More than three years after the court handed down its decision in Wayfair, the landscape of sales tax compliance remains fragmented. Some businesses adopted the additional filing requirements immediately, while others are still weighing their options. For businesses with limited internal human and financial resources, the issue of compliance is not as simple or straightforward as it seems. Some estimates put the percentage of compliance for out-of-state sellers with sales tax economic nexus standards at about 50 percent.
As we get further away from state adoption of economic nexus standards, states will begin to shift into discovery mode to identify non-compliant businesses. We have already seen several states begin to contact out-of-state retailers to determine whether they have nexus. The fear of the unknown generally controls whether an out-of-state business will seek out a proactive resolution, with many businesses choosing to delay compliance until some triggering event occurs. Triggering events can encompass contact from a state in the form of a business activity questionnaire or due diligence associated with a transaction.
Out-of-state sellers that are forced to deal with their non-compliance potentially face significant exposure. In some cases, these exposures can be devastating. One path for businesses with exposure due to non-compliance would be to consider a voluntary disclosure agreement (VDA) with a state or states as a means to mitigate their liability. Many VDA programs have the same general terms and conditions. However, some state programs have unique characteristics and businesses will need to determine whether they qualify to participate in these programs.
VDAs are designed to promote voluntary compliance and encourage businesses to address overdue tax liabilities resulting from non-compliance. The agreements are a win-win for both the businesses and states that participate in the programs. Businesses can reduce the amount of their overdue liabilities by limiting the filing period related to the overdue taxes, also known as the look-back period. Most states will use a look-back period of three or four years to determine the exposure. Businesses that qualify to participate in these programs can also benefit from the abatement of some or all the late payment and/or late filing penalties imposed for the non-compliance.
In addition to the benefits of a limited look-back period and penalty abatement, there are other factors that businesses must evaluate when deciding to pursue a VDA. For example, one of the most important considerations is the company’s ability to comply with the timelines set forth in the agreement. Once the application for a VDA has been submitted and accepted, businesses have a limited amount of time to comply with the filing requirements and pay the overdue liability.
Before proceeding with a VDA, it is recommended that businesses understand the taxability of their products or services, obtain any applicable exemption certificates, and accurately determine the amount of overdue tax for the applicable look-back period.
Some states will give a business as little as 30 days to file all of the applicable returns and remit the tax. While an extension of time can be obtained, most states will only grant one extension and the request should be used in a strategic manner. Missing a deadline could result in the business being disqualified from the VDA program. Disqualification could lead to the disclosure of the identity of the disqualified business and the pursuit of a longer filing period of overdue taxes.
States are beginning to build more robust processes to identify businesses that are non-compliant with the sales tax reporting rules. Non-compliant businesses should seriously consider overdue tax liability resulting from economic nexus and act now. Once a business has done its due diligence to accurately and completely submit information to the state, it can proceed with the submission of a VDA to limit its overdue tax liability.
Understanding the taxability and exemptions is critical to not overpaying or underpaying tax. Amended returns are not usually permitted for periods covered by a VDA and any overpaid tax will be forfeited by the business. Because the pursuit of a VDA is a long process, it’s important to begin the process now to help guarantee its success.
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