What Are Sales Tax Voluntary Disclosure Agreements? (VDAs)

Calculating and collecting sales tax can be complex, especially with changing regulations and growing businesses. Many companies give their best effort but still have unpaid sales tax that can result in significant penalties. Sales tax liabilities don't have to be the end of your business. Companies have options to take control of their sales tax issues and potentially get a clean slate in the states where they do business. It's possible through a widespread program called a voluntary disclosure agreement, or VDA.

What is a VDA, and what does it mean for your business? What are the benefits and challenges of entering this agreement with the state tax department? In this article, we’ll dive into the ins and outs of VDAs.

Voluntary Disclosure Agreements Explained

A voluntary disclosure agreement (VDA), also called a volunteer disclosure program (VDP), is an agreement between a company and a state in which the company agrees to come forward to pay its tax obligation in exchange for some concessions. These concessions can include reduced penalties or a limit on the scope of years under consideration for tax liability.

Put simply, a VDA incentivizes companies to come clean about their taxes and have a fresh start with the state. It allows companies to come forward about outstanding tax liabilities and avoid the penalties that would come if the issues were discovered during an audit. Each state has its own VDA process, so businesses that are out of compliance or behind on their sales tax in multiple states have to go through the process in every state where they are out of compliance.

Why would states allow businesses to come clean about their taxes? It can be complex and costly for companies to comply with sales tax. When businesses aren’t compliant or remitting sales properly, it can lead to a significant drop in sales tax revenue for states — money that funds crucial government programs like infrastructure, education, and healthcare. In many states, sales tax funds nearly 15% of the state's budget, so missing that revenue can seriously limit state programs and funding. To get companies back on track and help them become compliant, states allow businesses to limit their outstanding liability through a VDA.

As the name implies, a VDA is voluntary. A VDA is a proactive approach to minimize a company's financial and legal risks of past non-compliance. Companies that voluntarily disclose past tax issues and liabilities can avoid more severe penalties and potential legal consequences. 

How Does a VDA Differ From a VDP?

The terms VDA and VDP are often used interchangeably. Some states call the process a voluntary disclosure agreement, while others consider it a voluntary disclosure program.

In both instances, the state runs the program, and each VDA or VDP is unique to the state. The voluntary disclosure program is the overall program and offering from the state, and the voluntary disclosure agreement is the actual document. The agreement is a signed contract between the state and the business, while the program is the larger requirements businesses must follow to become compliant.

Benefits of a VDA

A VDA allows a business to disclose unpaid sales tax and negotiate with the state’s tax agency to potentially avoid penalties and interest. By entering into a VDA, companies can potentially erase their past sales tax liabilities.

Applying for a VDA allows companies to negotiate with a state’s tax department on their liabilities. Companies can also discuss potential incentives with the state, such as erasing or limiting their tax liability. After the VDA is complete and signed by the company and the state, the company typically is considered compliant with its sales tax (essentially erasing any history of non-compliance) and in good standing with the state

When To Use a VDA

A VDA is most useful when a business is behind on remitting its sales tax or out of compliance with local sales tax regulations. Any company with a sales tax registration in that state can apply for a VDA. However, it's important to note that a company can't purposefully stay out of compliance with sales tax and apply for a VDA. In many cases, companies enter a VDA if they were unsure about changing sales tax regulations, didn't realize they had nexus in a state, or miscalculated sales tax — basically, any accidental sales tax non-compliance.

A VDA provides two key benefits to companies:

1. Limits exposure and liability. Entering a VDA limits a company’s exposure and tax liability. It gives businesses a chance to correct an oversight, often before the state realizes it. It’s generally advisable that if you find an error in how you’ve been collecting and remitting state sales tax, then you should come forward and sign up for a VDA.
2. Earns useful incentives. States are motivated to earn more sales tax revenue, so they are willing to offer incentives to businesses that enter a VDA. Your company can gain concessions of waived penalties and interest and a limit on the scope of years the state government can look back. These concessions can help your business get compliant quickly, saving the cost of missed penalties and giving you a fresh path forward.

However, a VDA isn't always the best option. There are some things to consider when applying for a VDA to ensure it’s the best option for your company:

• Additional liabilities. During VDA negotiations, the state may present additional tax liabilities you weren’t aware of but that you are responsible for.
• Material worth. If your sales tax liability is small, it might not be the right time for your company to enter a VDA because it could open you to more scrutiny. A sales tax expert can help you decide if it is materially worth it for your company to apply for a VDA.
• Amnesty programs. States occasionally open tax amnesty programs that could be more beneficial to your company than a VDA. The details of these programs vary by state and program, so it’s best to consult a sales tax expert before deciding.

Can You File a VDA on Your Own?

The first step in applying for a VDA is to complete a form with basic information. In most states, companies can anonymously start the VDA negotiation with a state or through a third-party lawyer or tax expert. That means companies have options about how to approach the process. 

A DIY approach to a VDA can work for companies with smaller liabilities or those applying for a VDA in multiple states. However, it's recommended to work with a sales tax professional for more complex sales tax issues or if negotiations need to take place.

Regardless of your approach, it’s important to note that applying for a VDA doesn’t guarantee acceptance into the program. Before negotiations can start and the state tax department considers your incentives, the group will determine if the department has contacted your company or if you were willfully not following sales tax rules. In that case, the VDA is void. Most states only allow companies to enter a VDA once, meaning you can’t get a clean slate, not pay sales tax, and then clear it again with another VDA in a few years.

What Happens If You Don’t Remedy Past Liability?

A VDA allows businesses to remedy their past liability and move forward with a clean sales tax slate. By registering for a sales tax permit and doing business in the state, companies agree to collect and remit sales tax appropriately. If companies choose not to remedy their past liability through a VDA or by paying back what they owe, they could face serious consequences.

A state tax agency can conduct a sales tax audit if it suspects a business isn’t accurately reporting sales tax or when the sales tax return a company files with the state doesn’t match what it reports to the IRS. These audits can be time-consuming and pull the business away from other activities.

If the state determines that the business didn’t collect sales tax from customers or remit the proper amount, the company will likely face consequences, including the following:

• Pay all past-due taxes. If a business doesn’t collect sales tax from customers properly or remit the current amount to the state, it can be forced to pay past-due taxes out of pocket.
• Pay penalties and interest owed in addition to the past-due taxes. Each state has its own penalties for not paying sales tax, but the average penalty is about 30% of the total sales tax due.
• Criminal charges. If the state finds that the business intentionally defrauded the state, it has power to press criminal charges against the company and its leaders. While this doesn’t happen often, it is still a possible consequence.

The bottom line is this: All companies need to properly collect and pay sales tax, either through the traditional methods or by remedying past liabilities with a VDA. It’s part of responsible and ethical business ownership.

Ready to engage in a VDA? The dedicated team at The Sales Tax People specializes in providing comprehensive Sales Tax Registration and VDP services to streamline compliance processes and minimize potential risks. With our in-depth knowledge and strategic approach, we help you navigate the intricate landscape of sales tax regulations, ensuring compliance and peace of mind. Contact us to learn how we can support your business.