Failure to comply with the applicable sales tax rules can have a devastating effect on a business, but they’re often overlooked because they’re considered “pass-through” as the business is responsible for collecting the applicable taxes which pass through the business and are subsequently turned over or paid to the states. While these pass-through taxes are not meant to create a financial burden on a business, failure to comply can create significant risk.

In years past, auditors could show up at your door asking to look at your records. Now that’s much less common. Usually, you learn about an audit through a notice or letter from the state or jurisdiction in question with instructions on how the audit will proceed.  Many audits are conducted remotely, and an auditor never visits your office. Audits remain an important tool for tax jurisdictions to evaluate the level, or lack thereof, of sales tax compliance within a business. Even though many audits have shifted to remote audit, the fundamentals of the sales tax audit haven’t changed. 

A Voluntary Disclosure Agreement (VDA) can be a great tool to address past sales tax obligations, but it’s important to consider all the plusses and minuses and ensure you make the right decision for your business when it comes to mitigation efforts.

A voluntary disclosure agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property, and other tax types. In exchange for voluntarily reporting the tax due, states offer a waiver of some penalties and other benefits to the business. If back taxes are not disclosed but are instead discovered through an audit, the taxpayer is at a disadvantage and will end up being assessed various penalties plus interest plus all historical tax due.

Voluntary disclosure agreements (VDAs) can be an effective way to mitigate prior period sales tax exposure. They can also come with a lot of misconceptions.

When it comes to managing sales tax compliance, for most businesses there are really three ways you can do it.

1. Attempt to manage everything in-house
2. Outsource sales tax compliance
3. Do nothing and roll the dice.

So what happens if you attempt to manage the process in-house but lack the expertise and bandwidth to manage it effectively? Or what if you do nothing and decide to roll the dice? What are the risks associated with non-compliance? We’ve compiled some of the top questions we get from clients on the risk and liability of sales tax non-compliance.

Is a Voluntary Disclosure Agreement right for you? Voluntary Disclosure Agreements (VDAs) can be an effective tool in mitigating prior period sales tax exposure, however it may not always be the best solution.

All states that impose sales tax have a VDA program, or Voluntary Disclosure Agreement, to help alleviate the penalties of non-compliance and encourage businesses to comply. A VDA can be a very attractive option for businesses who have many years of non-compliance or that have collected sales tax previously but failed to remit.  But what exactly is a VDA? Why is it beneficial? Keep reading for answers to our most frequently asked questions on VDAs.

Maybe you’ve just figured out that you have nexus and were non-compliant without realizing it, or maybe you’ve been rolling the dice and crossing your fingers you won’t get audited – no matter your situation, if you have established nexus, are selling a taxable product or service into multiple states and aren’t complying with sales and use tax laws -  you have the potential to owe quite a bit in penalties and interest if caught. 

Many businesses engage in interstate commerce and are liable for sales taxes in one or more of those states.  It’s becoming more and more common, especially for small businesses who sell via the Internet, to create sales tax nexus.  In some cases, these businesses fail to file sales taxes in states where they should.  It comes as a surprise that they owe sales taxes at all and often the time to file has passed.  If you own a company involved in multi-state transactions and you find yourself owing past sales taxes, filing a voluntary disclosure agreement could be a great option.

I recently met with a company that has been growing their business primarily through Amazon’s FBA program.  As like many nascent businesses, sales tax compliance was not a significant concern as they were launching and taking off.  They collected sales tax in their home state and the state where they shipped their inventory to Amazon.  Unbeknownst to them (or perhaps a calculated business decision), they had created sales tax nexus in multiple states and had not been collecting the sales tax due.

VDA’s (Voluntary Disclosure Agreements) are a hot topic so far in 2016. I believe companies that have been out of compliance historically use the beginning of the year to course correct and get on the right footing from a sales and use tax perspective.

Sales tax compliance often takes a back seat to income tax compliance.  While you work to reduce your effective income tax rate, sales tax liability may be growing exponentially.  If left unchecked for too long, sales tax can have a significant financial impact on an organization.  With average, combined sales tax rates in the 9% range + penalties and interest - an unexpected sales tax audit could easily reach 15% to 20% or more of revenue in a state.

While these white papers may not be on Amazon's top recommended beach reads... you might find they save you significant money and excruciating pain in the future.

Here is a list of TaxConnex's top downloaded Sales Tax white papers:

• Top 5 Sales Tax Nexus Creating Activities - Sales tax all begins with nexus.  This white paper provides a great overview of the common areas where we see companies get tripped up from a sales tax nexus perspective.
• 5 Steps to Sales Tax Compliance - Keeping with the "5" theme, this guide overviews how to achieve sales tax compliance for a business that is currently out of compliance.
• Voluntary Disclosure Agreements - This popular white paper outlines the VDA (Voluntary Disclosure Agreement) process and provides simple steps to follow along the way.

Hope you enjoy!

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.