Navigating the Risks and Benefits of Voluntary Disclosure Agreements

Addressing tax compliance isn't just a legal responsibility; it's a strategic imperative in business. A Voluntary Disclosure Agreement (VDA) stands as a powerful tool for businesses seeking to correct past mistakes and pave the way for a future marked by fiscal integrity. In our experience, our clients tend to engage in VDAs for both of these reasons. They want to do “the right thing” while minimizing their tax burdens for retroactive liabilities.

If that all seems little weighty for just an article intro, don’t fret – here at Miles Consulting, we endeavor to make it all a little less scary. This article delves into the risks, benefits, and nuances of these VDAs, illuminating the path toward informed decision-making.

Here’s what you’ll find:

1. What Is a Voluntary Disclosure Agreement (VDA)?:

A VDA is a contract between a company and a state that outlines the benefits for both parties when a taxpayer rectifies retroactive tax exposure.

2. The Advantages of Voluntary Disclosure:

Voluntary disclosure programs provide reduced penalties, limited lookback periods, reduced audit exposure, and confidential handling of the disclosure process.

3. Eligibility and Participation Requirements:

Businesses must meet specific criteria, including full disclosure and compliance with payment terms, to participate in voluntary disclosure programs.

4. Unlocking the Benefits of Voluntary Disclosure:

Voluntary disclosure programs minimize financial impact, reduce audit exposure, and uphold business integrity through confidentiality.

5. Navigating the Risks of Disclosure:

Businesses must be aware of potential risks such as unintended audits, unanticipated tax liabilities, and data sharing between states when entering voluntary disclosure programs.

6. Evaluating the Path Forward:

A careful evaluation involves identifying issues, assessing benefits, evaluating risks, and conducting a comparative analysis to determine the most suitable compliance path.

Can’t find what you need? Let’s talk – reach out to us at info@milesconsultinggroup.com.

1.What IS a VDA?

A VDA is a contract between a company and a state that outlines the benefits for both parties when a taxpayer becomes compliant for past tax exposure (sales tax, income tax, or both). It involves said taxpayer coming forward voluntarily to settle outstanding liabilities, before the state identifies these liabilities as taxation concerns. It’s important to note that companies can generally only participate in a VDA if they have not been previously contacted by the state and/or they have not collected (and not remitted) the sales tax.

VDAs offer a strategic avenue for rectifying past tax issues and setting your business on a path of financial stability – and of course, a good tax standing with the state.

2. The Advantages of Voluntary Disclosure

VDAs offer several compelling advantages for businesses:

1. Reduced Penalties: Participating in the VDAs can lead to a significant reduction in penalties (and interest in rare cases) associated with past tax liabilities. This financial relief can alleviate the burden on businesses and improve their overall fiscal health.
2. Limited Lookback Period: State programs often specify a limited lookback period during which businesses must address past tax liabilities. This period typically ranges from three to four years.
3. Mitigated Audit Exposure: By voluntarily disclosing past tax discrepancies, businesses can shift their focus to future compliance. This proactive approach reduces the likelihood of intrusive audits, providing a more secure operational environment.
4. Confidential Handling: The program ensures discreet handling of the voluntary disclosure process, maintaining confidentiality and instilling confidence in businesses as they rectify their tax liabilities.
5.  Offensive Advantage:  The business has the advantage of being in the driver’s seat with respect to timing, documentation provided, etc., as opposed to being on defense in an audit situation.

3. Eligibility and Participation Requirements

The eligibility and participation requirements for VDAs typically include:

1. Unregistered Taxpayers: Businesses that have previously not registered for sales or use tax in a particular state may be eligible to participate. This applies to businesses that have conducted activities triggering tax obligations in that state.
2. Full Disclosure: Businesses must provide a complete and accurate disclosure of their past tax liabilities, including details of transactions and potential tax owed.
3. Compliance with Payment Terms: Participating businesses must agree to comply with the payment terms and conditions set forth by each state’s VDA, including remitting any taxes and interest owed within the stipulated time frame.
4. No Ongoing Non-Compliance: To maintain eligibility, businesses must commit to ongoing compliance with state tax laws and obligations beyond the voluntary disclosure process.

It's important for businesses to carefully review the specific eligibility and participation requirements outlined by the program for the state in question. Seeking guidance from tax professionals can help ensure that businesses meet the necessary criteria and navigate the disclosure process successfully. We can help!

4. Unlocking the Benefits of Voluntary Disclosure

1. Minimized Financial Impact: Alleviating Fiscal Burdens

Embracing VDAs can substantially ease the financial strain on your business. Reduced penalties and limited lookback periods serve as a lifeline, lessening the weight of past errors. By taking the initiative, you pave the way for a healthier bottom line, preserving valuable resources and bolstering fiscal stability.

