When it comes to business taxes, compliance is absolutely essential. That said, mistakes happen. When they do, it’s often better for your business to be up front about those potential tax liabilities than keeping silent and hoping for the best. In this blog, we’re weighing the pros and cons of voluntary disclosure agreements (VDAs) and why a business might want to enter into such an agreement with a state.
What Is A Voluntary Disclosure Agreement?
Simply put, entering into voluntary disclosure agreements is about companies identifying their potential state tax exposure (sales tax, income tax, or both) and coming forward voluntarily to pay any outstanding liabilities before the state identifies the company as part of an audit or other outreach effort. As states are becoming more aggressive in their pursuit of out-of-state taxpayers, it’s becoming a bit of an inevitability that businesses with tax liabilities will be found eventually.
It’s also important to consider that states have the benefit of technology on their side, making it faster and easier than ever to match records and search for inconsistencies. If they find something, you’ll quickly receive a notice and lose your ability to file a VDA. This is a key reason for being proactive about outstanding tax liabilities.
What Are The Advantages Of VDAs?
In considering whether to come forward proactively, a company may wonder what the benefits of doing so are and why they shouldn’t just wait and hope they’re looked over.
Here are some of the advantages of doing a VDA:
How Has Wayfair Complicated The Matter?
VDAs are nothing new, but we have seen an increase in them over the last few years. Part of this can be attributed to increased state tax responsibilities due to the Wayfair decision. As a result, companies are finding that they need to determine whether they may previously have had enough physical presence to create nexus. If so, the company needs to determine how far back the exposure goes.
That said, even three years later, many companies are still discovering this potential landmine and as a result, turning to VDAs to get compliant. This is also true for international companies. We recently helped three consumer product companies with international affiliations remediate their U.S. liabilities relative to sales tax.
Another reason why Wayfair has drawn attention to the area of non-compliance and the need to go the voluntary disclosure route is the flurry of new rules for marketplace facilitators. As we’ve described in previous blogs, marketplace facilitators (such as Amazon, Etsy, etc.) are now responsible for collecting the sales tax on sales made by sellers through their marketplaces. So, often sellers believe they are relieved of the duty to collect tax. They are – but only on the marketplace. Depending on their other sales channels (for instance, direct to consumer from their own website), they often still have to collect some sales tax. Many times, companies don’t even realize they may have a problem.
What’s New With States And VDAs?
One of the benefits of doing VDAs has historically been that companies could easily work with an assigned VDA representative at the state and file the various paperwork (registrations, returns, sales schedules, etc.) directly with that representative.
Generally, states didn’t require electronic filings until after the VDA process was complete. While we still work with these representatives in most states, more states are requiring at least some registration to be completed online. For a variety of reasons, this can be somewhat challenging, which is why working with a tax partner like Miles Consulting Group can be beneficial.
Are You Considering A VDA?
By their nature, voluntary disclosures lend themselves to some assistance from a consultant. If a company wants to remain anonymous, they must use a third party to assist. Also, because each state has different lookback periods, different rules for reporting, and sometimes specific nuances in how to finalize the paperwork, it helps to have someone on your side with a little experience in the process.
That said, it’s important to choose a partner that will consider your particular situation and help you determine if a VDA is the best way forward for your business. Maybe you don’t need the formality of a VDA and simply registering and back-filing returns is sufficient.
At Miles Consulting Group, we generally recommend VDAs for larger liability states and we always work with our clients to consider not only the sales tax ramifications of a VDA, but also how it might impact income tax or gross receipts tax filing requirements, which not all firms consider.
Our goal is to find the most advantageous answer for your business and build a comprehensive road map that will lead you to tax compliance.
Do You Have Questions About VDAs? Contact Monika Miles And Team.
Monika founded Miles Consulting Group which focuses on multi-state tax consulting, helping clients navigate state tax issues such as sales tax and income tax in interstate commerce, including e-commerce.
Prior to forming the firm, Monika worked for 12 years combined in Big 4 Public Accounting and private industry. Monika has provided such services as federal and state income/franchise tax compliance and consulting, sales/use tax consulting, audit support, and credits and incentives reviews. She has served clients in a variety of industries including manufacturing, technology, telecommunications, construction, utility, retail and financial institutions.
Monika graduated from the University of Texas at El Paso (UTEP) with a BBA in Accounting/Finance and has a Masters in Taxation from San Jose State University.
