What is a Voluntary Disclosure Agreement (VDA) and Is It Right for You?
Michael J. Fleming is the founder and president of Sales Tax and More, a full-service consulting and solutions firm with a passion for state tax. He is one of the country's leading authorities on sales tax issues such as consulting and research, registrations, returns, nexus, drop-shipping, eCommerce, and service providers.
Michael is a renowned writer and speaker, and he regularly presents on webinars. He is also the host of the Sales Tax and More podcast, where he shares his wisdom and learnings with his audience in order to help them navigate the tricky world of taxes.
In this episode…
When a state finds out that a seller supposed to have registered for sales tax has failed to do so, it will seek out that seller and require him to pay all the taxes he should have paid including any penalties and interest accrued. The state can decide to go back as far as seven to eight years or even the first day the seller started selling in that particular state, which is the first day of nexus.
In such cases, negotiation with the state is often out of the question, but the seller can reach out to the state and enter into a Voluntary Disclosure Agreement (VDA) which will lead to reduced back taxes, reduced penalties, and reduced or waived interest. However, there are limitations to doing a VDA.
In this week's episode of the Sales Tax and More Podcast, co-hosts Michael Fleming and Ellie Moffat talk about the use and limitations of Voluntary Disclosure Agreements (VDAs). Michael starts by explaining what a VDA refers to and when it makes sense to use it and then shares alternative solutions.
Here’s a glimpse of what you’ll learn:
Michael Fleming explains what a VDA refers to and when it is applicable
Limitations of using a VDA
Michael explains why most people don't use VDAs
When does a VDA make sense for sellers?
The drawbacks to doing a VDA
Alternative solutions available to sellers for sales tax remittance
How to get in touch with Sales Tax and More
Resources Mentioned in This Episode
Ellie Moffat's email: emoffat@salestaxandmore.com
Connect with Michael
Sponsor for This Episode
Sales Tax and More assists companies and their trusted advisors like CPAs with sales tax needs. They offer consulting and research, registrations, returns, and so much more. Over the years they have assisted thousands of sellers both foreign and domestic with their tax issues in the United States and in Canada.
To learn more about their services, visit https://www.salestaxandmore.com/.
Make sure to register and join the Sales Tax and More Webinar to get access to complex materials on tax in an easy-to-understand format.
Episode Transcript - Audio Version
[0:10] Intro: Welcome to Sales Tax and More, your go-to resource for all things state tax-related. Now, here's your host, Michael Fleming.
[0:26] Mike: Hi, Mike Fleming here founder of Sales Tax and More. And today's co-host of the Sales Tax and More Podcast, where we talk about everybody's favorite subject, which is, of course, sales tax. Today, my co-host will be interviewing me about what is a VDA and is it right for you? But before we get started, I'd like to introduce you to Ellie Moffat.
[0:49] Ellie: Hi, everyone. sales tax is certainly my favorite topic. I've said it before. I'll say it again. And before we jump in here, I'm just going to do a quick introduction for Sales Tax and More. Sales Tax and More is a full-service consulting and solutions firm. We have an excellent team here, experienced tax professionals who are very dedicated to fulfilling your state tax and related needs. So we do a lot of returns, registrations, consultations, research, along with offering a lot of resources. And like our name states more. So if you have questions about our services, we will give you plenty of ways to reach out to us. Yeah, Mike, what is a VDA?
[1:32] Mike: Great question. It's one that we hear all the time. And sometimes, you know, we don't realize that in the industry. We throw these terms around and not everybody knows what the terms mean. So VDA stands for voluntary disclosure agreement. And let's talk about if a state finds you they come across you and you're not registered and they believe you should have been. They're going to be either going back seven, eight, or ten years. Now, in theory, they could go back to the first day that you actually started selling in the state, you know, the first date of nexus. But in reality, they routinely go back seven, eight, or ten years, it depends on the states. I don't know of any state that goes back nine years. Most states go back either seven years or eight years. And then there are a few that go back ten years. And, you know, once the state finds you, you don't get to negotiate with them. And so, you know, can we work for five years? Generally, if you want some type of mitigation program, you got to be proactive. And you've got to reach out to the state and you got to tell them, Hey, we just realized we should have been collecting tax, and we want to enter into a Voluntary Disclosure agreement with you. And because you have stepped forward voluntarily and because the state hasn't had to use their resources to track you down. The state's going to reward you. So instead of going back that through the seven, eight, or ten years, they're generally going to go back either three or four years. They're going to waive everything that's older than that three or four years. And they're also going to waive the penalties. Just about every state out there is going to waive the penalties. Some states, you know, about six or seven or so actually waive interest also. So a state like Texas rather than going back seven years. They're going to go back four years and wave 100% of the penalty and wave 100% of the interest. So it's an exposure mitigation program.
[3:40] Ellie: So far, it's sounding really great here. Mike, are there limitations on a VDA?