Our clients also often ask about reduced or alleviated interest. In most states, interest is statutory and not able to be waived. The notable exceptions are Texas, which does waive interest in a VDA, and New York which charges a lower interest rate if companies come forward in a VDA versus if they are selected for a non-compliance audit.

2. Audit Exposure Reduction: Embracing a Forward-Looking Approach

Voluntary disclosure is a strategic shift from dwelling on past missteps to forging a proactive, forward-looking approach in business. By acknowledging errors and seeking resolution, the likelihood of intrusive audits is reduced. This shift in focus promotes a more secure compliance environment, allowing your team to concentrate on future growth and strategic goals. We will note here that states do not contractually agree in the VDA not to audit the VDA period or future periods. However, in our many years of experience, we’ve very rarely seen a state audit the VDA period.

3. Discreet Confidence: Upholding Business Integrity

Confidentiality provisions inherent in VDAs provide a layer of discreet handling. The assurance that your efforts are handled with discretion instills confidence within your organization. This confidentiality preserves your business's integrity, allowing you to address compliance concerns without unnecessary public exposure.

In the realm of tax compliance, VDAs offer more than financial relief; they unlock a pathway to renewed fiscal health, reputation protection, reduced audit exposure, and fortified business integrity. By embracing these benefits, businesses position themselves for a future defined by responsible practices and sustained growth.

5. Navigating the Risks of Disclosure

While VDAs offer a path to rectify past errors and achieve compliance, businesses must navigate potential risks that could impact their journey:

1. Unintended Audits: Unveiling Scrutiny

Taking the step towards voluntary disclosure might inadvertently shine a spotlight on your business, attracting the attention of tax authorities and potentially triggering an audit. This unintended consequence could introduce complexities that require careful management. Again, as noted above, we’ve seen very few states ever audit the VDA period. One notable exception is New York, which may on occasion audit the VDA period.

2. Unanticipated Tax Liability: Balancing Expectations

In some cases, engaging in voluntary disclosure may reveal a greater tax liability than initially anticipated. While the program aims to provide relief, the discovery of higher obligations could offset the expected benefits, introducing financial challenges. As consultants, we don’t ever want our clients to meet with that kind of surprise. We always work with them to calculate the exposure before coming forward in a VDA.  There are companies out there (yes, we’ve seen them) that push their clients into filing VDAs quickly and in great volume. Oftentimes, the full exposure has not been calculated. Our team takes a measured approach that thoughtfully considers the ramifications and cost/benefit of VDA in each state to be considered. We caution readers against entering into VDAs without such thoughtful analysis up front. Rather, talk to us first!

3. Identification in Other States

We’ve included this here because companies are often concerned that states share data, and that by coming forward in a VDA in one state, they will be contacted by neighboring states. And while we cannot guarantee that they won’t, we also don’t see it happen all that often. Still, it is for this reason that we don’t generally recommend using the VDA program offered by the Multistate Tax Commission (“MTC”) (because we do believe that data is more likely to be shared there). That said, we do recommend to clients that once they embark on a program to come forward and voluntarily file, that they do have a path to complete all the VDAs and filings for multiple states within a reasonable timeframe. If a company is in non-compliance, there is always a ‘game of cat and mouse’ to see if the company can come forward in a qualifying VDA before they are notified for audit. And, the longer a company is in non-compliance the more liability continues to accrue before the company can become registered and collect and remit tax.

6. Evaluating the Path Forward

Embarking on the path of voluntary disclosure requires a careful evaluation of your unique circumstances:

1. Issue Identification: Precision in Problem-Solving

Begin by conducting a comprehensive review of your state tax landscape. Identify areas where disclosure is necessary, ensuring a precise understanding of the issues at hand.

2. Benefits Assessment: Weighing Relief Potential

Quantify the potential benefits and savings that voluntary disclosure can provide. Monetary benefits include reduction of penalties and reduced lookback. These can be big dollars. Penalties are often in the 15-20% of tax owed realm. What’s more, reduced lookback means that a company may be able to shed the liability of some of its earlier years. Being on the offense in the negotiations (as opposed to having to deal with the complexities of an audit – where the state is on the offense) is also a huge benefit.

3. Risk Evaluation: Balancing Potential Consequences

Thoroughly assess the risks associated with voluntary disclosure. Consider how the potential unintended outcomes might impact your business and weigh them against the benefits you anticipate. As a general rule, we advise our clients that the benefits of a VDA most often outweigh the risks. Why? Let’s talk – reach out to us here.

