If you are in business, you must have come across the term business taxes, and compliance is totally essential. But, mistakes do happen. And when it happens, it is good for the business to stay upfront regarding the tax liabilities than to stay silent & hoping for the right things to happen. In this article, we will know what is sales tax VDA and why businesses need to enter such an agreement with the state.
What’s A VDA?
The Voluntary Disclosure Agreement or VDA is the legal deal between the state revenue agency & company that realizes it hasn’t met the obligations related to the sales & use tax compliance. With VDA, the company can complete necessary registrations in the state and can satisfy outstanding tax liabilities. Besides, after completing a VDA program, the company may have the regular monthly or yearly sales tax reporting needs with the state that depends on the volume of the activity in a state.
Since companies expand the footprint, they might have made material exposure because of compounding & unfulfilled tax-filing compulsions. To support the compliance goals, you need to look for a dedicated team to VDA. As a part of the process, the sales tax VDA team performs the following services:
- Exposure analysis & tax mitigation support
- Analysis of the tax paid & audit status
- Abatement and reduction in the penalties
- VDA negotiation
- Payment remittance
- And more
What Are The Benefits Of VDAs?
When considering if to go ahead proactively, the company might look at the advantages of doing it and why they must not wait & hope they are looked over.
Benefits of VDA to Check Out
Limited lookback period – Most of the businesses engage in the VDA agreements since it limits their lookback period to 3 or 4 years. It is highly beneficial if the business has generated nexus several years before & failed to collect or remit sales tax, and has not filed income tax returns. The state may allow those businesses to cut off those years & report on last some years.
Anonymity– Most of the states may allow the businesses to stay anonymous through the process. It can be beneficial as we will explain the client’s whole situation & determine if the state can accept their proposal before showing the firm name. Some states need the firm to disclose their name upfront, however most have the period where the company will be “protected” insofar as getting credit to come forward before they should identify a company name.
Penalty abatement–Normally all states having a VDA program can waive off penalties for the companies that come ahead voluntarily. It is very important as penalties will amount to over 25% and more of an overall tax. Many states waive and reduce the interest, which includes New York and Texas that have the lesser statutory rate for the companies in VDA, versus punitive rate in case they find out the company.
Are There Any Risks Of VDA?
There’re some pitfalls that a company must know when initiating the VDA. Taxpayers should come ahead & request VDA with the state before getting any kind of inquiries, communications, and audit notices from the state in question. There are some states that limit the inquiries, communications, and audit notices to specific kinds of tax getting disclosed, whereas others expand it to include taxes administered by a state. It is a common misconception on VDA. So, the main thing is this be the “voluntary” admission in case the state reaches out on its own to tell you about tax deficiencies, and the state doesn’t see it as you going forward voluntarily.
Suppose the company’s VDA gets accepted then some strict deadlines should be met to get all the advantages of the Voluntary Disclosure Agreement. Keep in mind, the Voluntary Disclosure Agreement or VDA is the legal deal between a company and state. Also, there are clear deliverables that have to be offered by a company and a strict timeline of when the items will be provided. Like everything in the sales & use tax, the deadlines differ from one state to another, but the experienced consultant may know such deadlines and make sure their client meets them on time.