Should I File a VDA for Economic Nexus?
Last Updated on August 18, 2022
COVID-19 created a perfect storm for remote sellers as sales dropped sharply for brick-and-mortar locations in favor of consumers purchasing online. With the exception of two states (Florida and Missouri) that do not have economic nexus laws, the three-year anniversary of the Wayfair decision (South Dakota vs. Wayfair., 585 U.S.) arrives in June.
Most states have a three-year lookback period for audits, and given the need to replenish state coffers, more remote sellers will begin receiving audit notices. When the Wayfair decision went into effect, states offered grace periods of six-plus months to “simply register” and start collecting and remitting sales tax, sans penalty or interest. Those days are over.
Remote sellers should only register for sales tax “if” they meet the provisional criteria as prescribed by that state. If a company is off by a week or even a month since establishing economic nexus, you might be able to register and go about your business, but the clock is ticking. Unfortunately, numerous remote sellers have yet to embrace economic nexus, despite eclipsing those dollar and transactional provisions.
If your business is unregistered, you owe the tax – plain and simple – just as if you had sold those products or services in a retail store. So this begs the question: Should you roll the dice and just register, or do you need to have a VDA (Voluntary Disclosure Agreement) filed? Given the nearly three years since the Wayfair decision went into effect, a registration may not be worth the gamble.
Remote sellers that may be looking at a merger or acquisition scenario most likely do not have a choice. As part of due diligence, they may have to file VDA(s) to be 100% compliant on a go-forward basis. For others trying to solve the economic nexus puzzle, you can build a business case on whether to register or file a VDA in each state by answering these questions:
- Have you clarified that your sales are taxable?
- Do you know where you have established economic nexus?
- Do you know when you have established economic nexus?
- Can you calculate your tax exposure, including the penalty and interest for that year?
- Are your sales expected to increase or decrease in those exposed states?
- Am I dealing with an aggressive state?
A VDA is generally filed by a third-party which contacts the state anonymously on the taxpayer’s behalf. Compliance is the end goal, but to do that, the unregistered remote seller must satisfy the state’s historical back-tax requirements. While interest is statutory, the penalty is abated. Unlike 6% to 8% interest in most cases, penalty assessments can range anywhere from 10% to over 30% in some states. For remote sellers, the state can only audit an unregistered taxpayer dating back to when economic nexus was established. Thus, the two reasons to have a VDA performed: 1) 100% compliance with the state and 2) penalty abatement.
The time expended by the third-party can take anywhere from 20 to 40 hours, while the total time with the state to approve the VDA agreement can take six to eight months. It is not an inexpensive option compared to registration, but mere registration will only allow for the taxpayer to collect and remit sales tax moving forward. This means that any prior exposure, if left unpaid, will continue to increase due to the interest and penalty. To VDA or not to VDA can be a difficult choice for a remote seller, but weigh the pros and cons as the states are unlikely to forget you – they are just taking their time.
Celebrating our 22nd year in Sales & Use Tax Consultancy, TaxMatrix performs Economic Nexus Studies, Economic Nexus Exposure Analysis, Voluntary Disclosure Agreements, State Registrations and Custom Tax Matrices for remote sellers nationwide.