We continually hear that states are looking for new revenue sources to offset their deficits and balance their budgets. As such, they are looking for out-of-state companies that may unknowingly have had a business presence in their state for many years, yet never collected sales tax or filed income tax returns. If this applies to your company, there may be relief for you—but only if you register and file a Voluntary Disclosure Agreement (VDA) before they find you.
What is a Voluntary Disclosure Agreement?
If a company determines it has nexus in a state, and therefore required to collect sales taxes and/or file returns, the company may qualify to file a VDA with the state. The purpose of the VDA is to effectively “come clean” yet also limit exposure for back taxes and penalties. The VDA must be filed before any contact from the state. A typical VDA provides that the taxpayer will file and pay all current and future taxes, as well as back taxes for a specified look-back period. Any taxes due prior to the look-back period are waived. Most importantly, penalties for the look-back period are usually abated.
If the company determines that they have been doing business in that state for multiple years and has not collected sales tax or filed income tax returns, then consider filing a VDA. Most states typically require only a 3- or 4-year look-back period under the VDA. In return, the state agrees not to assess civil penalties on the late filings (although they typically charge interest). The state also agrees not to audit those prior years.
Multistate Voluntary Disclosure Program
There is now a Multistate Voluntary Disclosure Program (“MVDP”). Through this program, a company with nexus in multiple states can enter into an agreement using a uniform procedure with the National Nexus Program (NNP) and the Multistate Tax Commission (MTC). This program is free to use. The types of tax generally covered by this program are sales and use, income, and franchise tax. The NNP staff member will contact the state without divulging the name of the taxpayer. If between the time of notification and the time of registration and filing the company is contacted by the state, the taxpayer may continue with the VDA, despite the direct state contact.
A company may hire a third-party advisor or use the NPP through the MTC programs. Either will give a general description of the items sold by the company, or services it provides, and the type of transactions that occur in the normal course of doing business without divulging the name of the business. They will tell the date on when business first started in that state. If the VDA is for sales tax, the request must divulge if the company collected tax, but did not remit it. And they must divulge if there was any prior contact between the state and the company. In some states, simply receiving a “nexus questionnaire” will preclude voluntary disclosure.
The NNP serves states that are members of the program. Currently there are 38 states that participate in the NNP program. Some states that do not participate may still offer a voluntary disclosure program but must be contacted separately.
How DHJJ Can Help
If you think you may have a nexus issue and wish to find out more about the Voluntary Disclosure Programs available to you, please contact Arleen Bankemper, CPA at firstname.lastname@example.org or call 630-420-1360.