Voluntary Disclosure Agreements

Is there a worse feeling than discovering you owe money and didn’t even realize it? Unfortunately, this has happened to many business owners regarding sales tax compliance.

The 2018 South Dakota v. Wayfair Supreme Court decision allowed more states to require merchants, especially e-commerce retailers, to 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. 

This article will discuss voluntary disclosure agreements (VDAs) and how they can save your business time and money if you’ve discovered a 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.

What Is a Voluntary Disclosure Agreement?

It’s an all too common realization for e-commerce companies. You learn about economic sales tax nexus and realize that you’ve had sales tax nexus in several states but haven’t been collecting sales tax or filing tax returns. 

In many states, economic nexus is triggered when you make over 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 simply made more sales in 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 mitigate the potential damage to your business caused by unpaid taxes. 

If you’ve caught the problem early, you can request a voluntarydisclosure agreement (VDA) before a state contacts you.

How Does a Voluntary Disclosure Agreement Work? 

The voluntary disclosure request 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 the 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. 

If you owe past due sales tax in multiple states, you can also contact the Multistate Tax Commission and fill out a Multistate Voluntary Disclosure Application.

Voluntarily disclosing is better than hiding out and hoping the state never finds you. Why? If the state finds you first, they can perform an audit that can go back up to seven 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 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 tax program 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.

Pros and Cons of Voluntary Disclosure Agreements

There are several advantages and disadvantages to voluntary disclosure agreements.

Pros of Voluntary Disclosure Agreements

1. Reduces Tax Liabilities and Penalties

The most significant benefit of a VDA is the financial incentives to your company, especially if you owe a lot of money. States typically limit the “look-back” period for unpaid tax to three or four years for VDAs related to sales tax. This means that if your company did not collect and pay sales tax for eight years, the state will limit their assessment, and you will only be required to report and pay tax on the three to four years included in the look-back period instead of all eight.

2. Submitting a VDA Is Anonymous

In most circumstances, you can enter a VDA anonymously with the help of a tax expert or attorney. The third-party representative you choose will start the VDA process by submitting a letter or application on your behalf. They will negotiate your penalty, limit your look-back period, and set up a payment plan so you can pay back taxes for what you owe.

Most states do not require your tax expert or attorney to disclose your company’s name. 

Cons of Voluntary Disclosure Agreements

1. Missing Information Can Void Eligibility

If you fail to disclose the facts regarding your company’s situation up front, such as nexus, the VDA can be voided. There’s also the potential that, because of missing information, your taxpayer identity is disclosed only for you to be deemed ineligible.

Work closely with a sales tax expert so you have all the information needed. 

Other Options for Handling Uncollected Sales Tax

A voluntary disclosure agreement is generally your best option regarding 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 your sales tax registration information, which is never recommended. And if the state finds out that you have been doing business there in the past and did not disclose it, they can bring down legal consequences for you.

Voluntary Disclosure Agreements: Conclusion

States are savvy when it comes to finding uncollected taxes. That’s why we recommend contacting a sales tax expert and taking care of sales tax before it becomes a bigger, costlier headache.

Zamp is the first managed sales tax solution on the market, allowing businesses to outsource their sales tax compliance from start to finish. We handle the complete sales tax life cycle from nexus tracking to registrations and filings. Our team has over 200 years of tax experience and is ready to help get rid of your sales tax headache.

About the author

The Zamp Team

The Zamp Team consists of experienced writers and editors who are dedicated to researching sales tax topics to help readers make smart decisions about their business and sales tax compliance. Collectively, the team has over 200 years of sales tax experience.