I was going to pay a person through PayPal and asked what the total was with tax. I was told there was no tax if paying through PayPal. I asked, aren’t you required to charge tax? They said, if I was paying cash, the taxes were included. While I suspect they are doing this to avoid paying income tax on it, I have no way of actually knowing whether or not they will. So is it ethical for me to pay the non-tax price for this product?

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About John Hooker

T. Jerome Holleran Professor of Business Ethics and Social Responsibility Tepper School of Business Carnegie Mellon University

One response »

  1. John Hooker says:

    I think you are talking about sales tax, not income tax. I will assume that both you and the seller are in the USA. The first issue is whether the seller is even required to collect sales tax online. This is fiendishly complicated, because it varies by state and may depend on the location of the buyer, whether the seller has a “physical presence” in the buyer’s state, the type of product sold, the size of the seller’s business, etc.

    PayPal has sophisticated tools for computing sales tax, but the seller must turn them on and set them up properly. It would be hard for you to determine whether the seller is collecting the right amount of tax, even if you had all the relevant information. To further complicate matters, if you don’t pay sales tax online, your state may theoretically require you to pay the tax directly to the state, perhaps when you pay state income taxes.

    To focus on the ethical issue, let’s suppose you somehow know that the seller is supposed to collect sales tax, but PayPal adds no tax to the price. In your case, the seller claims that the price already includes the tax, but let’s suppose you somehow know this is false. Then should you pay the tax?

    If you add tax to the price, the seller would just pocket the money or send it back to you. If your state requires you to remit tax directly to the state on internet purchases, then the choice is easy: pay the tax.

    If you are not legally required to pay the sales tax, then we fall back on the general issue of what you should do with discretionary funds. Unless your state government is far more effective than most, you can probably think of a more utilitarian way to dispose of your money than sending it to the government—perhaps by donating to your favorite charity.

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