Sales tax obligations that aren’t properly reported to the appropriate department of revenue pose a significant tax liability, as an audit of these obligations can lead to penalties, interest and perhaps even more substantial consequences. For businesses that have unreported state tax obligations, however, there is a path to comply. Voluntary disclosure agreements provide a method for providers to self-report their obligations and mitigate potential negative consequences.
Unreported Back Taxes Are Becoming More Common
While unreported back taxes are not new, this problem is becoming increasingly prevalent as businesses grow and tax laws change. Businesses that expand into new jurisdictions don’t always realize they need to register for sales and use tax, especially if the new nexus is created by remote sales or services. Within jurisdictions that businesses do operate in, keeping up with legislative changes that create or increase reporting obligations is often difficult.
Of particular relevance, the Wayfair decision brought these nexus and remitting issues to the forefront of sales tax problems. South Dakota v. Wayfair (2018) ruled that the state’s sales tax nexus law was constitutional, and businesses could be required to report sales and use tax if businesses met a certain threshold of sales — a physical location in the state was not required.
Since the Wayfair decision, not only have similar existing laws been upheld but new states are also passing similar legislation. When combined with the increased remote sales that businesses have (especially in light of the Covid-19 pandemic), it’s easy to overlook a new nexus and create a reporting failure liability.
Businesses With Unreported Taxes Can File Voluntary Disclosure Agreements
Businesses that find themselves with unreported taxes due can usually use a voluntary disclosure program to rectify the issue and become compliant. The exact details of voluntary disclosure agreements vary by jurisdiction, but most states offer a program that generally similar to others.
What is a Voluntary Disclosure Agreement?
A voluntary disclosure agreement (VDA) is a negotiated agreement by which businesses enter into one of these programs. In the agreement, a business discloses their taxes due in exchange for certain protections. Most states agree to limit the lookback period and waive certain costs, which can result in major savings for businesses that have failed to report taxes for a prolonged prior period.
A VDA sales tax agreement is only applicable for unreported sales and use tax. The agreement can’t be used for past-due taxes that are reported but unpaid. Such taxes must be paid, along with any penalties, fees or interest that are assessed by the jurisdiction.
A VDA tax agreement also is distinct from any sales tax amnesty program that a jurisdiction might offer. Some states offer a limited amnesty program that allows unregistered businesses to register without facing repercussions. Amnesty programs tend to be simpler and more cost-effective than VDA agreements, but they often don’t cover all of the back taxes that a business owes. Which option is best for a particular business is situationally dependent, and businesses should consult with a knowledgeable tax professional to assess their situation.
What Businesses Qualify for VDA Tax Agreements?
In order to qualify for the VDA tax agreement option, businesses generally must meet the following criteria:
- Have a sales tax nexus within the state, but be located outside of the state
- Not have previously registered, and be willing to voluntarily register
- Not have been contacted by the state or be under an audit
- Have a tax liability to report, and have reasonable cause for not reporting
What Benefits Does a VDA Agreement Offer?
For businesses that meet these criteria, the VDA agreement offers multiple benefits:
- Limit Lookback Period: Most VDA agreements limit the lookback period to 3 or 4 years. This can be a major benefit if a business created a nexus many years ago and has a much longer potential period for which there are unreported sales taxes.
- Reduce Penalties and Fees: An essential component of VDA agreements is the reduction of penalties, fees and interest. Whether all or some penalties are reduced varies, but most jurisdictions will waive penalties at least partially in exchange for businesses coming forward. In certain cases, it may be possible to waive all penalties.
- Some Anonymity: It’s usually possible to remain anonymous through at least the start of a VDA agreement process. This can allow businesses to explain their full situation and see whether the agreement will be approved, before visibly coming forward.
- Register for Future Tax Obligations: Registration for future tax reporting and remittance is part of the VDA agreement. This helps states ensure that future taxes will be remitted, and it affords businesses a way to register after they should have.
- Save Time: Although a VDA agreement normally requires professional tax help, this is a much easier process than a full-fledged audit. The time required is much less than if a jurisdiction initiate an audit first.
What’s the VDA Process for Preparing an Agreement?
The process for filing a VDA tax agreement may be simpler than an audit, but it’s still an involved process that requires several steps and knowledgeable expertise. Businesses can expect to evaluate their tax nexus, analyze their tax liability and exposure, and prepare and file the VDA agreement.
Contact a Tax Professional Who Does VDA Agreements
If your business has unreported tax liability due to business activity, we here at FAStek are able to help. We can help with VDA agreements in multiple states, and we’ll work closely with you to negotiate the best agreements possible. We’ve assisted many businesses with these agreements, and we’re ready to help you.