Voluntary Disclosure Agreement
and How to Stay Proactive with
Sales Tax Filing
The sales tax landscape has been changed forever by the expansion of online sales in 2020 and 2021. The COVID-19 pandemic has forced local retailers to explore the benefits of switching to online sales. The issue facing retailers and service providers is how to stay current with sales taxes in states across the nation.
As a brick-and-mortar retailer, a company is limited to paying sales taxes in the state they call home. Moving into the online retail sector is the first step and just be followed by a proactive approach to paying taxes. A voluntary disclosure agreement, VDA, is becoming a popular option for those who fear they owe back taxes to states across the U.S.
Understanding the Sales Tax Issue
Retailers have been selling products and services across state borders since the 1990s when the internet went mainstream. Retailers and state taxation agencies have changed sales tax tack since the 2018 Wayfair Supreme Court decision. The decision was made in favor of South Dakota, with the state asking for the right to claim sales tax on Wayfair products. The Tax Advisor reports the issues facing online retailers to continue to expand, with some gains being made by retailers over state collectors.
Consider a Voluntary Disclosure Agreement
For businesses that have been in operation for several years, a voluntary disclosure agreement is a good option to consider. The use of a VDA can limit the losses associated with owing back taxes. The taxation problems facing online retailers usually amount to a large bill based on the lifetime of their unpaid taxes. The Supreme Court decision allowed states to chase companies for back taxes dating back to their initial use of the Internet to make sales. Every sale made in a state above a financial threshold adds to the sales tax owed by a business.
Is a Voluntary Disclosure Agreement Proactive?
The short answer to this question is yes. A business owner concerned about their sales tax bill can choose to use a voluntary disclosure agreement in a bid to limit their tax bill. The use of these agreements has been growing in recent months because they allow a company to limit their owed taxes to the last few years. each voluntary disclosure agreement allows a company to declare the fact they owe sales tax. On a positive note, the company and the state agree to payments for a small number of years. Most agreements limit the years of sales tax to be paid to three or four years.
Beat Aggressive Sales Tax Collections
The Journal of Accounting explains there have been aggressive attempts to retrieve the taxes from online retailers who have failed to pay their sales tax obligations in the past. Several states have joined California in chasing Amazon affiliates for unpaid taxes dating back several years. For an online retailer to maintain their good standing with tax collectors in several states, they need to look back at their records and track their sales.
The choice of a Voluntary Disclosure Agreement is a good one for those who fear they face large sales tax bills. By choosing to enter an agreement with a state where tax is owed, a retailer will have the opportunity to limit their tax obligations to three- or four-year’s worth of back taxes. The savings made by online retailers as they enter an agreement may mean the difference between going out of business and continuing to be a success.
Anonymity is Allowed
A concern for several retailers is they will incriminate themselves if they apply to enter a VDA with a specific state. This concern has been removed for some online retailers because several states have made the process of applying for an agreement anonymous. The fear of being chased for over a decade of back taxes can be removed if an online retailer successfully agrees with a state to limit their payments and interest charges to between three and four years.
Avoid Future Problems
The sales tax nexus has changed the landscape of online retail in the U.S. For online retailers wishing to avoid future issues with sales taxes, a proactive approach is to ensure the correct level of sales taxes is collected. A Voluntary Disclosure Agreement is a retrospective approach to protecting a business from sales tax problems. A proactive approach would be to collect the correct sales tax amounts when making a sale. The ability to collect taxes at the time of a sale will limit the problems a business faces, with each retailer learning about the level of sales tax they need to collect from each sale in individual states.
If a business is to remain active and in good standing, it needs to be protected against sales tax debts. In several states, the threshold for sales tax on online products and services is $100,000 or $250,000, meaning a Voluntary Disclosure Agreement or tax amnesty program will ease retrospective concerns.