This paper, as part of a research attempt to map and analyse the current situation regarding the Swedish restaurant industry’s tax situation, is focusing on the effects tax evasion on the competition. Previous research has indicated that a large shadow economy sector could lead to unfair market competition and consequently less development in the sector. The companies within the shadow sector of the economy, ie the companies that with different methods are trying to avoid paying some or all of the taxes due to the tax authority, can survive and prosper with lower margins. Simultaneously tax revenues are decreasing. This is a serious issue in a country where the tourism is perceived as an important part of the overall economic strategy. Ultimately the situation could force the serious firms out of business and inflict the tax paying morale in the society as a whole. The results are based on a survey of 535 restaurants in Sweden and indicate that there is a problem not only to survive as a law-abiding firm, but also that the unfair competition is affecting the whole sector’s progress and development. The theoretical contribution is based on adding knowledge, based on industry specific data, to the discussion on the effects of the shadow economy. Simultaneously, the results could be practically useful for the development of a more suitable tax system, such as a presumptive tax system, that could address some of the issues with unfair competition in sectors with similar problems.