[3:45] Mike: Now, of course, you know, VDA is you know, the state's rewarding you for stepping forward voluntarily so they find you before you enter into a VDA then a lot of times that VDA is off the table, it's no longer available. There are some exceptions to that rule states like Michigan and Florida may still offer it to you. But once you're contacted by a state, then generally it's off the table, and states keep good records of how they tried to contact you, whether it be by telephone, whether it be by email, whether it be by mail, whether they sent your nexus questionnaire, all of that is considered a contact even if you didn't respond. So that's one of the big limitations on a VDA. Another one is you still have to pay, you know, either three or four years worth of back taxes and in most instances, unless it's one of those special states, interest. So a lot of companies just don't have the money to come up. With now there are payment programs, but you still have to pay the back tax. So there are some limitations on VDAs
[5:03] Ellie: Yeah, Mike this really sounds like a great program. And so I'm gonna ask what everyone is probably thinking here. Why aren't more people doing VDAs?
[5:14] Mike: Well, a VBA is a tool, snd just like any tool, it's great for some circumstances, but it's not, you know, a one size fits all tool. Unfortunately, lately we've been hearing horror stories about, you know, the software companies, especially forcing people or scaring people into doing VDAs and, you know, one of the bigger companies out there, if I mentioned their name, everyone would know them. I'm not gonna mention their name today. But they say if you owe more than $500, then you need to do a VDA. Now, the problem is they're charging $3500 to do a VDA. Now, we charge a lot less than and we only charge $1975. But if you only owe a state $500, it doesn't matter. You know whether you know it's this other company charging $3500 or us charging $1975. Does it make sense to do a VDA if you're going to, you know, pay the person processing that VDA performing that VDA service for you if you're going to pay them more than the tax that you owe? Absolutely not. So, you know, you got to look at what your potential exposure is. So that's one of the big things if you only owe a couple of hundred dollars, then you know, there are alternatives. You know, we can do a historical registration, which is you just pay the state the actual money that you owe. So if you only owe $500, pay the state the $500. Why pay us the $1975 or why pay the software company $3500 to meet that's just flushing money down the toilet. So it's a tool. It's a great tool for a lot of people. But it's not for everyone.
[7:13] Ellie: So to confirm here, Mike. Are you saying that a VDA is not a good program for many sellers?
[7:20] Mike: Yeah, absolutely. It's a perfect tool for some sellers. But maybe, you know, you only owe $500, like in the example I was just using, or maybe you've been contacted by a state already and now you don't want to you know, start this process and you know, disclose who you are, because most of the time a VDA is done on an anonymous basis, and they don't know who you are because someone like us is processing this on an anonymous basis. And then all of a sudden you disclose who the client is, and the states say oh, we already tried to contact them and this VDA is no good. Now you know, the state has all your information. And they're going to try to go after you. So this is not a good tool for everybody. Maybe, you know you've only been doing this for six months, and maybe your exposure is not that great. Maybe you just want to get registered on a historical basis, as I said, or, you know, sometimes a lot of companies, especially these e-commerce companies, they just don't have the money to go back and pay all the states all of this back taxes. And you know, I don't condone this, but there are some clients just want to register on a going-forward basis and register prospectively, because they want to stop the bleeding. They don't want the problems to get any worse. And they know that this doesn't absolve them of any past liability and you know, they're going to have to deal with the states if the states ever find out about this past liability. But in their minds, it's better than nothing. And when it comes along those lines, I tend to agree with them. You got to stop the bleeding. So you know, it's not a one size fits all program. You know the more likely a state is to find you, the larger your exposure, the longer you've been doing this. These are all factors that will play into whether this is the right way to get right with the states. So, but it's not a one size fits all tool. So don't get pressured into doing a VDA by one of these fear-mongers out there. It may be in your best interest but so many people. I saw one group that was pushing VDS on someone where none of their products are taxable. So that is absolutely ludicrous. I mean, you know, But things like that. That's what happens when you go to a software company and want services from them. So don't get me started on that. That's a whole other topic. But we've got to make sure that the VDA makes sense. That's the biggest thing. Does it make sense? And if it does, and you have the ability to do it, then go forward. But don't be scared of doing it. I mean, there are good reasons not to do it. There are alternatives that you can do that will have the same results and end up saving you more money in the long run.
[10:41] Ellie: Mike, let's talk more about the drawbacks here. You kind of briefly mentioned a couple, but what are some of the drawbacks?