4. Comparative Analysis: Exploring Alternatives

Before finalizing your decision, perform a comparative analysis. Evaluate voluntary disclosure against other compliance options, such as contesting penalties, back-filing returns outside of a VDA or engaging in audit defense (generally not a great option), to determine the most suitable path forward.

With a clear understanding of both the benefits and risks, your business can make an informed choice that aligns with its goals and values. Through careful evaluation, you pave the way for a more secure and compliant future.

In the balance of informed decisions, VDAs pave the way to rectify past missteps and embrace fiscal integrity. Guided by our expertise, businesses can confidently traverse the maze of taxation, making choices tailored to their unique circumstances. This is how you can become empowered to take control of your tax, and so foster a future marked by financial responsibility and compliance excellence in business.

by Monika Miles

Direct Sales and Sales Tax: A Comprehensive Guide

As the sales landscape continues to quickly evolve to more online and less brick and mortar selling, retailers are finding that they must now be even more knowledgeable than ever about managing their sales tax compliance.

This article delves into the intricate relationship between direct sales and sales tax, shedding light on the multifaceted aspects that direct sellers need to navigate. Here’s what you can find out:

1. Types of Direct Sales Subject to Sales Tax:

Direct sales include in-person, online, and multi-level marketing transactions, each with unique implications for sales tax.

2. Record-Keeping and Documentation:

Precise record-keeping is essential for substantiating tax obligations, deductions, and exemptions, reducing audit risks.

3. Calculating and Collecting Sales Tax:

Sellers need to understand sales tax rates, jurisdictions, calculation methods, and the importance of timely remittance.

4. Registering for a Sales Tax Permit:

Obtaining a sales tax permit is the first step towards compliance, but it involves answering questions accurately and understanding nexus.

5. Consequences of Non-Compliance:

Non-compliance can result in penalties, fines, and audits by tax authorities.

6. Navigating Tax-Saving Mechanisms:

Businesses should explore deductions and exemptions based on factors like buyer type, transaction nature, and item category, while navigating state-specific rules.

Can’t find what you need? Let’s talk – reach out to us at info@milesconsultinggroup.com.

1. Types of Direct Sales Subject to Sales Tax

As we write about direct sales here, we’re talking about commerce that is business to consumer (“B2C”) and business to business (“B2B”). Direct sales encompass a spectrum of transactions, each with its own distinct characteristics and implications for sales tax. These include:

1. In-person sales (brick and mortar location): These traditional sales take place at physical storefronts, requiring sellers to consider state and local sales tax rates that vary based on jurisdiction. Accurate determination of the applicable sales tax rate is crucial.
2. Online and e-commerce sales: The digital age has given rise to online sales, which carry their own set of complexities. Sellers must determine "nexus," or their level of connection to a particular state, which determines whether they are obligated to collect sales tax on sales made to customers in that state. The 2018 Supreme Court decision in South Dakota v. Wayfair further complicated  the criteria for establishing nexus. Here’s everything you need to know.
3. Multi-level marketing sales: In the realm of multi-level marketing (MLM), sales tax obligations often extend beyond the initial seller to subsequent tiers of the distribution network. Determining the responsibilities of each party within the MLM structure is crucial to avoid compliance pitfalls.

2. Record-Keeping and Documentation for Direct Sales

Precise record-keeping substantiates tax obligations, deductions, and exemptions. These records provide a safeguard in the event of an audit. Carefully maintaining properly completed (and signed) exemption certificates, resale certificates and other items contemporaneously (rather than having to try to track them down during an audit) is key to good record keeping.

To note - while it is possible to compile some of these documents retroactively, it is so much easier to obtain them at the time of sale.

3. Calculating and Collecting Sales Tax on Direct Sales

Understanding sales tax rates and jurisdictions: The patchwork of sales tax rates across states and localities can be confusing and difficult to track. Sellers also need to navigate the concepts of origin-based and destination-based sales tax, which respectively consider the point of sale and the buyer's location when determining the appropriate tax rate.  Most states are destination based, but origin based does come into play occasionally.

Calculation methods for sales tax: Depending on the state, retailers may need to charge sales tax at either a single-rate (in states such as Massachusetts and Indiana), or a blended-rate which can include the state rate, plus county, city or special district add-ons (as in California, Texas and New York). Because rules and rates are different state to state, it is essential to have a well thought out plan for compliance to accurately calculate tax owed.

