Voluntary disclosure agreements: fixing past-due sales tax

Why use a voluntary disclosure agreement?

A business that had nexus but never registered has no statute of limitations running in that state, because no returns were filed. The state could assess tax for every year since nexus began, with penalties. A voluntary disclosure agreement usually limits the lookback, often to three or four years, and waives penalties, in exchange for coming forward and paying. See economic nexus.

Who qualifies?

• Businesses not yet contacted by the state about the tax, including through audit notices or nexus questionnaires.
• Businesses not already registered for that tax in the state, in most programs.
• Some states treat tax actually collected from customers but not paid over differently, and may not limit the lookback for it. See collected sales tax but did not remit.

How does the process work?

1. Work out your exposure

   Sales into each state by year, against its threshold and taxability rules.

2. Approach the state, often anonymously

   Through a representative, without naming you.

3. Agree the terms

   Lookback period, penalty waiver and deadlines.

4. File and pay

   Back returns or a schedule of liability, with tax and interest.

5. Register and comply going forward

   Collect and file from the agreed date.

The representative keeps your identity private until you accept the state's terms.

Is there a multistate option?

Yes. The Multistate Tax Commission runs a program that lets a business approach several participating states through one process, anonymously, with consistent terms. It suits sellers with exposure in many states at once.

What do you need to prepare?

Sales into the state by month or quarter for the lookback period, the taxable portion of those sales, any exemption certificates for exempt buyers, and the date nexus began. Marketplace sales collected by the marketplace are usually excluded from the tax due, though they may count toward the threshold. A clear schedule speeds the state's review.

How much does it cost?

The tax for the lookback period, plus interest. If you did not collect the tax from customers at the time, it comes from your own pocket, which is why acting early matters. Sales to customers who paid use tax, or to exempt buyers with certificates, can reduce the amount. See exemption certificates.

What does an example look like?

An online seller discovers it crossed a state's $100,000 threshold four years ago and has since made about $150,000 of taxable sales a year there, never collecting tax. At a 6% rate, that is about $9,000 a year. Under a voluntary disclosure agreement with a three-year lookback, it pays about $27,000 plus interest, penalties are waived, and the fourth year is not assessed. If the state found it first, it could assess all four years, plus penalties.

How long does the process take?

Usually a few months: preparing the analysis, the anonymous approach and negotiation, then filing and paying within the agreed deadline, often 30 to 60 days after the agreement. Start collecting tax from the date you approach the state, so the exposure does not keep growing during the process.

What are the alternatives?

Registering now without disclosing the past leaves the earlier years open to assessment if the state looks. Waiting risks an audit with full penalties and no lookback limit. For small amounts in states with simple processes, filing back returns directly can be enough. See sales tax audits.

This guide is general information. It is not tax or legal advice for your situation.