[10:51] Mike: Well, you know, it's not an amnesty, so that's number one. You still have to pay either three or four years’ worth of back tax. And depending on the state, you'll have to pay the interest, just about all the states are going to waive the penalty. You know you don't want to, you know, try to think that, you know, I see a lot of companies, they lie to me and they say, Oh, we've never been contacted by the state. And they think that the state's not going to have good records. And then you go through this process and it comes right down to the last minute we disclose who you are. And the state says, Oh, they don't qualify, they've been contacted already. So you don't want to make sure that you've never been contacted. That's a big drawback. This doesn't work if you've been contacted in most states. And then, you know, you have to make sure that you have the money. There was someone who told me well, I want to get right with all of these states, you know, work up the numbers for me, work up the numbers and it was half a million dollars. You know, spread out across, you know, five, six states. Now they were saving just about that same amount of money. But they didn't have $500,000. So they got upset and they were like, Well, you know, I can't pay this $500,000. So that's, that's a drawback. I mean, you're getting right with the state. Now, if the state finds you, you could owe a whole bunch more than whatever you actually owe them. But, you know, even a discounted amount can sometimes add up to a lot of money in some states. So those are the drawbacks.
[12:39] Ellie: Okay. So Mike, let's talk a little bit about some alternatives then. What are some alternatives?
[12:46] Mike: And I touched on these. So one of the big alternatives is what we call a historical registration. And what that means is simply, you're going to tell the state, you know when your Nexus began, and the state is going to say thank you very much. Now, please, you know, give me all of my back tax plus my penalty and interest. But if you only owe $500, why pay someone to do a VDA for you, whether it's us, you know, $1975, or the software company for the $3500 just doesn't make sense, do a historical registration. And on these historical registrations, sometimes you can get the state to waive your penalty anyway. So if you only owe a smaller amount of money, you know, a good rule of thumb here is, if you're not saving more than the cost of the VDA, then it doesn't make sense to do a VDA. You want to use this historical registration. Or, you know, like some clients they say, Mike, I understand this is not what the states want me to do. But I don't have the money right now to go back and pay the states but I want to stop the bleeding. I want to stop it now. So that isn't an alternative. It's not what the state wants you to do and that, you know, exposure doesn't go away. But you're not adding to that number every single day on a going-forward basis. Amnesties, you know, depending on the state depends on the time frame. Sometimes amnesty is a better alternative. Sometimes a managed audit is a better alternative for all of the FBA Fulfillment by Amazon sellers who got those letters from California saying that, you know, we're coming after you for the back taxes going back to 2012. You know, they came out with a special VDA and they tried to make everyone you know, an offer that, you know, in general, is not available to anyone who wants to stay in contact with them. But so many people did not take advantage of this and the state of California is going to start coming hard after people. So for them, the only option available is a managed audit and in a managed audit, someone like us would do the audit for the state. And because the state doesn't, you know, have to spend their money to do the audit, they're generally going to weigh 50% of the interest plus the penalty. So you still got to pay the, you know, taxes potentially back to 2012. But that interest adds up over that eight-year period, and 50% that getting waved along with 100% of the penalty, sometimes makes a managed audit worthwhile. amnesties are great in that you know if you've been contacted by a state, you know, and the VDA is not available and amnesty may be available. Amnesties, in general, are not as good as a VDA because there's no limited lookback period. So if you've had nexus for eight years, they may want all eight years’ worth of back taxes, but they're generally more generous when it comes to waiving penalty and or interest. And you got to read the fine print, something I remember an amnesty that the state of Washington came out with, and you know, we're so used to saying oh, VDA is better, VDA but is better. This time, there was a limited look-back period in which the amnesty was actually better than the VDA. So you got to read the fine print. You gotta know what's available out there. But, you know, managed audits, amnesties, registering historically, registering prospectively these are all alternate to VDA’s. Again, the VDA may be your best bet. But you gotta check. You got to make sure that it makes good economic sense that it makes good business sense to do the VDA and not let someone pressure you or, you know, get a second opinion. You know, say, Hey, does it make sense to do VDAs here? You know, as I told you, one of the easiest ways to do this is to look at how much money you owe the state. And if it's less than the amount of the VDA why bother doing the VDA. Just go ahead and get registered and pay the state the money.
[17:39] Ellie: Thank you so much! Mike, how can people get in touch with Sales Tax and More? How can they reach out to us?
[17:47] Mike: Well, Ellie, they can always contact you.
[17:50] Ellie: You can always contact me, haha.
[17:51; Mike: Ellie is available, at emoffat@salestaxandmore.com. Sales Tax and More all spelled out. So that's Ellie's email address. She'll take care of you very well. Or you can go directly to our website. We've got lots of great resources on the website, you know, you can sign up for webinars that provide for continuing education. And the website address is www.salestaxandmore.com that is all spelled out. And you can also, you know, submit a request to have someone contact you through our website, or you can actually sign up for a consultation with me. Those are paid consultations, but a lot of people do want to talk more in-depth, and rather than talk to a salesperson, they actually want to discuss their specific issues and find out if using VDA does make sense for you.
[19:01] Ellie: Thank you so much, Mike. And we hope that you guys join us on our future podcasts and check us out as Mike said on our website. Join us for those webinars and everyone has a wonderful afternoon.
[19:14] Mike: Thanks, everyone. See you next time.
[19:17] Outro: Thanks for listening. Be sure to click subscribe and check out all of the resources we have out on the web.