something like "Three Happiness."  Still, when Sam Woo opened their first Orange County branch a local OC restaurant reviewer did refer to Sam, the man, as being in charge. 

And Sam Woo isn’t a monolithic chain, but rather various family members in a loose confederation under the Sam Woo banner, mostly in the Los Angeles area.  Consequently when a news item comes out regarding the Sam Woo restaurant chain,  not all branches are involved. With this clarification in place, one of the Sam’s is in big trouble, engaging in various types of tax and insurance fraud, being sentenced to 3 to 9 years in prison and having to paying $3 million in restitution.  The actual length of the prison sentence seems to be tied to the amount actually repaid to the defrauded taxing agencies and insurance companies.  

Of course, we knew stuff like this was going on in the Chinese restaurant community and occasionally we heard a few details now and then.  Indeed in my Menuism article on why some Chinese restaurants frequently change their names, I made reference to a couple potential tax avoidance scams that could be associated with restaurant name changes.  Meanwhile, a few years ago, the unofficial "Mayor of Chicago Chinatown" Tony Hu, who owned a string of Chinatown restaurants, was sent to prison for a year and fined $100,000 on vague tax evasion and money laundering charges.  But the Sam Woo episode is the most specific information that has ever gone public regarding this kind of activity, and given the magnitude of the punishment here compared to that received by Tony Hu, we can imagine the Sam Woo situation was, in the words of the state of California, egregious.

It is interesting to go through point by point as to the schemes that some of the Sam Woo restaurants took part in.  They are detailed in a news release from the State of California as follows.

Sales tax underreporting.    For over thirty years, the Sam Woo branch in Los Angeles Chinatown was one of the busiest restaurants in Chinatown.  It was also probably the biggest one that operated on a cash only basis, which was a pain when dining there.  But now we know why this, and other branches of Sam Woo in the Los Angeles area operated on a cash only basis.  Actually, in the Menuism article I described the more notorious sales tax scam than merely underreporting restaurant sales.  In this scam, after not reporting all of your sales, you then dissolve the corporation operating the restaurant, then open up a similar or identical restaurant at the same location, but in a new corporation and operating under a new restaurant name.   Practically speaking, this reduces the period of time that the government has to catch up with you for sales tax evasion.  It appears that Sam Woo took advantage of this strategy once, back around 2010, when the Sam Woo in Los Angeles Chinatown closed down and was replaced by something called Hong Kong BBQ.  Now they did print new menus, so while the look and feel of the restaurant was the same, I couldn't be sure if maybe somebody came in and bought the business and decided run it in a similar manner, but a waiter assured me it was the same operation.  Now given that the current criminal action against Sam Woo only goes back to 2012, it does appear that they got away with something with their Hong Kong BBQ maneuver.  And as I will indicate later, the waiter had one other piece of interesting information.

Income tax underreporting.  Obviously income tax underreporting goes hand in hand with sales tax underreporting when running a cash only business.  However what most people don't realize is that sometimes it is the desire of employees that drives the restaurant into the underground economy reliance on cash payments.  Many Chinese workers prefer being paid off the books in cash.  As a young accountant over 40 years ago I was surprised to learn that Chinese restaurants used unreported cash income not to line their own pockets by avoiding income tax, but rather to make under the table cash wage payments to their employees, for which the employer received no tax deduction.  While tales of employer exploitation of Chinese restaurant workers are well known and undoubtedly not uncommon, it was interesting to learn that some Chinese restaurant workers could dictate the terms of their employment.

While the obvious assumption is that these workers want to reduce their income tax liability by reporting less income, there are more important factors involved.  There are many government benefits tied to a worker's reported income, such as Medicaid (known in California as MediCal) eligibility. If I didn't realize this is common knowledge in the Chinese community I certainly would have caught on when I encountered a Chinese restaurant owner many years ago who drove a luxury car and casually mentioned he was on MediCal.  The desire of restaurant workers for at least some of their wages to be paid in untraceable cash has actually caused an operational dilemma for some Chinese restaurants as restaurants skew more toward credit card payments by their customers.  These restaurants simply don't have the cash receipts available to make under the table wage payments coveted by many restaurant workers.

Payroll tax underreporting.  In my Menuism article I also speculated about another possible tax scam that I had not heard about, but was suggested by a cryptic comment made by an unnamed waiter who attributed the change in identity as being forced by the government for being in business for so long.  That conversation was actually made at the former Sam Woo turned Hong Kong BBQ noted above and indeed payroll tax fraud was one of the counts against Sam Woo, by underreporting employee wages and also misstating the rate of employee turnover, which lowers your unemployment tax rate.

Last on the list was worker compensation fraud tied to underreporting reported wages.  I suspect this was done to be consistent with payroll tax reporting, and might not have been intended to be a separate source of fraudulent gain.

Mind you these are just the enforcement actions carried out by the state of California.  Federal income tax rates are roughly triple that of state income tax rates.  Can you imagine what the IRS is going to do to them?