Believe it or not, states do recognize that it’s a huge undertaking for businesses to keep up with state sales tax. And they want to incentivize businesses to get compliant and remit sales tax – even if that business has prior liability. That’s where sales tax voluntary disclosure agreements come in.
A voluntary disclosure agreement (VDA) is an agreement that a company and a state enter into where the company agrees to come forward to pay its tax obligation in exchange for some form of concessions, like reduced penalties or a limit on the scope of years under consideration for tax liability.
In other words – VDAs are programs that incentivize companies to come clean and start fresh with a state.
But that’s a simple definition. There are many nuances to consider when thinking about coming forward to agree to a voluntary disclosure agreement with a state. In this post, we hope to outline some of the reasons why a company would submit to the stipulations of a VDA and some of the things to consider before taking that next step.
Why Should You Consider a Voluntary Disclosure Agreement?
VDAs differ state by state. And your company’s situation is also unique. Deciding where to negotiate a VDA depends on a lot of factors, but here are some of the top-level reasons.
#1. LIMIT EXPOSURE AND LIABILITY
The main reason to negotiate a voluntary disclosure agreement with a state is to limit your company’s exposure and tax liability.
Let’s face it – It’s easy to overlook state sales tax. Between differing physical and economic nexus requirements in every state that imposes a sales tax, it’s easy to get confused, miss something or to not even want to deal with it.
VDAs give your business the chance to make correct a previous oversight, before the state recognizes it first. 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. YOU CAN COME FORWARD ANONYMOUSLY
One of the best things about a voluntary disclosure agreement is that you usually start the negotiations for the VDA anonymously using a third-party lawyer, CPA or tax expert. This allows you to feel secure in coming to the table.
Factors up for negotiation in the VDA could be the scope in which the state can look back for tax violations, the tax years you’re liable for and the waiving of penalties and interest.
Keep in mind – your business could be liable for taxes in a state for years before you even realize it. And if that state decides to audit you, and they find out about that liability then you could be in for a lot of penalties and interest.
In most cases, it’s better to come clean and have those penalties erased.
#3. BOTH PARTIES ARE INCENTIVIZED
When entering a voluntary disclosure agreement, you gain concessions in waived penalties and interest and a limit on the scope of years the state government can look back on. States gain your compliance and a new source of tax revenue in the future.
It can feel frightening to step forward to negotiate one of these agreements at first. But there is comfort in knowing that both sides are motivated to reach an agreement that is mutually beneficial in the long term.
After entering into a VDA, the state ensures a new source of revenue for itself. You get peace of mind knowing that your business is compliant, and you saved money in foregoing penalties and sometimes interest.
What to Watch Out For
There are a lot of benefits to VDAs, but make no mistake, VDAs aren’t right for everyone. There are pitfalls to every negotiation that you need to be aware of. And there may be other solutions out there that can benefit your business more than a VDA.
#1. ADDITIONAL LIABILITIES
Additional liabilities can come up in these negotiations that you were unaware of. You will be responsible for those additional liabilities. Before deciding to enter into a voluntary disclosure agreement, make sure the errors you found are the only errors.
#2. MATERIAL WORTH
It may not be materially worth it for your company to apply for a VDA. The idea behind a VDA is to mitigate your risk and exposure, but you have to keep in mind that you may be opening yourself up to more exposure by agreeing to one.
If your liability is small, then you may not need to consider a VDA just yet. An expert can help weigh the pros and cons in this case.
#3. AMNESTY PROGRAMS
Lastly, you should be aware of tax amnesty programs. States open up amnesty programs from time to time, and they may be more beneficial for your business than a VDA.
Not all amnesty programs are created equal. Again, a state sales tax expert can help you weigh your options when deciding which course of action is right for your company.
We covered the basics of VDAs, but as we said before, this subject is nuanced. And deciding where to come forward needs to be reviewed on a case-by-case basis.
It pays to talk to an expert to determine whether you should apply for a voluntary disclosure agreement if you have nexus and aren’t yet compliant. Once you go through this process, you’ll be surprised how confident you feel.
Let us help you make the right decision on getting compliant. It costs more to wait, so let’s chat today. Peace of mind is a ‘What’s Next’ call away.