Sales Tax Voluntary Disclosure Agreements

Oops!  You’ve just started at a business and determined that they have had nexus in a jurisdiction for years but never registered or collected sales tax there.  What do you do?  Fortunately, most states allow for a voluntary disclosure agreement (VDA) to entice companies to self-report past discrepancies in their sales and use tax reporting.

What is a VDA?
A VDA is an agreement that allows a taxpayer to be granted a reduced look-back period (usually 3-4 years rather than the date the company actually began doing business – because the statute of limitations doesn’t start until something is filed).  It also typically grants abatement of penalties associated with late filing and generally smooths the way to reporting past errors.  The taxing jurisdictions benefit because it adds another taxpayer to their system without them having to go find the non-compliant ones through audits and nexus questionnaires.

Why It’s Important
With today’s regulatory environment, companies must disclose to their shareholders potential liability for unidentified tax disclosures.  The audit risk only gets greater as states are seeking additional ways to increase revenue in today’s poor economy.  

Process
Typically a company would want to enlist the help of a third party (such as Allyn) to approach the jurisdiction in an anonymous situation to notify the jurisdiction that a taxpayer would like to come forward.  This protects the taxpayer in the event they later receive notice for failure to file.  They would have the right to proceed under the VDA rather than be subject to the penalty assessed.  It is important to remember that a VDA is negotiated. It does not necessarily carry the same terms from state to state or even business to business.  A company can walk away if it does not like the terms (this is why it is best to remain anonymous).  

Having a knowledgeable sales tax consultant working for you to craft the terms with the jurisdiction could prove invaluable.  This is why it is important to first contact a consultant before placing the jurisdiction on notice (via filing prior period returns late or through other contact) that your company erred.