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Dealing with Back Taxes

DILEMMA

Our company is 17 years old and currently operates nationally. We provide a service. After 14 years in business, we learned that our service is subject to sales tax in certain states. This was brought to our attention by the state of Texas, which proceeded to bill us for several back years. Although we retain a top-level accounting firm, we had never been alerted that our service may be subject to sales tax in certain states. Therefore we have never charged sales tax. Our accounting firm suggested that they could research all states to see if they impose a sales tax on our service. My question is: Do we have an ethical responsibility to (a) pay for this research to be done? (b) Report our existence to the states that charge sales tax? (c) Pay back taxes and possibly interest and penalties based on whatever the state charges us?

In a Taxing Situation

RESPONSE

Thanks for writing. One of the most basic moral lessons that we pass onto our children is the fact that acting ethically can sometimes be costly. Of course, this is also true in business settings.

Almost everyone agrees with the idea that applicable laws function as a “moral minimum” for businesses to follow. Moreover, it is largely incumbent upon businesses to become aware of and to understand the legal environment(s) under which they are operating. I understand that we may not agree with some laws (especially taxes!), however, if each of us chose to only obey the laws with which we agree, would be in deep trouble as a society.

So, yes, it is a moral obligation to pay taxes where and whence they are due. It is not clear from your description if alerting you to all applicable tax laws was within your retained accounting firm’s scope of contracted services. If so, it looks like they may have failed you. If not, it would be advisable to have them conduct the research unless there is a better option available (another firm, in-house expertise, etc.)

Making yourself known to the tax authorities, however, may of course place you at a competitive disadvantage. Not knowing the nature of the goods or services that you provide or your financial circumstances, I am not in position to assess whether or not charging sales tax would raise your prices to the point where customers would turn to your nearest competitor, or if you could simply “eat” the additional amount in question. If customers would flee, it might be best to alert the state to the existence of your competitors. No one wants to be a “snitch,” but this would certainly make sharing the tax burden fairer.

Kenman Wong
Professor of Ethics, School of Business and Economics
Seattle Pacific University

If you have an ethical dilemma at your workplace,
email Ethics at Work (eaw@ethix.org).
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Ethix along with our diagnosis.

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