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If you have discovered that your business has established Nexus with a taxing authority, outside of the current reporting period, and the applicable State & Local Tax(es) have not been collected, remitted or filed, it may be worthwhile to consider applying for a Voluntary Disclose Agreement with the relevant state(s) as it may be your business’s best option forward.
What is a Voluntary Disclosure Agreement (“VDA”)?
A VDA is a contractual agreement between a business and the state in which the business comes forward voluntarily to disclose and pay its tax liability.
What are the benefits of filing a Voluntary Disclosure Agreement?
After determining a State & Local Tax liability has been incurred and is outstanding, coming forward voluntarily to disclose this liability can provide the following benefits:
Significant limitations on the lookback period of outstanding tax liabilities (as opposed to an unlimited lookback period if discovered by the state).
Complete waiver of penalties, and occasionally a reduction or waiver of interest (as opposed to full penalties and interest if discovered by the state).
Businesses can often apply anonymously to solicit a ruling/determination from the state, allowing them to remain protected from any unwanted audit triggers should they decide not to proceed.
A taxpayer driven process with minimal intrusion or review from the state, as opposed to an audit which can be very time consuming, all-tax encompassing, and lead to auditors at your place of business reviewing invoices.
Through these benefits, the savings can easily amount to tens of thousands of dollars, not to mention company time and eliminating any future headaches.
How do Voluntary Disclosure Agreement benefits vary by state?
State
Anonymity
Sales Tax Lookback Period
Penalties and/or Interest Reduction
Alabama
Yes
3 Years
Yes
Arizona
Yes
4 Years
Yes
Arkansas
No
3 Years
Yes
California
Yes
3 Years
Yes
Colorado
Yes
3 Years
Yes
Connecticut
Yes
3 Years
Yes
Florida
Yes
3 Years
Yes
Georgia
Yes
3 Years
Yes
Hawaii
No
3 Years
Yes
Idaho
Yes
3 Years
Yes
Illinois
No
4 Years
Yes
Indiana
Yes
3 Years
Yes
Iowa
Yes
5 Years
Yes
Kansas
Yes
3 Years
Yes
Kentucky
Yes
4 Years
Yes
Louisiana
Yes
3 Years
Yes
Maine
Yes
3 Years
Yes
Maryland
Yes
4 Years
Yes
Massachusetts
Yes
3 Years
Yes
Michigan
Yes
4 Years
Yes
Minnesota
Yes
3 Years
Yes
Mississippi
Yes
3 Years
Yes
Missouri
Yes
3 Years
Yes
Nebraska
Yes
3 Years
Yes
Nevada
No
3 Years
Yes
New Jersey
Yes
4 Years
Yes
New York
No
3 Years
Yes
North Carolina
Yes
3 Years
Yes
North Dakota
Yes
3 Years
Yes
Ohio
Yes
3 Years
Yes
Oklahoma
Yes
3 Years
Yes
Pennsylvania
Yes
4 Years
Yes
Rhode Island
Yes
3 Years
Yes
South Carolina
Yes
3 Years
Yes
South Dakota
Yes
3 Years
Yes
Tennessee
Yes
3 Years
Yes
Texas
Yes
4 Years
Yes
Utah
Yes
3 Years
Yes
Vermont
Yes
3 Years
Yes
Virginia
Yes
3 Years
Yes
Washington
Yes
4 Years
Yes
West Virginia
Yes
3 Years
Yes
Wisconsin
Yes
4 Years
Yes
Wyoming
Yes
3 years
Yes
What is the VDA application process?
While every state has its own VDA filing medium, regulations, agreement terms, and benefits (as mentioned above), there are certain commonalities between the states.
There are generally five main steps involved in the VDA application process:
VDA application preparation & submittal:
The taxpayer, or a third-party tax consultant, will complete and file the VDA application form with the relevant state or local taxing authority. While most submissions need to be completed via email or mail, some states are also implementing online filing systems. Submission requirements can vary wildly from state to state.
In some states, a registration application is required to accompany the VDA application, eliminating the option for anonymity.
Review and determination by the taxing authority:
After reviewing the VDA application, the relevant taxing authority then determines the company’s eligibility for its VDA program. Most commonly, the key eligibility criterion is that the taxpayer cannot have been reached out to by the authority regarding the tax type in question prior to the application in any form.
The taxing authority will subsequently request additional information and documentation to support the application.
The state will then review the entire submission and associated documents prior to making a final determination whether to accept or reject the disclosure.
Agreement negotiation:
Upon acceptance of the application, the company may be able to enter negotiations with the taxing authority, enabling it to structure and establish the terms and conditions of the VDA and its benefits specific to its own specifications. This can include determining the extent of the disclosure, the turnaround time for resolving the outstanding liability, and the reduction or waiver and assessment of any applicable penalties and/or interest.
Compliance agreement:
Once the terms of the VDA are finalized, the taxing authority will issue a closing agreement. The taxpayer will have to sign the agreement and return it to the state (consequently disclosing their entity’s identity, in those states where is acceptable).
The agreement gives assurance that the tax authority will not pursue any further measures relating to the disclosed tax liability and generally outlines the conditions of the settlement, including any waived penalties, interest, or liabilities to be paid.
Paying the tax due:
After the VDA is signed, the company is expected to pay any taxes due, plus applicable penalties and interest. This often requires registering for the tax type with the state.
Payment plans can often be negotiated through the VDA process to lessen the immediate impact of the tax due.
Once all dues are paid, historical compliance with the state is settled and ongoing compliance is warranted.
How to determine if your business may need to consider filing a VDA?
The rules and regulations around when and if a State & Local Tax liability is incurred by the establishment of Nexus can vary wildly by state, and the business’s relevant activities in that state. Over the last five years, there have been several landmark court cases that have drastically impacted the Nexus landscape in the United States. To make a proper determination as to whether a business has established Nexus with a state, it is generally advisable that the business undertakes an in-depth Nexus Study.
Consult with a tax advisor that has experience handling State and Local Tax matters to make sure you and your business stays compliant.
