Voluntary Disclosure Agreements (VDAs) and How E-Commerce Brands Use Them for Sales Tax Compliance

In the world of e-commerce, ensuring your compliance with sales tax regulations across different jurisdictions is essential. Voluntary Disclosure Agreements (VDAs) are critical in helping businesses address past tax liabilities, manage reporting, and avoid penalties. These agreements help businesses comply with their tax obligations while offering reduced penalties and a limited look-back period. This guide will explore how VDAs benefit e-commerce brands, when to consider them, and how solutions like Kintsugi can automate these critical compliance processes.

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 come forward and disclose previously unpaid sales tax, income tax, or use tax without facing severe penalties. This voluntary disclosure process offers substantial benefits, including reduced penalties, limited look-back periods, and protection from criminal prosecution, which can result from unreported tax liabilities.

An in-state VDA applies to businesses that already have a registered presence in a state but failed to report or pay certain taxes, allowing them to come forward and resolve past liabilities with reduced penalties. An out-of-state VDA is for businesses that have established nexus in a state without registering, enabling them to voluntarily disclose their tax obligations before the state initiates an audit, often benefiting from limited lookback periods and waived penalties.

For e-commerce brands operating in regions like Villa Dolores or participating in ECNL markets, a VDA becomes crucial for addressing unfulfilled tax obligations and avoiding costly audits. The Multistate Tax Commission provides a multistate option, allowing businesses with nexus in multiple states to handle reporting, validation, and compliance through a streamlined process.

By entering into a Voluntary Disclosure Agreement, businesses gain the opportunity to minimize overall liability, protect sensitive data through confidentiality agreements, and use automation tools to ensure accurate disclosure. Moreover, leveraging advanced data analysis and reporting platforms helps businesses meet their tax obligations efficiently while ensuring long-term compliance with state tax laws.

The Role of Nexus in VDAs

The concept of nexus plays a critical role in determining tax obligations for e-commerce businesses. Establishing nexus—whether through physical presence, such as offering vertical transportation services in Villa Dolores, or through economic factors like ECNL sales thresholds—triggers sales tax, income tax, and use tax responsibilities.

Failing to meet these obligations can lead to significant tax liabilities, penalties, and audit risks. Utilizing a Voluntary Disclosure Agreement (VDA) ensures timely disclosure, protects businesses from criminal prosecution, and offers reduced penalties with a defined look-back period.

When Should an E-Commerce Brand Consider a VDA?

E-commerce brands should consider entering into a Voluntary Disclosure Agreement (VDA) when they realize they have past tax liabilities in a state and want to minimize penalties and interest. Here are key scenarios where a VDA might be beneficial:

1. When the Business Has Established Nexus Without Registering for Sales Tax

If the brand has been selling into a state and meets economic nexus thresholds (e.g., $100,000 in sales or 200 transactions) but hasn’t registered or collected sales tax, a VDA can help reduce back taxes and penalties.

2. When the Brand Expands to New Markets and Discovers Past Noncompliance

If an e-commerce business recently reviewed its sales data and found that it should have been collecting tax in additional states, a VDA offers a structured way to resolve past liabilities.

3. Before a State Initiates Contact About Sales Tax Compliance

If a state reaches out for an audit or compliance check before a business applies for a VDA, the company may lose the opportunity for reduced penalties. Businesses should act before they receive a notice.

4. If the Business Uses Marketplace Facilitators but Still Has a Tax Obligation

While platforms like Amazon, eBay, and Walmart collect and remit sales tax for third-party sellers in most states, some brands may have direct sales or other tax obligations (e.g., business taxes, income taxes) that require a VDA.

5. After Conducting a Sales Tax Nexus Study

If an internal review or third-party nexus analysis reveals that the business has tax exposure in multiple states, applying for VDAs in affected states can help limit financial risk.

6. When Expanding Into Physical Presence Nexus (Warehouses, Employees, or Inventory)

E-commerce brands that use third-party fulfillment centers (e.g., Amazon FBA, Shopify Fulfillment Network) or hire remote employees may trigger physical nexus in certain states, creating unreported tax obligations.

7. If the Business Has Been Collecting Sales Tax Without Registering

Some brands mistakenly collect sales tax before registering in a state. This creates liability, as states typically require proper registration before collection. A VDA can help address compliance issues.

8. If a Merger, Acquisition, or Funding Round Exposes Tax Liabilities

Investors and acquirers often conduct due diligence to uncover unpaid sales tax liabilities before an acquisition. A VDA can clean up tax exposure before the deal closes, avoiding surprises.

9. When the Business Has Not Filed Historical Tax Returns But Wants to Limit Exposure

Many states have lookback periods (typically 3–4 years), meaning businesses applying for a VDA won’t be held liable for unpaid taxes beyond that timeframe. Without a VDA, states could assess taxes dating back to when the business first started selling.

10. When States Introduce New Tax Laws That Affect the Business

If a state changes its tax laws (e.g., revising economic nexus thresholds or expanding taxable digital goods/services), e-commerce brands may find themselves out of compliance without realizing it. A VDA can help retroactively correct this.

