One of the biggest piles of BS I have ever read. Of course illegal earnings can be taxed. Remember Al Capone, who wasn't jailed because of any of his illegal activities, but for not paying the taxes on his (illegal) income. In Germany the "tax secret" goes so far, that the tax authorities aren't allowed to tip off the law enforcement, so you can declare your income from pimping and drug dealing 
Regarding the legality of HKs, it differs from country to country. In Germany importing for personal use is legal (because it's not you, the importer, that broke the law, but the guys in HK). On the other hand, if you start to sell your HKs, they get illegal, because the distribution rights belong to the local licensee and he probably hasn't allowed you to distribute the title.
So at the time, when customs inspects the DVDs, they are still legal, or at least the customs can't prove that they're not for your personal use (unless you order dozens of each title). But in the moment you sell them, they are illegal.
Regarding the legality of HKs, it differs from country to country. In Germany importing for personal use is legal (because it's not you, the importer, that broke the law, but the guys in HK). On the other hand, if you start to sell your HKs, they get illegal, because the distribution rights belong to the local licensee and he probably hasn't allowed you to distribute the title.
So at the time, when customs inspects the DVDs, they are still legal, or at least the customs can't prove that they're not for your personal use (unless you order dozens of each title). But in the moment you sell them, they are illegal.