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.
What is a VDA?
A voluntary disclosure agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property, and other taxes.
What are the main benefits of a VDA to my business?
In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look back (generally 3-4 years) potentially reducing the tax due significantly as compared to an audit. If a business is not registered for sales tax and is audited, the state can assess tax due, penalties and interest from the time from which taxable sales first occurred. This could be 5 years, 10 years, or more. Thus the benefit of the limited look back period of 3-4 years allows a business to eliminate the risk associated with the older periods.
*If you had previously collected sales tax but failed to remit, you must pay all that has been collected (even beyond the look back period) but the penalty would still be waived. And in extreme cases, the penalty could be in excess of 50% of the tax amount… and could be considered a criminal offense!
When does it make the most sense to register for a VDA?
There are three common situations in which a VDA is most beneficial:
If you have previous non-compliance and exposure dated back more than 4 years
When you’ve collected sales tax but have yet to register and remit to the prospective state
If you are looking to sell your business or otherwise seek outside capital and have previously not complied
Sales tax risk might be considered immaterial, but when you consider up to 10% of a business’s overall revenue could be exposed, compounded over a period of multiple years, including penalties and interest for non-compliance; sales tax risk can be quite significant. It has even been known to tank a merger or acquisition.
Do I qualify for a VDA?
There are two main qualifications for your business to be accepted into a VDA program. 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.
If a VDA is such a great money saver then why are states for it?
Simply put, a state cannot find and audit every business that is not in compliance. States would prefer for businesses to voluntarily comply. A VDA allows the state to welcome in new taxpayers, and get cash up-front for the previous 36-48 months of non-compliance. That taxpayer is now registered to continue collecting/remitting prospectively. The waiver of penalty and the limited look back is fair and equitable for both parties in a VDA.
Sales tax is confusing and it's not getting any easier. If you have more questions on VDA’s, compliance, surviving a sales tax audit or sales tax nexus, contact us – when you work with TaxConnex, sales tax is all on us.
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