Should I File a VDA?
Last Updated on December 28, 2021
States are continually refining provisions on economic nexus standards, and companies must ensure they are following all revisions to comply with economic nexus standards. However, the question still needs to be asked – “What about physical presence?” While one side of the table argues that physical presence does not exist anymore since the Wayfair Supreme Court Case overruled those standards, states have not yet made any changes to their current laws indicating physical presence is no longer a factor. Therefore, companies should still ensure they are not exposed when it comes to physical presence.
What is physical presence?
Since sales and use tax is a state-and-local-levied tax, the definition of what exactly constitutes physical presence varies by state. However, any minimum contacts within the state such as employees, brick and mortar locations, independent contractors, fulfillment centers, leasing equipment, etc. generally establish physical presence. It is also important to note that if a state establishes physical presence and does not register and file for sales and use tax, the statute of limitations never starts running for that state. This means if a company established physical presence in a state five (5) years ago, an auditor would be able to assess the entire five-year period with a tax liability, plus penalty and interest.
What are the remedies to physical presence nexus exposure?
Companies that learn about physical presence nexus exposures via nexus studies or other means have three possible options for remedy: A) State Amnesty Programs, B) State Registrations, or C) Voluntary Disclosure Agreements (VDA).
State Amnesty Programs do not occur very often in States. If a State offers an amnesty program, they are run for very short periods of time, generally a three (3) to six (6) month period. This means a taxpayer has a short period of time to request inclusion into the amnesty program, calculate total tax liability due, and pay the past tax liability to the State. While penalty is still abated during an amnesty program, sometimes a state will also abate interest on the past tax liability. It is important to note that taxpayers should also read the fine print of all amnesty programs. In some instances, a state may preclude a taxpayer from filing for refunds of any overpaid tax occurred during the period disclosed under the Amnesty Program. In addition to abatement of penalty and potentially interest, the look-back period will be limited to the statute of limitations period.
A State Registration is when a Taxpayer submits just the registration to obtain a sales tax account in the state so they can begin collecting and remitting the sales tax on taxable transactions. A state registration should only be conducted when nexus has just been established or nexus will be established shortly in the future.
Voluntary Disclosure Agreements (VDA) have a lot of the same characteristics as an Amnesty Program. For instance, voluntary disclosure agreements are generally conducted on an anonymous basis until the agreement with State is in place. Voluntary Disclosures generally limit the look-back period to the statute of limitations, and penalties are abated. Under voluntary disclosure agreements, interest remains statutory and must be paid on past tax liabilities. Since third parties can perform voluntary disclosure agreements so they remain anonymous until the binding agreement is in place between the State and the taxpayer, the third party can handle the following functions on behalf of the taxpayer:
- Contact the state on the client’s behalf
- Ensure terms of the agreement include abatement of penalty and limited look back period, where applicable
- Prepare calculation of past tax liabilities via spreadsheet or completion of returns
- Prepare all paperwork necessary for voluntary disclosure agreement, including registration application
- File all information directly with the State
While a proper business case should be made for any option, unregistered companies with past tax liability exposure may find that filing a VDA is the only answer. Celebrating our 20th year in sales and use tax consultancy, TaxMatrix files voluntary disclosure agreements and state registrations, in addition to performing nexus studies for clients. For more information, contact us.