State & Local Tax Blog

Sales Tax Voluntary Disclosures: 5 Things to Know Before You Sign

Voluntary Disclosure Agreements (VDAs) are a great way for a business to get compliant while minimizing the expense of doing so. Here are five things you should consider before you sign your VDA.

What Is a Voluntary Disclosure Agreement?

There are thousands of businesses that can’t afford to get compliant because of unpaid sales tax, interest and penalties. Unfortunately, states lose revenue from this. To make getting compliant easier, states sometimes allow businesses to limit their outstanding liability. This is known as a voluntary disclosure agreement.

These agreements are a win-win for both parties. Businesses can get compliant at a reasonable cost. And state governments increase their revenue collection.

VDAs have been around for a long time, but have increased in popularity after the landmark Supreme Court Decision Wayfair v. South Dakota drastically increased the liability of thousands of businesses. To achieve a clean slate and get businesses compliant with new regulations, most states offer voluntary disclosure programs.

However, VDAs only apply to the state in which they’re offered. If you’re out of compliance in multiple states, you’ll need to go through the disclosure process in every state where you’re unregistered and have nexus.

Consider the Available Programs

To encourage businesses to get compliant, states often implement formal voluntary disclosure programs. These make it easier for states to offer VDAs to businesses at scale.

Voluntary disclosure programs provide an amazing benefit: most states will limit how far back they look for back taxes, and waive their noncompliance penalties, which can be as high as 40%. This provides a valuable opportunity to get compliant while saving thousands in taxes and penalties.

But disclosure programs don’t last forever.

Most disclosure programs have a defined deadline for getting registered. If you miss it, you’re usually out of luck. But sometimes states will extend their programs. Washington, for example, extended its deadline by several months in July 2020.

Even then, there is always the possibility to negotiate a VDA outside of a formal program. But sometimes negotiated VDAs don’t offer the same benefits and protections a more formal program can. You’re better off taking a great deal now than negotiating an uncertain one later.

If you’re looking to get compliant, it’s worth exploring disclosure programs as soon as possible.

Your Total Sales Tax Liability

Most voluntary disclosure programs are intended for businesses that are unregistered and have substantial nexus. If you have nexus, but your total liability is low, you likely don’t need to worry about signing a VDA.

The goal of sales tax legislation is for states to generate revenue. If the revenue the state can generate from your VDA and sales tax compliance is small, it might not make sense to participate in a voluntary disclosure program.

Until your sales tax responsibility reaches several thousand dollars per year in a given state, it’s usually immaterial to both you and the state’s department of revenue.

So, if you’ve generated a sales tax liability but aren’t sure if you should register with the state, it’s a good idea to work with a specialist in state sales tax to evaluate your options.

Read the Fine Print

Each state has unique sales tax laws. While most agreements will define who is eligible, terms and costs will all be drastically different.

VDAs are complex legal contracts with provisions that will impact your business. Thorough due diligence is essential to avoid costly surprises. Because entering into and reviewing VDAs is a challenging and time-consuming process, most businesses elect to work with sales tax pros to make the process easier.

You Can’t Sign a VDA While Under Audit

You can’t request a VDA if you receive a state audit notice beforehand. And, if you’re already under audit, you can’t use a VDA as a “Get Out of Jail Free Card.”

If you’re not under audit, move quickly. When it comes to state audits, it’s not a matter of if, but when. And if you fail to get compliant beforehand, you’ll end up with a mountain of liability, interest and penalties that you will have to pay out of your own pocket.

So, request a VDA as soon as possible.

Conclusion

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. But before you sign a VDA, make sure you’ve conducted thorough due diligence and are aware of the agreements’ implications.

Need assistance with a voluntary disclosure agreement? We’re here to help. Fill out our short What’s Next questionnaire to get in touch with our consultants for a free 45-minute consultation.

 

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