You missed collecting sales tax in a state, and an audit could reach back a decade. A voluntary disclosure agreement (VDA) lets you come forward first in exchange for lower penalties, a shorter lookback, and audit protection. Kelley Birrell covers the three conditions that decide whether you still qualify and the three step process from first contact through payment. She also gives the honest counterargument: if your exposure is smaller than the professional fees, just register and pay.
Sales Tax
How to Use a VDA to Wipe Out Sales Tax Liabilities
5 min
Transcript
0:00 What a VDA is
Are you worried about sales tax liabilities that may come back to haunt your ecommerce business? If you've missed collecting or remitting sales tax in the past, you're not alone. And the good news is that there may be a way to fix it without triggering an audit or paying massive penalties.
Keep watching to learn how a voluntary disclosure agreement, or VDA, can help you clean the slate and get compliant. In this video, I'll explain what a VDA is, how it can protect your business, and the steps you need to take to get started, so that you can finally put these sales tax worries behind you.
So what is a VDA? Well, a voluntary disclosure agreement is a legal agreement between your business and the state sales tax authority. It allows you to voluntarily come forward and disclose unpaid sales taxes in exchange for reduced penalties and audit protection. This can be a game changer, especially if you've missed collecting and remitting sales tax in the past when you should have been.
0:51 The three benefits
So what are some of the benefits of a VDA?
Well, the first one is reduced penalties. States will often agree to reduce or even completely eliminate these penalties when you voluntarily come forward and disclose this. This can save you a lot of money in comparison to getting caught in an audit.
The next is a limited lookback period. Instead of looking back eight to 10 years, as can often happen in an audit, a VDA will usually limit that lookback period to only three to four years, which is a huge reduction in your potential liability.
And the last, and by no means least, is that of audit protection. By voluntarily coming forward, you can protect your business from the nightmare of going through an expensive, time consuming, and often stressful audit.
1:37 Whether you qualify
So how do you know if you qualify for a VDA? Because not every ecommerce business does, so make sure you pay attention.
The first criteria is that you have to voluntarily come forward. The second is that you have to not already be in an audit. And the third is that you need to have had no prior sales tax related contact with the state. That means you haven't registered for a sales tax permit and they haven't contacted you by way of email or letter or phone call.
If there has been contact, that automatically disqualifies you for a voluntary disclosure agreement. So because of that, if you've not already been contacted, pay attention. Don't wait, because you don't want to be contacted and then have this option off the table.
2:15 The three step process
So what is the VDA process? Well, you can look at it in terms of three steps.
The first one is that of initial contact. You have to be the one to step forward and say, hey, there's a problem, and I would like to voluntarily disclose these taxes. You'll often reach out to the state by a letter or by a form.
The second step is that of negotiation. You're going to negotiate the terms of the contract, like the lookback period and the penalties. The goal here is to reach an agreement that minimizes your liabilities.
The last step is that of payment and compliance. After an agreement has been reached, you now need to pay your back taxes and any penalties that you've agreed upon. And then moving forward, you need to stay sales tax compliant so you don't find yourself in this mess again.
2:58 When to consider one
So when should you consider a VDA? Well, they are worth considering if you have crossed the nexus threshold in a state and you didn't register. Then the next one is if you find that you have a substantial back tax liability. And the third is if you feel like you're at risk for an audit.
3:14 The pros and the catch
So what are some of the pros and cons of doing a VDA? Well, the pros are easy to figure out. Significant cost reductions, audit protection, and peace of mind.
So with pros that look as good as that, what could possibly be some of the cons? Well, the process of getting a VDA can be extremely complex, and we recommend that you get expert guidance to walk you through the process. This is not going to be cheap. These professionals do cost.
So make sure that you consider if your potential sales tax liability is higher than those professional fees. If it is lower, then I would encourage you to consider registering and just paying the back taxes and the penalties and interest. But if it is higher, I encourage you to consider getting professional guidance so that they can walk you through the process.
4:00 Where to get help
So to sum it up, a VDA can protect your ecommerce business by reducing penalties, limiting the lookback period, and protecting you from audits. It is a valuable tool for clearing up sales tax liabilities and getting sales tax compliant.
Now, if you're feeling overwhelmed by your past sales tax liabilities and you don't really know where to start, reach out to us here at LedgerGurus. We have an entire team of sales tax experts who have done this process with some of our clients. We can help you to go through the process, to know what to expect, and also to make the best decisions for your business.
Don't wait until it's too late. Let's get you compliant and back on track. If you found this video helpful, be sure to like it, ask any questions in the comments, and subscribe for more helpful tips like these.