Sales Tax: What is a voluntary disclosure agreement?
Retailers who have realized they owe past due sales tax to a state can request a voluntary disclosure agreement (VDA)
VDAs are not an option if the retailer has already been contacted or audited by a state
A successful VDA can mitigate much or all of a retailer’s penalties and interest when it comes to uncollected sales tax
Is there a worse feeling than discovering you owe money and didn’t even realize it?
This has happened to many business owners when it comes to sales tax compliance.
The 2018 South Dakota v. Wayfair Supreme Court decision allowed more states to require that more merchants, especially e-commerce retailers, collect and remit sales tax. But many merchants, who perhaps understandably don’t keep up with every nuance of sales tax law, missed that memo.
Fortunately, even if you’re just now realizing that you have sales tax nexus and an obligation to collect sales tax in new states, there are options that can keep this from becoming a bottom-line-threatening business disaster.
Read on to learn about voluntary disclosure agreements (VDAs) and how they can save your business time and money if you’ve discovered new sales tax liability.
Note: While this post is about voluntary disclosure agreements regarding sales and use tax liability, taxpayers can request voluntary disclosure agreements for other tax types, such as income tax, too.
Voluntary Disclosure Agreements, Explained
It’s an all too common realization for e-commerce companies. You learn about economic sales tax nexus and realize that, oh no, you’ve had sales tax nexus in several states but haven’t been collecting sales tax.
In many states, economic nexus is triggered when you make more than 200 transactions or sell more than $100,000 in a calendar year. Whether you didn’t realize that these conditions created a sales tax collection obligation, or you simply made more in sales to a particular state than you knew, it can be a sinking feeling to realize that you should have collected sales tax but didn’t.
Fortunately, there are options to help mitigate the potential damage to your business when it comes to unpaid tax.
If you’ve caught the problem early, before being contacted by a state, you can request a voluntary disclosure agreement (VDA).
First of all, it’s vital that your business hasn’t already been contacted or audited by a state regarding past due sales tax. In this case, a voluntary disclosure agreement is already off the table.
But if you haven’t yet been contacted, you can contact the state directly to admit your sales tax liability and ask for an abatement of interest and penalties.
The VDA process generally works by contacting the state’s taxing authority (usually called the Department of Revenue) and disclosing that you realize you have been non-compliant. At this point, you don’t have to name your company and can remain anonymous.
From there, the state will contact you regarding next steps. Often, this means abating much or all of the interest and penalties that your business owes. Note that the state may still request that you pay some portion of the taxes due.
Voluntarily disclosing is a better option than hiding out and hoping the state never finds you. Why? Because if the state finds you first they can perform an audit that can go back to up to 7 years (in some cases even more) of your business records and they can issue interest and additional penalties for non-compliance.
Why do states offer voluntary disclosure agreements?
States and local areas use sales tax to pay for budget items like building roads or operating schools. It’s in their best interest to collect all the sales tax they are allowed by law. They simply want retailers (and other taxpayers) to comply with the law. If abating fines and penalties can lead to more compliant sellers, most states are happy to do so.
Plus, allowing for voluntary disclosure saves them the time and expense of finding non-compliant retailers and conducting arduous audits.
The Texas Comptroller details their Voluntary Disclosure Program here. Just remember that each state is different and may be more or less lenient than the program described here. That’s why we always recommend working with a state and local tax expert (SaLT) when requesting a voluntary disclosure agreement.
What are my other options aside from a voluntary disclosure agreement?
We think a voluntary disclosure agreement is generally your best option when it comes to uncollected sales tax. Most states are eager to have non-compliant taxpayers come forward voluntarily and will work with you to mitigate interest and penalties as long as you remain compliant.
Don’t want to request a VDA? You can hope for a sales tax amnesty. These are programs where states issue a general amnesty allowing non-compliant taxpayers to come forward by promising no interest and penalties. However, sales tax amnesties are rare, and your chances of a state announcing an amnesty just when you need one are rarer still.
Other retailers choose to register for a sales tax permit without disclosing that they’ve already been doing business in a state. However, this option requires falsifying information on your sales tax registration, which is never recommended. And if the state finds out that you had been doing business there in the past and did not disclose, they can bring down legal consequences on you.
The very worst thing you can do is ignore the problem and hope it goes away. States are savvy when it comes to finding uncollected tax. That’s why we recommend contacting a sales tax expert and taking care of sales tax before it becomes a bigger, costlier headache.