Understanding Voluntary Disclosure Agreements and Sales Tax

Here, we’ll go over the ins and outs of VDAs—why you might need one, what the process looks like, and how to weigh the benefits against the risks. We’ll also touch on state-by-state differences so you can see how these agreements vary based on where you do business. 

What Is a Voluntary Disclosure Agreement?

A Voluntary Disclosure Agreement (VDA) is a formal agreement between a business and a state tax authority that lets companies resolve or make good on past tax liabilities. It’s designed for situations where a business hasn’t complied with sales tax rules because they either didn’t know about the rules or weren’t aware they had to pay. 

The idea is that a VDA encourages businesses to voluntarily come forward. In exchange for this honesty, states often reduce penalties, waive interest, or limit how far back they’ll look for unpaid taxes.

Sales tax is the most common tax type addressed in VDAs, but they can also cover use tax, income tax, franchise tax, and use tax. 

Why a Business Might Need To Do a VDA for Sales Tax Compliance

Sales tax compliance isn’t particularly straightforward, especially if your business operates in multiple different states. It’s really easy to make mistakes or get caught off guard by how quickly laws change. A VDA helps you address these issues before they spiral into bigger problems. 

Avoid Being Punished by Complicated Sales Tax Laws

Every state has its own sales tax rules and it can get complicated really quickly trying to remember what rules apply where. Some states exempt certain products, while others require you to pay tax. 

Nexus laws (the rules that determine if you have a tax obligation in a state) add another confusing layer to it because they also differ from state to state. A VDA lets you fix any mistakes or oversights that crop up because of this confusion.

Reduce the Risk of a Bad Audit

The more states you sell in, the higher your risk of an audit. 

If a state audits your business and finds unpaid taxes, they’re highly likely to apply penalties and interest—worse, if they think your non-compliance was intentional. VDAs give you the chance to come forward first in a bid to get your punishments reduced. 

Stay compliant as you expand 

Economic nexus laws now require many businesses to owe sales tax in states where they don’t have a physical presence. 

Some states require you to collect and remit sales tax once you go over a specific revenue threshold or transaction count—even if you’ve never set foot there. These rules are easy to miss if you’re growing quickly or aren’t actively staying on top of it. VDAs let you clean up these liabilities before they cause you bigger issues. 

The Pros of Voluntary Disclosure Agreements

VDAs can be a lifesaver if you’re on the brink of non-compliance (or, in some cases, well in the trenches of it). 

• Reduce penalties and interest. One of the biggest perks of a VDA is the state often waives penalties and reduces interest if you voluntarily come forward. 
• Limit average lookback period. If you don’t have a VDA, states can go back years and years in your books. VDAs limit this so states only go back three or four years. 
• Avoid criminal penalties. A state can hit you with criminal penalties if they think your non-compliance was intentional. A VDA protects you from this worst-case scenario by showing you’re willing to resolve the issue. 
• Keep your anonymity. Most states will let you initiate a VDA anonymously through a third party. This means you can test the waters and negotiate terms without revealing your company’s identity. 

What it looks like in action: if you’ve discovered you’ve not been collecting sales tax in states where you have economic nexus or you’ve expanded into new markets and haven’t realized you’ve created a new physical nexus, a VDA essentially lets you admit your oversight before the state finds out themselves. 

The Cons and Potential Risks of VDAs

Like with anything, there are a couple of downsides to VDAs. 

• You still might have to pay. Even though VDAs can reduce penalties, you’ll still owe the back taxes you didn’t collect or remit, plus some interest. This can quickly add up depending on how long you haven’t been compliant. 
• They aren’t universally available. Some states don’t offer VDAs at all, while others have strict eligibility requirements. 
• They can be time- and resource-intensive. You need to gather documentation, calculate your existing liabilities, and negotiate terms with specific states. This can take weeks or months. 

Tip: if your past liabilities are low (like a few hundred dollars), you might find the time, effort, and fees you need to get a VDA outweigh the benefits. In these cases, it might make more sense to quietly pay the taxes or focus on improving compliance moving forward. 

What the VDA Process Looks Like

Applying for a VDA isn’t the most straightforward process—no surprise, really, considering it varies from state to state. Here’s what you can expect. 

Preparation is Everything

Before you apply for a VDA, it’s important to understand your situation fully. 

Start by assessing your liabilities: 

• Which states do you owe taxes to?
• How much do you owe?
• How far back does your exposure go? 

If you’re unsure, get in touch with a tax advisor. Once you’ve collected the info you need, prioritize states based on your potential risk—like the ones where you’ve exceeded nexus thresholds or where the penalties are highest. 

How to Apply For a VDA

To kick off a VDA, you typically need to contact the relevant state’s tax authority. This will usually be via a written application. Some states let you do this anonymously at first—you just have to use a representative until you’ve agreed on terms. 

The application process usually involves disclosing the nature of your business, how long you’ve been in business and the taxes you owe. 

