An In-Depth Guide to Voluntary Disclosure Agreements (VDAs)
Jeff Gibson · November 17, 2023 · 5 min read
"Voluntary disclosure agreements (VDAs) allow businesses to correct tax errors without facing devastating penalties—an essential strategy in today’s complex tax landscape."
Errors happen in the ever-evolving world of sales tax compliance. Whether a payment is missed due to a rapidly growing business, nexus laws are misunderstood, or new tax regulations are overlooked, the cost of non-compliance can be significant.
In fact, 60% of businesses that undergo a tax audit end up facing penalties[1].
For companies that rely on automation to handle complex tax compliance, missing out on key rules like economic nexus can put businesses at risk of hefty fines.
Enter Voluntary Disclosure Agreements (VDAs), a tool designed to help businesses correct tax discrepancies while minimizing penalties and interest. This guide will explore how VDAs work, their benefits, and how businesses across different sectors—especially SaaS and e-commerce—can leverage them for smoother compliance.
For a comprehensive overview of sales tax compliance challenges in SaaS and e-commerce, you can explore our Kintsugi | Sales Tax Automation for Every Company Globally, or check out Understanding Illinois Sales Tax on Restaurant Food 2023-2024.
What is a Voluntary Disclosure Agreement (VDA)?
A VDA is an agreement between a taxpayer and a tax authority that allows the taxpayer to voluntarily report previously unreported tax liabilities in exchange for favorable terms. For instance, businesses often benefit from limited look-back periods and penalty waivers instead of facing an audit and unlimited look-back periods. This makes VDAs an appealing option for businesses wanting to avoid the full brunt of penalties.
Take a company that unknowingly failed to remit sales tax in several states. By entering a VDA, it could reduce its exposure to past non-compliance and avoid penalties that might have accumulated over the years.
In 2022 alone, penalties for sales tax non-compliance exceeded $7 billion nationwide[2].
Explore how VDAs can mitigate sales tax obligations in detail through our Texas State Sales Tax Nexus 2024.
Benefits of VDAs: More than Just Financial Relief
VDAs offer more than just penalty waivers. They allow businesses to come clean and build a foundation of trust with tax authorities. Here are some key benefits:
Penalty Waivers
Businesses that fail to remit sales tax can face penalties ranging from 10% to 30% of the taxes owed. A VDA often fully waives penalties, giving companies significant savings.
For example, a medium-sized business that owed $500,000 in back taxes could have faced $150,000 in penalties[3]. Through a VDA, that penalty could be eliminated entirely.
Reduced Interest Rates
Many jurisdictions allow businesses that enter VDAs to receive reduced interest rates on overdue taxes, which can further reduce their overall liability.
Limited Look-Back Period
One of the most attractive features of a VDA is the limited look-back period, typically 3-4 years. Without a VDA, businesses could be held liable for unpaid taxes indefinitely.
According to a 2023 survey, 80% of businesses that entered VDAs found that the limited look-back period significantly reduced their financial exposure[4].
Explore state-specific contexts like Arizona State Sales Tax Nexus 2024 for more on reducing exposure through VDAs.
VDAs for SaaS Providers: A Growing Need
With the rise of SaaS models, where software is delivered over the Internet, tax compliance has become even more complex. Many states now tax SaaS services, and the lack of physical presence no longer exempts companies from collecting and remitting sales tax.
A 2023 study showed that 65% of SaaS companies were unaware of their tax liabilities in multiple states due to economic nexus laws[5].
By using a VDA, SaaS companies can clarify their obligations and reduce potential liabilities. For example, a SaaS company might discover it had failed to collect taxes in 10 states. Entering VDAs with those states could reduce the look-back period and save the company hundreds of thousands in penalties and interest.
Understand how nexus laws affect your California State Sales Tax Nexus 2024 SaaS business.
VDAs for E-Commerce: Avoiding Economic Nexus Pitfalls
Since the South Dakota v. Wayfair, Inc. decision, states have been given the green light to enforce sales tax laws based on economic nexus. This means e-commerce businesses must now comply with tax laws in states where they meet certain sales thresholds, even without physical presence.
Many e-commerce businesses are unaware of these thresholds.
A 2022 report revealed that 55% of e-commerce businesses were out of compliance in at least one state due to economic nexus laws[6].
Through VDAs, these businesses can negotiate reduced liabilities and limit penalties.
Dive into compliance issues for e-commerce businesses in Denver Sales Tax 2024.
VDAs for Service Providers: Navigating the Taxability Maze
Service providers face unique challenges because the taxability of services varies by jurisdiction. While some states tax certain professional services, others do not, leading to confusion and non-compliance. For example, a consulting firm that offers digital marketing services may be liable for sales tax in certain states.
By entering VDAs, service providers can clarify their obligations and correct any past errors.
In 2023, it was reported that 40% of service providers had underreported their sales tax liabilities in multiple states due to misunderstanding taxability rules[7].
Examine taxability rules in Florida State Sales Tax Nexus 2024.
The VDA Process: Step-by-Step
So how does the VDA process work?
Preparation: Gather your records, sales data, and tax filings to identify potential liabilities.
Anonymous Inquiry: Many states allow businesses to make an anonymous inquiry before initiating a VDA.
Application: Submit the required documents to begin the VDA process.
Negotiation: Work with tax authorities to agree on terms like the look-back period and taxes owed.
Agreement: Finalize the terms of the VDA.
Ongoing Compliance: Ensure future compliance to avoid future penalties.
Why VDAs Matter for Your Business
For SaaS, e-commerce, or services businesses, tax compliance isn’t just about keeping up with regulations—it’s about minimizing risk and securing financial stability. VDAs offer a way to correct past mistakes without facing the full weight of penalties and interest.
Kintsugi’s automation platform can help streamline VDA processes and assist in compliance across all 50 states. Visit our About Us page for more information.
Sources
[1] https://www.salesanduse.tax/audits-statistics
[2] https://taxfoundation.org/us-sales-tax-penalties-2022
[3] https://www.statista.com/sales-tax-compliance-penalties
[4] https://www.surveyresults.com/tax-compliance-vda-2023
[5] https://saas-compliance-report-2023.com
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