Sales and Use Tax – VDA?
I previously wrote about registering for Sales and Use Tax in new states here –
As a foreign company doing business in the US here’s a great intro –
VDA TAX INFO: WHAT IS A VOLUNTARY DISCLOSURE AGREEMENT?
Any sales tax consultant will tell you that a Voluntary Disclosure Agreement, also known as a VDA, is the best way to bring a company in to compliance with its previously unmet sales tax responsibilities. With the recent changes, many companies have found that they now have sales tax liabilities in states or other local jurisdictions where sales taxes were not previously collected. In other cases, a taxpayer may have collected the appropriate sales tax, but not yet be registered with the state to remit the sales taxes collected. Regardless of the reason for the outstanding tax liabilities, Voluntary Disclosure Agreements or VDA’s are a helpful method to initiate contact and communications with those states where a company needs to take action to become compliant for sales tax.
WHAT IS A VOLUNTARY DISCLOSURE AGREEMENT, OR VDA, AS IT RELATES TO SALES TAX?
A Voluntary Disclosure Agreement is a legal agreement between a state revenue agency and a company who realizes that it has not met its obligations related to sales and use tax compliance. Through the Voluntary Disclosure Agreement, the company will complete all necessary registrations within the state and will satisfy any outstanding tax liabilities. Going forward, after completing the Voluntary Disclosure Agreement program, the company will have regular monthly, quarterly or annual sales tax reporting requirements with the state depending on the volume of activity within the state.
WHAT ARE THE BENEFITS OF A VDA?
Voluntary Disclosure Agreements have several major benefits. Depending on the state, Voluntary Disclosure Agreements will reduce or eliminate penalties and, on some occasions, interest due on uncollected or unremitted sales taxes. Don’t underestimate the savings these reductions or eliminations in penalties and interest can yield! This is especially true in comparison to the increased penalties and interest that can be assessed if a state identifies the company is not in compliance before a company comes forward under a VDA.
Voluntary Disclosure Agreements or VDA’s also limit the lookback period. The limited lookback period is generally 3 to 4 years, depending on the state. The limited lookback period will not apply to a company that has been collecting taxes and not remitting them. In those circumstances, the lookback period must include all periods for which the company has been collecting sales tax.
In Voluntary Disclosure Agreements, most states will allow a company to estimate its previous liabilities, which simplifies the process. With a few exceptions, Excel schedules calculating the tax liabilities will be accepted in lieu of filing all previous sales tax returns. States are willing to make these concessions to ease the process because the states’ main objective is to encourage voluntary compliance with future and ongoing tax collection and reporting responsibilities. In short, the state is willing to forego some of the formalities and even some revenue to bring new taxpayers in to the fold.
Assistance from a sales tax consultant is not necessary to file a Voluntary Disclosure Agreement or VDA application; however, there are benefits in choosing a sales tax consultant to help you through the process. For example, a taxpayer can remain anonymous during the Voluntary Disclosure Agreement request process if it uses a sales tax consultant as its representative. Using a sales tax consultant who is familiar and experienced with the policies of each state’s Voluntary Disclosure Agreement program can eliminate some of the following risks as well.
WHAT ARE THE RISKS OF A VOLUNTARY DISCLOSURE AGREEMENT?
There are several pitfalls a company should be aware of when initiating a Voluntary Disclosure Agreement. The taxpayer must come forward and request the VDA with a state prior to receiving any inquiries, communications or audit notices from the state in question. Some states limit these inquiries, communications or audit notices to the specific type of tax being disclosed, while others expand this to include any taxes administered by the state. This is the most common misconception about Voluntary Disclosure Agreements. The key is that this be a “voluntary” admission…if the state is reaching out on its own to contact you about some tax deficiencies, the state does not view it as you coming forward voluntarily.
If a company’s Voluntary Disclosure Agreement or VDA is accepted there are strict deadlines that must be met in order to receive all the benefits of the Voluntary Disclosure Agreement program. Remember, a Voluntary Disclosure Agreement is a legal agreement between the company and the state. As such, there are very clear deliverables that need to be provided by the company as well as a strict timeline for when these items must be provided. Like nearly everything in sales and use tax, these deadlines vary from state-to-state, but an experienced sales tax consultant will know these deadlines and be sure his or her client meets them.
In closing, Voluntary Disclosure Agreements are a safe, effective, streamlined process for companies to become compliant with a state’s sales use tax reporting requirements while disclosing prior missteps the company may have made regarding sales and use tax compliance. While sales and use tax compliance can be a hassle or a challenge, leaving problems or unmet sales tax responsibilities unresolved will only lead to larger, more complex and costly issues in the future. A sales tax consultant can help navigate this process and even provide a turnkey solution to your company’s sales tax compliance challenges.
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