As businesses expand their sales across multiple states, they might inadvertently trigger sales tax obligations, or nexus, without even realizing it. This situation can lead to costly back taxes, penalties, and interest charges, creating financial uncertainty and operational stress.

Discovering such obligations can feel overwhelming, but businesses have an effective solution available: Voluntary Disclosure Agreements, or VDAs.

What is a Sales Tax VDA?

A Voluntary Disclosure Agreement (VDA) is a formal arrangement between a business and a state tax authority.

Through a VDA, a business proactively discloses past unpaid sales tax obligations, providing an opportunity to settle these liabilities on more favorable terms.

The primary objective of a sales tax VDA program is to encourage voluntary compliance by offering incentives rather than penalties.

The major benefits of using a sales tax VDA program include:

• Limited lookback period: Most states cap the lookback period at just 3-4 years. This significantly reduces the potential amount of unpaid taxes owed compared to an audit that could examine many more years.
• Penalty waivers: States often waive penalties entirely for businesses voluntarily coming forward under a VDA. Considering penalties can reach 30-50% of unpaid taxes, this represents substantial savings.
• Potential interest reductions: While interest charges on unpaid taxes are typically never waived, some states offer reduced interest rates as an incentive for voluntary disclosure.
• Avoidance of audits: Proactively disclosing through a VDA reduces the likelihood of a full state audit, providing businesses with greater control over the compliance process.

Practical Example of Sales Tax VDA Benefits

Imagine a company that unknowingly established a sales tax nexus six years ago, resulting in an annual tax liability of $20,000.

Without using a VDA, this company could face a total of $120,000 in unpaid taxes. Additionally, penalties might add another 40%, or approximately $48,000, bringing the potential liability to $168,000.

With a VDA in place, however, the lookback period is limited to just three years, cutting the tax liability in half to $60,000. Additionally, all penalties would be waived.

The cost to engage an accounting firm or consultant to manage the VDA typically ranges from $3,000 to $7,000, depending on the state and complexity.

Instead of owing $120,000 in taxes plus $48,000 in penalties, the business would owe $60,000 plus applicable interest and the cost of the VDA engagement.

This illustrates significant cost savings, often motivating businesses to consider VDAs as a proactive compliance strategy.

Critical Considerations for Sales Tax VDA Compliance

Before initiating a VDA, businesses should be aware of important considerations:

• Eligibility limitations: If a business has already received a notice from a state concerning compliance, audit, or unpaid taxes, they are typically ineligible for a VDA.
• State-specific rules: VDA eligibility rules and processes vary by state. It’s important to understand each state’s specific requirements and procedures.
• Interest obligations: Interest is typically not waived, although some states offer reduced interest rates as an incentive for businesses that voluntarily disclose.
• Importance of nexus studies: Conducting a nexus study prior to pursuing a VDA helps businesses accurately identify their sales tax liabilities, ensuring they fully understand their obligations and potential exposure.

How TaxCloud Helps Simplify Sales Tax VDA Compliance

At TaxCloud, our mission is to simplify the complexities of sales tax compliance, empowering businesses to manage their tax obligations with confidence.

Our platform provides comprehensive support, including automated nexus monitoring, precise real-time sales tax calculations, and simplified filing across multiple states.

Additionally, TaxCloud can assist in identifying when a VDA might be beneficial, providing guidance and resources to help businesses navigate the VDA process smoothly and effectively.

Staying ahead of sales tax compliance through proactive measures like VDAs not only saves businesses significant amounts of money but also ensures peace of mind.

Reach out to TaxCloud today to learn how we can support your business in managing sales tax obligations efficiently.