The phrase of the day is “V-D-A”! In the state tax world, that refers to Voluntary Disclosure Agreements, and we are working on many of these for our clients lately. What are they, exactly, and why should your company perhaps be considering them as well?
What is a Voluntary Disclosure Agreement?
Simply put, entering into voluntary disclosure agreements with states 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 a game of “Beat the Clock!”
What are the advantages?
In considering whether to come forward proactively, a company may ask some of these questions, “Why should we come forward and tell the state that we have liabilities? Can’t we just wait for them to contact me? Maybe they won’t find me at all!” (Trust me, we’ve heard all of these, and then some!) Here are some of the advantages of doing a VDA:
- Limited Lookback – Many companies engage in a VDA because it limits the lookback period to three or four years. That means, even if a company has created nexus many years ago and has failed to collect and remit sales tax, or hasn’t filed income tax returns, the state will allow them to cut off several of those years and simply report on the last few years. For instance, if a state has a four-year lookback period for sales tax and notifies the state on May 31, 2019, then the lookback period would generally be from June 1, 2015 through May 31, 2019. The company would need to report any liability for that period, but not prior.
- Penalty abatement or reduction – generally all states that have a VDA program will waive penalties for companies that come forward voluntarily. This is important because penalties can often amount to 25% or more of the overall liability. Most states will not waive interest, because it is statutory and the Department of Revenue can’t waive it. However, Texas currently does waive interest on VDAs, and New York has a lower statutory rate for companies in voluntary disclosure, versus a more punitive rate if they discover the company first.
- Anonymity during the process – most states will allow companies to remain anonymous through at least some of the process. That’s helpful because we can explain the client’s entire situation, with dates, etc. and determine if the state will accept the proposal before revealing the company name. A few states require the company to disclose its name up front, but most still have a period of time where the company can be “protected” insofar as getting credit for coming forward even before they must identify the company name.
- Being on Offense vs Defense with the state – As in sports and life, it is generally better to be on the offense than defense. It’s similar when dealing with states. If a state selects a company for audit, there is generally a very specific audit plan, with several initial document requests. Then, during the audit, the auditor will want to sample invoices, see exemption certificates and resale certificates, etc. If some of these are not satisfactory, the auditor can use his or her discretion to disallow credits, or exemptions. However, if a company comes forward voluntarily, there is generally not a detailed audit of their records. (It’s important to note that the state does reserve the right to audit VDAs, but it’s not often that they do.) Companies still want to make every effort to pay the correct amount during the VDA process, but the record-keeping is a little less onerous. Also, the VDA comes at timing set out by the company. Part of what makes an audit so daunting is that it often comes when you least expect it. In planning for a VDA, the company can proceed at its own pace, to some degree.
How has Wayfair complicated the matter?
VDAs are nothing new. We’ve been assisting clients with them for years. So why are we seeing more of them right now? Part of the reason is that companies are starting to be more aware of their overall state tax filing responsibilities as part of the larger discussion of the US Supreme Court case in South Dakota v. Wayfair (June 2018). As a result of the economic nexus concept and companies now having to register to collect and remit in states in which they have minimum sales volume (often $100,000 of sales or 200 transactions) many companies are finding that they need to analyze whether they may previously have had enough physical presence to create nexus. The answer is often “Yes”. And then, the company needs to determine how far back the exposure goes. Also note that often VDAs encompass both income tax and sales tax filings, so companies need to examine the exposure for both.
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 on-line. For a variety of reasons, this can be somewhat challenging. At the very least, it has taken some of the human element out of it. And, well, quite frankly, we kind of liked the human element!
How can we help?
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. How about 20+ years of experience? Even better! Our consultants have dealt with VDAs in states all across the country and we know the ins and outs of the various nuances. Schedule a conversation with us today to see if we can assist with your overall state tax analysis and whether VDAs might be the best course of action to remedy any unreported liabilities!
