When Should I File a Voluntary Disclosure Agreement (VDA)?

By Eric Carrasco
December 22, 2020
CPAs , Sales Tax Consulting Resource , State & Local Tax

For some businesses, applying for a voluntary disclosure agreement (VDA) has never been a more favorable option than it is today. Although, knowing when to file a VDA is essential.

In 2018, the Wayfair ruling changed how businesses determine sales tax nexus obligations. As a result, companies have been exposed to new state and local sales tax liabilities. Fast-forward almost three years later, and several companies are still not registering or remitting sales tax in states where they have liability.

Whether knowingly or unknowingly, this lack of compliance can expose businesses – and subsequently, their responsible executives – to hefty penalties and interest payments.

What is a Voluntary Disclosure Agreement (VDA)?

In summary, a Voluntary Disclosure Agreement (“VDA”) is an arrangement with the government to abate or lessen penalties and reduce the look-back period for any tax type that a business might owe.

Is a Voluntary Disclosure Agreement (VDA) right for my business?

Because of today’s heightened audit risk, how should companies decide if a VDA makes sense to pursue?

Why is 2021 a Good Time to File for a VDA?

One of the benefits of filing a VDA is the limited look-back period for qualifying businesses. Upon an agreement, a state can decide not to collect sales tax beyond a negotiated period of time. This is especially beneficial for businesses that have sales tax exposure exceeding 3-6 years. For example, New York’s look-back period under their VDA agreement can be limited to only 3 years, provided a business qualifies for this clause.

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    The COVID-19 pandemic will go on record as a major economic disruptor for industries across the country. By including 2020 in a limited look-back agreement, businesses with low sales in 2020 could experience less exposure and tax liability.

    Three key points to consider before starting the VDA process:

    1. What is your historical liability in each state? If your historical liability is below the benefits of the VDA, such as eliminating penalties, it may not be worth the process. Simply remit the past due tax and update your processes to comply moving forward.
    2. How far back does your liability go? One of the biggest benefits of a VDA is the limited lookback period of 3-4 years. If your liability is recent, you may not benefit as much from a VDA. For liability going back five years or more, a VDA is valuable.
    3. Are there other options, such as amnesty programs? VDA programs are always available in most states. However, amnesty programs are only available for a short period of time and come with additional benefits such as reduced interest. If you know that an amnesty program is about to begin, it might be worth pursuing this option instead.

    Why Consult a Sales Tax Expert for VDA Assistance?

    While using a sales tax consultant is not necessary to file for a VDA, it can be helpful. A sales tax expert with an understanding of multi-state policies can help weigh the risks and opportunities. Plus, with a sales tax consultant as a representative, the requestor can remain anonymous throughout the VDA process.

    In sum, understand what you’re up against and be prepared! The last thing you want is for an audit to catch you by surprise, or worse, hold you personally responsible.

    Speak with a PMBA expert to find out if a VDA is right for you