When a business realizes it may owe sales or use tax in a U.S. state where it wasn’t registered, things can get stressful quickly. But there’s a solution: a Voluntary Disclosure Agreement (VDA). A VDA gives businesses the opportunity to come forward, admit past non-compliance, and settle what’s due — often with less pain. Through this route, states may limit how far back they’ll look, waive penalties, and sometimes reduce interest. Every state runs its own program, but the goal is the same: help businesses become compliant while avoiding the worst consequences. This blog breaks down how VDAs work, who qualifies, what the benefits are, and what the process looks like step by step.
Voluntary Disclosure Agreements
A Voluntary Disclosure Agreement, or VDA, is a formal arrangement between a taxpayer and a state’s tax department. It’s offered through a broader Voluntary Disclosure Program, which allows businesses to admit past non-compliance in exchange for more favorable treatment.
Instead of waiting to be audited and hit with full penalties, interest, and potentially criminal charges, a business can take the first step by voluntarily disclosing the issue.
Key benefits include:
- A shorter lookback period (usually 3–5 years)
- Waiver of penalties
- Reduced interest
- Protection from criminal prosecution
These agreements are especially helpful for remote sellers, online businesses, and service providers that may have triggered tax nexus without realizing it — for example, by exceeding sales thresholds in a state without having a physical presence there.
One important note: each U.S. state runs its own VDA program, with its own deadlines, rules, and process. There’s no one-size-fits-all approach here.
Eligibility Conditions
Not every business can apply for a VDA, and the rules vary depending on the state. That said, most states apply a few basic conditions.
You’re generally eligible if:
- You haven’t received a notice or demand from the state for the period you want to disclose
- You haven’t already registered or filed returns for those tax years
- You’re not under audit for the tax period in question
- You’re not under criminal investigation
- You haven’t recently applied for a VDA in that same state
The most important part? You have to act before the state reaches out to you. If they contact you first, the option for a VDA usually disappears.
Benefits of VDA
If you qualify, a VDA can offer meaningful relief. Here’s what businesses often get in return for coming forward voluntarily:
- Limited lookback period: Instead of calculating taxes owed going back 10+ years, most states limit this to the past 3–5 years
- Penalty waiver: States usually waive all penalties tied to the unpaid taxes
- Interest relief: Some states also reduce or remove interest charges
- No criminal charges: Since the disclosure is voluntary, states don’t treat it as fraud
For businesses with potential exposure across multiple years — especially those that didn’t know they had nexus — this can result in massive savings and a clean slate.
How Does the VDA Process Work? (Part 1)
It all starts with submitting a written application to the state. In some cases, this can be done anonymously through a tax professional (like a CPA or attorney). That way, your identity isn’t revealed until the state agrees to the terms.
The application usually includes:
- Your business structure
- A short description of your activities
- A statement of eligibility (confirming you meet the state’s conditions)
- An estimate of tax due
- The time period you’re disclosing
- A short explanation of why you didn’t comply earlier
Once the application is submitted, the state will review it. They may ask for more details or documents before deciding whether to accept your case into the program.
If approved, they’ll send over a draft VDA that includes the terms — like the lookback period, deadlines, and penalty waivers. You’ll need to sign and return this within the timeframe they set.
How Does the VDA Process Work? (Part 2)
Once the agreement is finalized, you’ll need to complete a few steps:
- Register for sales tax in that state if you’re not already registered
- File returns for the disclosed period (typically 3–5 years)
- Pay any tax due, plus interest if the state requires it
After everything is submitted and paid, the state will review your filings. If everything checks out, they’ll confirm that your liability is resolved — and the matter is closed.
But here’s a warning: if you provide false information, miss deadlines, or fail to follow through, the agreement becomes void. In that case, the state can impose full penalties, interest, and even pursue enforcement. So once you commit, it’s important to follow the process carefully.
The entire process typically takes 3 to 6 months, depending on how quickly information is provided and how complex the case is.
Multistate VDA Program
For businesses with exposure in multiple states, there’s an option to file through the Multistate Tax Commission (MTC).
This coordinated VDA program lets you apply to several states at once using one central application. It’s especially useful for:
- Remote sellers with customers in multiple states
- E-commerce companies with growing national sales
- Any business that’s expanded beyond its original home state without registering elsewhere
The multistate process simplifies the workload and helps avoid facing separate audits from different state tax departments down the road.
Stay Tuned for More
A VDA is more than just a cleanup tool — it’s a strategic move. If your business has grown quickly, entered new states, or just didn’t know about sales tax obligations in certain places, it’s worth reviewing your position.
Coming forward before the state finds you can make a huge difference in cost, risk, and peace of mind.
In the next alert, we’ll explore Sales Tax on Software and SaaS — where taxability can shift depending on how and where your product is delivered.
To view previous alerts or stay updated, head over to www.m2kadvisors.com.