Collecting and remitting sales tax to tax authorities: Direct sellers must not only collect sales tax from customers but also ensure its proper remittance to the appropriate tax authorities. This demands meticulous record-keeping and a sound understanding of filing deadlines. The worst “sin” in the sales tax world is when a retailer collects tax but doesn’t remit it to the authorities in a timely manner. Sales taxes are fiduciary in nature (similar to payroll taxes) in that the state is entrusting the retailer to collect the state’s money on its behalf and remit timely.

4. Registering for a Sales Tax Permit

Obtaining a sales tax permit triggers tax compliance in a state. It is but the first step in the process of being a good corporate citizen and committing to regularly file in the state. Here are a few notable points in the process:

Navigating the Application Process

The process of registering for a typical seller’s permit is reasonably straightforward and is similar from state to state. However, it is very important to answer the multiple questions accurately and truthfully. We get calls all the time from potential clients who want to know if they can just register for a seller’s permit in a state and then begin to be in compliance from then on. Unfortunately, it’s not that easy. States ask a series of questions on the registration form that ultimately determine a company’s nexus start date with the state, which may likely be in the past and require some form of remediation. We always caution clients to determine nexus start dates BEFORE quickly filling out a registration form and to work with a professional to make sure they understand the possibility of retroactive liability before finalizing the registration with the state. And as always, we can help!

Be prepared to answer questions about the business, when you began making sales into the state, whether you’ve had any employees or contractors in the state, whether you hold inventory in the state, etc. Taxpayers must also be ready to identify a corporate officer (with their social security number and/or driver’s license) as the “responsible person” for any unpaid taxes or penalties for failure to remit or file. Some of these matters become trickier for foreign-based companies doing business in the US without US employees or a domestic mailing address.

Embracing the Concept of Nexus

The application process reinforces the concept of sales tax nexus – the connection between a business and a jurisdiction that mandates the obligation to collect and remit taxes.  As mentioned above, reviewing nexus triggering dates must come before registration for a sales permit. As direct sellers provide goods or services within specific states, they trigger this connection and the corresponding tax responsibility.

5. Consequences of Non-Compliance with Sales Tax Regulations

Penalties and fines for non-payment or underpayment of sales tax: Non-compliance can lead to steep penalties and fines, draining resources that could be better utilized elsewhere.

Audits related to sales tax compliance: Tax authorities have the power to conduct audits to ensure compliance. A rigorous adherence to regulations can help mitigate the risk of audits and their associated disruptions.

6. Navigating the Array of Tax-Saving Mechanisms

In the sales tax world, in addition to determining when a company is required to start filing in a state (has achieved nexus), and determining which products are subject to sales tax, taxpayers also must consider if there are any deductions or exemptions that they can avail themselves of.  Exemptions may be based on a variety of factors, including the nature of the buyer (i.e.; a government entity, a non-profit organization – in some states), the nature of the transaction (i.e.; sales for resale), or the nature of the item being sold (i.e.; food items, medical devices, etc.). And again, we note that while these are examples of typical exempt items, they are not the same from state to state. So, it’s really important to navigate each state’s rules, and their rules on keeping documentation to support the exemptions.

Unlocking Tax Relief Through Eligibility Criteria

Eligibility for these tax-saving opportunities hinges on meeting specific criteria that might resonate with the broader goals of certain economic behaviors or even, at its most dramatic, societal well-being. Businesses need to engage in a careful analysis of their offerings and the corresponding tax regulations to identify where these deductions and exemptions apply. This process of alignment not only saves costs but also aligns with the spirit of fostering accessibility and growth within a community. An example of this might be an exemption or deduction allowable for the purchase of equipment used in research and development activities. Or an exemption allowed for the installation of energy saving appliances or solar.

By grasping the various types of direct sales, accurately calculating and collecting sales tax, and following best practices for compliance, direct sellers can work towards financial success. And as you know, you don’t have to go it alone with us as your guide. Contact Miles Consulting today to determine the best direct sales and sales tax solution for your online business.

by Monika Miles

Calculating and Collecting Sales Tax for Direct Sales: Best Practices

In the realm of direct sales, maintaining adherence to sales tax rules  is paramount for the prosperity and expansion of your business. As a diligent business owner or manager, your primary objectives revolve around boosting sales, optimizing profits, and delivering exceptional products or services to your valued customers. And so, grappling with the intricacies of sales tax can prove to be a formidable task.

In this article, we're going to explore some handy strategies for calculating and collecting sales tax accurately in direct sales. We'll dive into the common challenges and pain points that many business owners or accounting professionals like you often come across.

So, let’s get started and make this sales tax thing a little less daunting!

Read more

by Monika Miles