11. If the Business Sells Taxable Digital Goods or Services Across Multiple States

Digital products, SaaS, and subscriptions have complex tax rules that vary by state. If an e-commerce brand has been selling untaxed digital products, a VDA can resolve past liabilities before penalties accumulate.

Common Pitfalls in Voluntary Disclosure Agreements

While Voluntary Disclosure Agreements (VDAs) offer numerous benefits, businesses must avoid common pitfalls to ensure successful compliance. Here are some pitfalls to avoid.

1. Failing to Confirm Nexus Before Applying

Businesses often enter a VDA without fully assessing whether they have a tax obligation (nexus) in the state. This can lead to unnecessary disclosures or missed jurisdictions where compliance is needed.

2. Incomplete Historical Liability Assessment

Underestimating past tax liabilities can result in underreported amounts, while overestimating can lead to overpayment. A thorough review of historical transactions is crucial.

3. Disclosing Before Understanding Exposure

Some businesses rush into a VDA without fully analyzing their exposure, missing opportunities to negotiate or properly allocate tax liability.

4. Missing Eligible Tax Periods

Many states limit the lookback period (often 3–4 years). If businesses start collecting tax before applying for a VDA, they might miss the opportunity to limit past liability.

5. Not Meeting VDA Deadlines

Once accepted into a VDA, businesses must comply with reporting and payment deadlines. Failure to meet these deadlines can void the agreement and trigger full penalties.

6. Failing to Account for Related Entities

Businesses with multiple entities must determine whether all are covered under the agreement. A missed entity could result in continued tax exposure.

7. Disclosing Too Much Information

States typically do not require detailed taxpayer identification in initial anonymous filings. Providing unnecessary details too soon can make negotiations harder or limit strategic options.

8. Not Considering Future Tax Compliance

Some businesses complete a VDA but fail to establish ongoing compliance processes, leading to future noncompliance and penalties.

9. Ignoring Local Tax Obligations

A VDA may cover state-level taxes but not local sales tax (e.g., city, county, special districts). Businesses should confirm if additional registrations or filings are needed.

10. Overlooking Industry-Specific Tax Complexities

Certain industries (e.g., SaaS, marketplace sellers, restaurants) have unique tax rules that can complicate VDAs. Not understanding these nuances may lead to misreporting.

11. Failing to Engage a Tax Professional

Many businesses attempt to handle VDAs internally, but without expert guidance, they risk errors that could increase liability or result in unfavorable terms.

How to Execute a VDA Successfully

Successfully executing a Voluntary Disclosure Agreement (VDA) requires a structured approach that prioritizes compliance, accurate reporting, and thorough data analysis. The first step is to conduct an in-depth analysis of all potential tax liabilities, including sales tax, income tax, and use tax, ensuring that all tax obligations are clearly identified.

Utilizing automation tools for data validation and reporting significantly reduces human error, streamlining the disclosure process. Establishing a non-disclosure agreement at the outset is essential to protect the confidentiality of sensitive business information during negotiations.

Clear negotiation of terms, including look-back periods and payment plans, ensures smoother interactions with tax authorities and minimizes future audit risks.

By integrating platforms like Kintsugi, which automate reporting, ensure real-time data updates, and provide robust validation, businesses can complete the voluntary disclosure process efficiently, reducing overall liability and maintaining long-term compliance.

Why Sales Tax Compliance Matters for E-Commerce Brands

Sales tax compliance is essential for e-commerce brands, especially those operating in regions like Villa Dolores, offering services such as vertical transportation or participating in ECNL markets. Failure to meet your tax obligations can result in significant tax liabilities, costly penalties, and potential criminal prosecution.

Establishing nexus in a state without proper disclosure of sales tax, income tax, and use tax obligations increases the risk of audits and additional financial consequences. A Voluntary Disclosure Agreement (VDA) allows businesses to address these issues proactively, offering benefits such as reduced penalties, a limited look-back period, and ensured confidentiality during the disclosure process.

Leveraging automation for real-time reporting and data analysis further reduces the risk of human error and ensures that e-commerce brands remain compliant with all relevant tax regulations. By prioritizing compliance, businesses avoid operational disruptions and financial risks and build trust with regulatory authorities and customers alike.

Automate VDAs & Sales Tax Compliance with Kintsugi

Automating Voluntary Disclosure Agreements (VDAs) and sales tax compliance is crucial for e-commerce brands managing complex tax obligations. Kintsugi offers a comprehensive solution that automates reporting, enhances data validation, and simplifies the disclosure process. Additionally, Kintsugi helps businesses avoid unexpected tax liabilities, audits, and penalties by tracking nexus thresholds in real-time and ensuring multistate compliance.

Our platform aligns with Multistate Tax Commission standards, providing insights on lookback periods, reduced penalties, and secure voluntary disclosure processes. With automated reporting and data validation, Kintsugi minimizes tax risks, enabling e-commerce brands to stay compliant, protect their reputation, and focus on growth. So, book a demo or sign up today to experience the power of Kintsugi.