Let’s talk about voluntary disclosure agreements (VDAs). Economic nexus laws were established after the landmark Wayfair v. South Dakota Supreme Court Decision. This drastically increased the sales tax responsibility of thousands of businesses. As such, more and more people are faced with unexpected sales tax liabilities in multiple states. 

Liability can happen when a business fails to comply with franchise, income, sales and use or other taxes. By submitting a voluntary disclosure agreement (VDA) you can effectively meet compliance obligations. This is a great way to get registered while minimizing the expense of doing so. However, signing a VDA and confidently navigating sales tax issues with your business can be a complex process. You’ve got questions; we’ve got answers. 

What is a VDA?

A voluntary disclosure agreement (VDA) is a contractual agreement between your business and the states and/or local jurisdictions. It is a legal measure to self-report back taxes owed. You can typically enter a VDA anonymously; this can be done through a third-party such as a sales tax advisor, CPA or attorney as a representative.  Most states will not require your representative to reveal your business or company name at this stage of communication.  The representative will be able to determine your eligibility for a VDA program and if it would be beneficial for your situation. They can even negotiate the penalty reduction, limit the look-back period and potentially set up a payment plan at a price your business can manage. If it’s not a good fit; the anonymity gives you the option to reject the state's offer and walk away unscathed. 

Why Should I Enter a VDA? 

When you enter into a voluntary disclosure agreement you are demonstrating to the state that your history of unpaid sales tax and tax liabilities were not made maliciously. It also shows the state it was an honest mistake made due to error, misunderstanding or miscommunication.

This process allows you the opportunity to negotiate terms and get compliant in a cost-effective way due to reduced penalties and interest along with the shortened look-back period.

Why Does The State Offer VDAs?

When a business can't afford to get compliant because of unpaid sales tax, interest and penalties; nobody wins. The state loses revenue in this scenario; furthermore, the business loses its ability to continue growing and selling their products and/or services.

  So the states have found that offering a VDA allows businesses to get compliant easier. The states will typically grant a waiver of penalty and interest when a business comes forward voluntarily. They will also limit the look back period, which typically ranges 2-3 years. This has the potential of seriously reducing the amount of tax due. 

Ultimately, offering the option of a VDA turns a sour situation into a win-win for both parties. Businesses can carry on and get compliant at a reasonable cost. Additionally, the state continues to increase revenue which plays a vital role in the functioning of state governments and systems.

When Should I Sign a VDA?

Disclosure programs don’t last forever. Most disclosure programs have a deadline for getting registered. If you miss it, you may be out of luck. If you are looking to get compliant, it’s a good idea to start weighing your options with disclosure programs as soon as possible. Acceptance into a program tends to be contingent upon patterns in your business’s noncompliance. 

Also, keep in mind that a VDA is not a “get out of jail free” card. If you are under audit you cannot request a VDA after you’ve already received the state audit notice. So if you have a large amount of tax liability, a VDA could very well save you from paying a considerable amount of money in interest and penalties out of pocket. 

 I Have Sales Tax Liability; Should I Go Sign The VDAs for Every State Right Now?

Hold your horses. Easy does it. Knowing when to enter into a VDA is important, but it’s equally important to know when NOT to. 

Most voluntary disclosure programs are meant for businesses that are not registered and have a large nexus footprint - meaning, they have established nexus in many states. If you have nexus, but your liability is low you probably don’t need to worry about signing a VDA. As we mentioned before, the goal of sales tax legislation is to generate revenue for the state. If the revenue potential from your VDA and your sales tax compliance is small, it may not make sense to participate in a voluntary disclosure program. However, don’t sit on getting compliant. It’s best to course-correct as soon as possible to obtain compliance. 

Are the Rules and Regulations Concerning VDA’s the Same in Every State?

  No. Each state has unique sales tax laws. Terms and costs will all be drastically different; which is why this process is so complicated. These differences will impact how much information you need to gather. Some states will allow you to use a spreadsheet to indicate the amount of taxable sales. Other states require more; such as completing tax returns for each period. 

Another nuance amongst the states are the terms of eligibility. For example, some states will allow businesses that have registered and filed for income tax in the state to enter a VDA for sales tax. However, some states don’t allow this. 

Entering into and reviewing VDAs is a challenging and time-consuming process. Most businesses elect to work with sales tax professionals to make this process easier. 

How Do I Know If a VDA is For Me?

If your business is having trouble getting compliant, voluntary disclosure agreements are a great way to get registered while minimizing the expense of doing so. It is the most advisable option. Playing a high stake game of audit roulette is a risky move.

  But before you sign a VDA, make sure you’ve conducted thorough due diligence and are aware of the agreements’ implications. It is important to take a proactive approach to resolve any sales tax liability. As we like to say, there is confidence in collaboration. Find confidence in your approach by working with our professionals who can help you navigate your next steps. Find peace of mind with our free “What’s Next Call” where you can find the answers to any further questions you have.