Why VDAs for Sales Tax Compliance Matters for SaaS Companies

This guide explains why VDAs for sales tax compliance matter for SaaS companies and how they help mitigate financial and legal risks. As SaaS businesses grow, understanding and adhering to sales tax regulations is essential to avoid penalties, audits, and potential prosecution. By leveraging automation and data validation, companies can accurately report tax liabilities and stay compliant with evolving tax laws.

Why SaaS Companies Should Care About Sales Tax Compliance?

Sales tax compliance is essential for SaaS companies because non-compliance can result in significant financial liabilities, including hefty penalties, back taxes, and potential criminal prosecution. With support from the Multistate Tax Commission, states are vigilant in identifying taxpayers who have not met their tax obligations, especially those with a nexus in multiple states.

Ignoring sales tax responsibilities can trigger audits that disrupt business operations and damage reputations. SaaS companies operating in diverse markets like Villa Dolores or partnering with organizations like the ECNL must prioritize compliance to ensure continuity.

Resources such as the California Department of Tax and Fee Administration’s (CDTFA) guide to out-of-state sales tax obligations highlight the importance of understanding and fulfilling your tax obligations.

By maintaining robust compliance measures and addressing tax liabilities proactively, SaaS companies can avoid audits, reduce penalties, and prevent legal risks associated with criminal prosecution, safeguarding their long-term growth and reputation.

What Is a Voluntary Disclosure Agreement (VDA)?

A Voluntary Disclosure Agreement (VDA) is a formal agreement between taxpayers and state tax authorities that allows businesses to voluntarily disclose unpaid sales tax, use tax, and other tax liabilities while benefiting from reduced penalties and limited look-back periods. This process is especially beneficial for SaaS companies that may have unintentionally overlooked tax obligations due to an unrecognized nexus, such as sales in multiple states, operations in regions like Villa Dolores, or partnerships with organizations like the ECNL.

The VDA process offers confidentiality, with many states permitting anonymous disclosures, which protects sensitive data during the initial negotiation stages. Additionally, the Multistate Tax Commission’s (MTC) voluntary disclosure program streamlines the process for companies operating in multiple states, reducing the burden of dealing with each state separately.

Engaging in a VDA not only helps avoid criminal prosecution but also demonstrates a commitment to compliance, providing financial relief by reducing penalties and preventing costly audits. Ultimately, voluntary disclosure agreements enable SaaS companies to correct past mistakes, limit future risks, and maintain a positive standing with tax authorities.

How SaaS Companies Benefit from VDAs

For SaaS companies, entering into a VDA offers numerous advantages:

• Financial Relief: By limiting the look-back period, companies reduce exposure to long-term tax liabilities, resulting in significant savings.
• Reduced Penalties: States typically offer reduced penalties for voluntary participation, decreasing the risk of criminal prosecution.
• Confidentiality: The VDA process often ensures taxpayer anonymity during negotiations, which protects sensitive data and operational analysis.
• Streamlined Reporting: Automation and validation tools can be integrated into the compliance process, making ongoing reporting more efficient.
• Improved Compliance: Engaging in voluntary disclosure demonstrates a commitment to legal compliance, reduces audit risks, and builds stakeholder confidence.

Industries like vertical transportation and regions such as Villa Dolores, where tax obligations can be extensive, benefit significantly from the structured compliance approach that VDAs offer. For SaaS companies, this means fewer interruptions due to audits and better management of sales tax requirements.

When Should a SaaS Company Consider a VDA?

SaaS companies should consider a Voluntary Disclosure Agreement (VDA) when they recognize unfulfilled tax obligations that could expose them to penalties, audit risks, and potential criminal prosecution. A VDA becomes crucial when nexus is established—through sales, employees, or property in a state—but sales tax or use tax has not been collected or remitted. '

Here are four scenarios when a SaaS company should consider a VDA.

1. Unregistered Sales Tax Nexus in Multiple States – If a SaaS company has been selling in states where it meets economic nexus thresholds but hasn’t registered for sales tax, a VDA can reduce penalties and limit past liabilities.

2. Recent Nexus Discovery During a Tax Compliance Review – If a company conducts a nexus study and finds unreported tax obligations, a VDA offers a structured way to voluntarily disclose and settle past-due taxes before states initiate an audit.

3. Before a Merger, Acquisition, or Funding Round – Potential investors or acquirers often conduct due diligence, and unresolved sales tax liabilities can delay deals or reduce valuation. A VDA helps clear past compliance issues and ensures a smoother transaction.

4. Failure to Collect Sales Tax on Digital Products and Services – Many SaaS businesses assume their products are tax-exempt, but several states tax digital goods and software subscriptions. If taxes were not collected, a VDA can help correct non-compliance before penalties accumulate.

By engaging in voluntary disclosure agreements, businesses can secure reduced penalties, limit the look-back period, and maintain confidentiality, ultimately protecting their financial health and reputation.

How to Successfully Execute a VDA

Executing a VDA successfully involves several essential steps:

1. Assess Tax Obligations: Conduct comprehensive data analysis to identify nexus points and existing tax liabilities.
2. Seek Expert Guidance: Engage professionals specializing in sales tax, income tax, and use tax compliance for tailored strategies.
3. Automate Reporting Processes: Leverage automation tools to streamline reporting, reducing human error and enhancing validation accuracy.
4. Negotiate Terms: Focus on securing reduced penalties, defining look-back periods, and ensuring confidentiality throughout the process.
5. Ensure Future Compliance: Implement long-term compliance frameworks, particularly in sectors like vertical transportation and regions like Villa Dolores.

The Multistate Tax Commission emphasizes that successful VDAs require consistent reporting, strategic disclosure, and effective data management to avoid future audit risks and criminal prosecution.

Get Compliant & Avoid Audit Risk with Kintsugi

At Kintsugi, we understand SaaS companies' challenges in maintaining sales tax compliance while managing multi-state operations and complex tax liabilities. Our tailored solutions help businesses avoid audit risks, reduce exposure to penalties, and prevent potential criminal prosecution through the strategic use of Voluntary Disclosure Agreements (VDAs).

By leveraging automation, data analytics, and robust validation tools, we streamline the reporting process and ensure accurate disclosure of tax obligations. Our services include nexus evaluations, confidential VDA negotiations, and ensuring businesses benefit from reduced penalties and shorter look-back periods.

Our expertise allows SaaS companies to efficiently manage their use tax requirements, avoiding costly audits and legal risks tied to non-disclosure agreements. Book a demo or sign up to see how Kintsugi can help your business achieve full compliance, safeguard its reputation, and minimize risks related to tax liabilities and criminal prosecution.