MANKATO — A popular Mankato sushi restaurant is accused of persistently defrauding the state of Minnesota of sales tax revenue totaling more than $200,000.
Shogun Mankato Inc., the company that owns Shogun Sushi and Hibachi in Mankato Heights Plaza, is facing 33 felony counts of filing false tax returns, according to the Minnesota Department of Revenue.
The couple that manages the restaurant at the corner of Madison Avenue and Highway 22 is also facing felony charges in the case.
“When a business intentionally uses illegal tactics to reduce their tax bill, it not only hurts law-abiding businesses who pay the correct amount, it breaches the trust of taxpayers who expect a business to pay the sales tax to the state on their behalf,” Revenue Commissioner Cynthia Bauerly said.
The charges follow a lengthy audit and investigation that began in July of 2016, according to a criminal complaint filed in Ramsey County — where the Department of Revenue is based.
The audit, covering a 37-month period starting in October of 2013, discovered that Shogun was reporting an unusually low percentage of cash sales compared to credit card sales.
“A restaurant with significantly lower cash revenue than expected may be under-reporting its cash transactions in an attempt to avoid paying the full amount of sales tax collected,” the criminal complaint states. “To test this, auditors ate at Shogun Mankato and saved the receipts from their meals. ... Each of the 12 ‘observation buys’ was done with cash, not a credit or debit card.”
After later checking the restaurant’s point-of-sale database, it was found that eight of the 12 observation buys had been altered in the system to “canceled” and the amount paid had been changed to $0.00.
“The auditors found numerous ‘canceled’ transactions in each month from October 2013 through October 2016,” the complaint states.
The Department of Revenue’s criminal investigations division took up the case in May of 2017. Further examination of the sales database indicated as many as 49,652 transactions may have been deleted during the 37-month period.
“Using the average ticket price during this time period, these deletions mean that over $2 million in taxable sales were not reported,” according to the complaint. “When the canceled transactions and deleted transactions are included in the revenue of Shogun Mankato, as cash transactions, the ratio of cash to credit falls into an industry-standard range.”
Because of the volume of sales at the restaurant, which has been voted Mankato’s “Best Asian Cuisine” in a Mankato Magazine contest, the restaurant was required to submit sales reports and pay taxes monthly. The charges against the business allege 33 of those reports were false and underpaid sales taxes by a combined $202,687.
Jian Chen, 34, and Fang Chen, 32, — a married couple with homes in Mankato and New York — were charged individually with two counts of knowingly aiding in preparation of tax returns that were fraudulent or false. The Chens were described as managers of the restaurant in the criminal complaint. Fang Chen was also listed as part-owner, along with Xu Bing Wang, 40, who has owned the Mankato restaurant since its founding seven years ago.
Wang is also an owner of Shogun Burnsville, which was charged in January with four counts of failure to pay $43,000 in sales tax. The managers of the Burnsville restaurant also faced charges individually that mirror the charges against the Chens in Mankato. Wang has not been charged individually in either case.
“Jian Chen and Fang Chen just worked there for a few months in 2016,” Fang Chen told The Free Press Friday afternoon in a phone call from New York. “I can’t believe they were charged.”
The criminal complaint states that the Chens were hired early in 2016, that they each have passcodes allowing them to access the restaurant’s point-of-sale database, and that log-on codes associated with them were responsible for canceling between 1,400 and 1,600 transactions in March, April, May and June of 2016.
The Chens were also responsible for providing sales reports to the restaurant’s accountant, who then files the reports with the state and pays the sales tax, according to the investigators.
When Shogun Mankato was informed that it was being audited, Jian Chen texted the company’s outside accountant in Chinese characters, asking “is there any (legal) responsibility on this?” Chen also texted “because we have deleted receipts/invoices in the computer,” according to the complaint.
During the execution of a search warrant in June of 2017, Jian Chen told an investigator that he was aware that there were deleted transactions on the point-of-sale system.
“He claimed that a fuse had burned out, causing the POS system to delete sales tickets,” the complaint states. “This is not a plausible explanation.”