Step-by-step guide to the VDA process

If your sales tax obligations have gotten ahead of you – and you owe back taxes – you have a few tools to mitigate your problem. You can refund collected sales tax to your customers, or you can proactivity register with a jurisdiction and pay what you owe.

Another, maybe more advantageous tool for you: the Voluntary Disclosure Agreement (VDA). Almost all states provide some version of a VDA to offer companies the chance to self-disclose sales tax exposure and past obligations in exchange for a tax break.

Paying up – to your advantage

First, realize that if you don’t disclose your back taxes and instead they’re unearthed through an audit, you can end up being assessed various penalties, plus interest plus all tax due. A VDA can make the sometimes-hefty penalties disappear.

A VDA is a legal means for taxpayers to self-report back taxes owed for income, sales, property and other tax types. In exchange for voluntary reporting of the tax due, states generally waive a taxpayer’s penalties and, almost as important, cap the look-back period for other tax liabilities.

For example, if you have $10,000 in tax due for each of the previous seven years and the state will limit the lookback to three years, you can voluntarily disclose the last three years’ liability ($30,000) and the state will forgive the remaining four ($40,000) of tax. And again, the state will generally waive penalties (though not interest).

Why would a state give you such a break? States can’t find and audit every business that’s out of compliance and would prefer that businesses voluntarily comply. A VDA allows the state to welcome in new taxpayers and get cash for the previous few years’ non-compliance.

VDAs can be helpful if you have previous non-compliance and exposure dating back five or more years, or beyond the limited look-back period. They also work well if you collected sales tax but have yet to register and remit to the state or if you’re looking to sell your business or otherwise seek outside capital and haven’t previously complied.

How to get a VDA

To be eligible for a VDA, you cannot have already registered in the state, and you cannot have already been contacted by the state for an audit or for questions about your sales/use tax exposure.

First, assess your transactions in various states to determine if you even have sales tax nexus, which is your economic connection with a jurisdiction that requires you to comply with its tax laws. (Don’t forget physical nexus, which can include traveling sales reps and remote service personnel.) Assess the taxability of your products and services in a state, then review your sales tax obligations to make sure you have no delinquencies.

If you think you might need a VDA in many states (including the District of Columbia), you can try the Multistate Voluntary Disclosure Program to negotiate a settlement using a procedure coordinated through the Multistate Tax Commission. You might find this free service faster, more efficient and less costly than approaching each state separately.

Many states – but not all – allow you to file a VDA application online electronically. Broadly speaking, after that:

• You may or may not have to register to collect and remit sales tax in the state before the VDA or shortly after applying. If you have already registered, some states disqualify you from a VDA if you have filed any sales tax returns.
• Some states allow you to estimate your eligibility for a VDA before you apply. There may also be a minimum tax liability in the lookback period to qualify.
• You generally must detail your business in the state (including reasons for non-compliance) and estimate your tax liability.
• In some states, you must hire a tax preparer, accountant or attorney; some states require a power of attorney form.
• If your VDA is accepted, states will generally contact you with more details of the terms for forms of records; some states are quick, other states take months.
• You’ll often have a period (say, 45, 60 or 90 days) to agree to the VDA and to file all sales tax returns for the lookback period. (Some states even want spreadsheets.) An estimated payment is often required for waiver of penalties.

A lot of work and waiting yes, but if your company is a good candidate for a VDA, this arrangement could be a financial lifesaver.

Learn more about VDAs on our “Hot Topic” webinar or download our VDA white paper.

If you need help understanding your sales tax obligations and whether a VDA would be right for your business, get in touch. TaxConnex experts can answer these questions and to help you ensure you remain compliant with the changing rules of sales and use tax.