Is a Voluntary Disclosure Agreement right for you? Voluntary Disclosure Agreements (VDA's) can be an effective tool in mitigating prior period sales tax exposure, however the following steps and factors should be part of any decision to pursue a VDA.
The first step is to determine if you have sales tax nexus, or a “connection” with a jurisdiction sufficient enough to require you to comply with its tax laws. This can be tricky, but substantial physical presence, which can include traveling sales reps and trade shows, is the standard by which sales tax nexus is evaluated.
Second, you should review the taxability of your products or services to determine if they are subject to sales and use tax – particularly in the states where you have sales tax nexus.
If it is determined that your products or services are subjects to a state’s sales and use tax, you will need to estimate your prior period exposure. This analysis should encompass all periods where your company had nexus and taxable sales. This data will assist in determining a mitigation strategy.
Mitigation options might include a refund of tax to your customers (if you collected tax and you are certain you do not have sales tax nexus), prospective registration and compliance (although you can remain at risk for penalties and interest under audit), or a Voluntary Disclosure Agreement.