Tip: Being upfront and transparent can work in your favor here. 

Negotiate Terms

Once your application has been reviewed, the state can come back with proposed terms. These terms might include the length of the lookback period, any penalty waivers, or how much they plan to reduce interest. 

Most businesses choose to get a tax advisor at this stage (if they haven’t already). They have the experience to help you negotiate terms and whittle down the tax you owe. 

File and Remit Your Overdue Taxes

After agreeing on terms, you’ll need to file the necessary tax returns and pay the tax you owe within a certain timeframe. It goes without saying, but it’s really important you pay on time otherwise you might void the agreement and run the risk of being served even higher fines and interest. 

We highly recommend keeping organized records throughout the process so you have everything to hand should you need it. 

How VDAs Differ Across States

Not all states have the same rules around VDAs. Which, as you can imagine, adds a whole new level of complexity.

Here are some of the ways they can differ.

• Lookback periods. Some states limit their lookback period to three years (like Florida), while others might ask for four or five. 
• Penalty and interest reductions. Some states waive penalties entirely, while others might only reduce them. Interest relief is less common, but there are a few states that offer partial reductions. For example, Washington doesn’t waive penalties for certain types of taxes, like excise taxes. 
• State-by-state requirements. Some states—like New York—won’t allow a VDA if you’ve already been contacted by their tax authority. In California, you can’t remain anonymous when you apply for a VDA. And in Nevada, you have to get a state business license as part of the VDA process. 
• Multi-state VDAs. The Multi-State Tax Commission (MTC) offers a program that simplifies the process if you operate in several states. It lets you apply for VDAs in multiple states at once, usually with the same terms. 

Who Should Consider a VDA?

VDAs aren’t just for businesses in trouble. So how do you know if you need to consider one?

If you identify as one of the following, you might need a VDA. 

Businesses Expanding Into New Markets

If you’ve recently started selling in new states, there’s a chance you might have created nexus without realizing it. Nexus laws are wildly different from state to state and they can be triggered by remote sales, employees, or even inventory stored in a third-party warehouse. VDAs let you address your tax obligations in new states before the penalties start piling up. 

Companies With Inconsistent Compliance

You might face a higher risk of an audit if you’ve paid sales tax sporadically in certain states or missed filing altogether. A VDA can help you clean up your record and avoid potentially harsher penalties later down the line. 

SaaS and Ecommerce Companies

Sales tax rules are particularly complex for SaaS and ecommerce brands because digital products and subscription services are often taxed differently across states (and the rules seem to evolve all the time). VDAs let you catch up if you’ve fallen behind.

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Working with a Tax Advisor for VDAs

Understanding, applying for, and sticking to the rules of a VDA can be overwhelming if you’re trying to do it all yourself. Instead of going it alone, get a tax advisor who can help you navigate the murky waters of sales tax (and save you money while they’re at it). 

A good tax advisor will assess your liability, speak to the tax authorities for you (often anonymously), and prepare filings and agreements to make sure everything is correct. 

The Benefits of Expert Guidance

• Tax professionals are experienced and objective.
• They know how to assess your liabilities, negotiate decent terms, and juggle different state tax authorities.
• Their insights can help you avoid costly mistakes. 

Choosing the Right Advisor

Look for someone who’s experienced in state and local taxes (SALT) and has extensively handled VDAs. Accounting specialists often have dedicated SALT teams. Before you sign on the dotted line, ask for references, verify their credentials, and make sure the advisor you choose has worked with similar businesses. 

3 Alternatives to VDAs

If a VDA doesn’t seem like the right fit, there are other ways you can address or avoid sales tax liabilities. 

1. Amnesty Programs

Amnesty programs are short-term initiatives offered by some states to encourage businesses to settle unpaid taxes. They often include reduced penalties and interest—similar to a VDA—but you can only join them during specific windows. If your timing aligns, they can be a good alternative. 

2. Managed Audits

If you’ve already been hit with an audit, some states won’t let you apply for a VDA.

Instead, you can opt for a managed audit. This is where the state supervises you while you self-audit, which can reduce penalties and interest. It’s not quite as lenient as a VDA, but it can mitigate some of the financial and legal risks of a traditional audit. 

3. Proactive Compliance

The best alternative to a VDA is to stay compliant in the first place.

Regularly review your sales activity, monitor nexus thresholds, and use software to automate tax calculations and filings. If you’re still unsure about your obligations, definitely invest in periodic consultations with a tax advisor to keep you on the straight and narrow. 

Final Thoughts

VDAs are a practical way to get ahead of sales tax liabilities before they spiral. They give you the opportunity to come clean with tax authorities in the hopes that they’ll waive penalties and reduce the lookback period for unpaid taxes. 

That said, VDAs can get complicated fast. Each state has its own process, requirements, and deadlines. Getting a tax pro on board can help you navigate these barriers so you don’t accidentally create more risk for yourself.