If you’ve discovered uncollected or unremitted sales tax—whether from economic nexus, product taxability mistakes, or system errors—this guide explains how to use a Voluntary Disclosure Agreement (VDA) to limit past exposure and get compliant with sales tax.
1) Understand what a VDA is—and why it helps
A VDA is a legal agreement with a state that lets a business voluntarily disclose past sales/use tax liabilities. In return, states typically:
- Limit the lookback period (often 3–4 years, varies by state), and
- Waive penalties (interest is usually still due).
Why it matters: If exposure spans six years, a VDA can cap the “catch-up” period to the lookback window instead of the full six.
2) Act before the state contacts you
VDA eligibility is generally lost once a state initiates contact (e.g., audit notice, nexus questionnaire).
Action: If you suspect liability on your sales tax or other items, start evaluating VDA options immediately—don’t wait for a notice.
3) Verify the lookback period for each state
Lookback periods and interest/penalty rules differ by jurisdiction.
Action: Create a state-by-state matrix noting lookback, interest, penalty waiver rules, and documentation required.
4) Consider multi-state exposure (and the MTC option)
Selling into multiple states may mean multiple VDAs. The Multi-State Tax Commission (MTC) program can streamline voluntary disclosures across participating states.
Action: Map historical sales by ship-to state and prioritize states by exposure/risk.
5) Use anonymous filing where available
Many states allow representatives (e.g., CPA/consultant) to negotiate terms without initially revealing your identity.
Action: If you’re uncertain about proceeding, start anonymously to protect eligibility while you finalize exposure and strategy.
6) Assemble complete, audit-ready records
Incomplete or inaccurate disclosures of sales tax can void a VDA. What you’ll typically need is as follows:
- Gross sales and taxable sales by ship-to address (state and local),
- Tax collected vs. tax due (by period),
- Exemption certificates (validated and on file), and
- A ballpark liability estimate over the lookback.
Action: Before applying, confirm you can produce periodized data and local allocations; many states require them within 60–90 days after approval.
7) Budget for payment—and ask about payment plans up front
Not all states offer payment plans for VDA liabilities; some require a lump-sum payment. When available, terms vary and often must be requested with the initial application.
Action: Build a cash-flow plan based on conservative assumptions (no plan, lump sum), and request any payment plan in the application when the state allows it.
8) Secure go-forward compliance on Day 1
VDAs require you to register and remain compliant prospectively.
Action:
- Register for sales and use tax (effective date per agreement),
- Configure product taxability and correct rate sourcing,
- Implement filing cadence and reminders,
- Centralize exemption certificates, and
- Schedule periodic compliance reviews or automation.
When a VDA might not be necessary
If exposure is only 6–12 months in a single state, it can be more efficient to register with a backdated start date, file the missing returns, and request a penalty waiver—especially if professional sales tax VDA fees would exceed the benefit. Evaluate both paths.
Pre-filing checklist
- Exposure mapped by state and period (including locals)
- Lookback, interest, waiver rules confirmed
- Data by ship-to address exportable for all periods
- Exemption certificates validated or cured
- Payment plan policy known; cash ready
- Go-forward systems configured (rates, taxability, filings)
Final thoughts (and how we can help)
VDAs turn a messy past into a clean slate—if you move before the state calls and your disclosure is complete. If you’re unsure whether you need a VDA or which states to prioritize, we’ll walk you through a quick exposure assessment and options.
RJM Tax Exemption has handled many VDAs across industries and can file anonymously, coordinate multi-state disclosures, and set up your go-forward compliance. Reach out to RJM Tax Exemption and see how our team can help.
FAQs
Q: Will a VDA erase interest?
A: Penalties are commonly waived; however, interest from sales tax or other items is usually still due.
Q: Can I do this myself?
A: Possibly for simple, single-state situations. For multi-state exposure, locals, or messy data, professional help can prevent voided agreements and audits.
Q: How long does the process take?
A: Timelines vary by state and your data readiness; plan for document turnaround windows of 60–90 days post-approval.
