What is Sales Tax Voluntary Disclosure Agreement
A voluntary disclosure agreement (or VDA for short), is an official document between a business and a state in which the business voluntarily discloses its sales tax non-compliance.
As part of the voluntary disclosure program that the business then enters into, the state offers a number of concessions, such as reducing penalties or limiting the period the tax authority audits for reimbursement.
(It’s important to note that tax VDA programs are not available to companies who collected but failed to remit sales taxes.)
Why Are Voluntary Disclosure Agreements Necessary
Multi-state sales tax nexus is a reality for a large majority of businesses in today’s digital business landscape. And due to the diverse economic activity thresholds that govern the creation of a nexus in a state, a sales tax nexus can easily be established unnoticed and pass under the radar of a business’s tax department.
Where VDAs used to be a way for companies to practice integrity when faced with accidental non-compliance, it has become a regular part of business operations for companies whose transactional footprint crosses state lines.
As sales tax compliance becomes a more intricate and complex matter, voluntary tax disclosure plays a welcome role in an evolving compliance journey, softening the blow of not getting compliance right the first time.
How does a voluntary disclosure program work?
A voluntary disclosure program is an initiative that enables taxpayers to voluntarily report any unreported income or assets to the relevant tax authority. The primary objective of the program is to encourage taxpayers to be transparent, honest, and cooperative in their disclosure and to work with the tax authority to determine their accurate tax liability. The specific terms of a voluntary disclosure program may differ depending on the program, but usually require that the taxpayer register with the tax authority, commit to complying with future tax regulations, and conduct a self-audit for a particular period.
Each state approaches its voluntary disclosure program differently and offers its own concessions according to the businesses non-compliance profile.
Let’s look at a few of the most common benefits and concessions available to businesses who file for a VDA.
The Benefits of a Sales Tax VDA
Limiting the exposure, liabilities, and penalties
Companies who come forward and disclose their non-compliance voluntarily are in general rewarded for the ethical step.
Beyond lower penalties and interest on unpaid taxes being lowered, the states’ tax authority will also limit its assessment on non-compliance to a shorter period (3 to 4 years in most cases), instead of the full period of non-compliance.
For a company that’s failed to collect sales taxes for extended periods of time, this limits the impact drastically.
Staying anonymous (at least initially)
When a VDA is entered into with the assistance of a mediating representative (such as a tax practitioner) the company can remain anonymous for the initial application period, getting fair and unbiased VDA terms for the applicant.
Not every state offers businesses this concession , though. In Washington, for instance, the applicant can only remain anonymous for a 15 calendar day period, while New York doesn’t allow anonymity at all.
Safeguarding the integrity of the company’s reputation
Entering into a voluntary disclosure agreement finally allows a business to walk away from non-compliance with its esteemed reputation in place. When the state discovers non-compliance, the impact is dire on all fronts, from financial to the public image of the company.
Entering into a voluntary disclosure program shows that any unpaid taxes are a result of misunderstood tax regulations and not fraudulent or born out of malicious intent.
It’s a second chance in an unforgiving industry where mistakes are more often than not capitalized on, especially with states still struggling in a recovering economy.
But voluntary tax disclosure and voluntary disclosure agreements should still be seen as a last resort.
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Complyt’s sales tax software helps you automate your nexus monitoring and keep track of your tax obligations in every state you do business in.
Book your demo today to see how we help you avoid the need for VDAs and voluntary tax disclosure.
