Tax Disclosure Pacts Pose State-by-State Challenges for Business

A voluntary disclosure agreement, or VDA, is a useful tool for remediating prior years’ tax exposure resulting from some form of noncompliance. Under a typical VDA, any non-filing or underpayment penalties are waived, and the taxpayer only needs to file prior period returns for the applicable “lookback” period—usually three or four years. Liabilities for prior periods are generally forgiven.

While many facets of a VDA are somewhat standard, there are still many nuances that should be negotiated to some extent. This often occurs when an acquiring company discovers that a target was unaware of issues, such as economic nexus, and therefore has prior-period sales tax issues that must be remediated.

While entering into a single VDA is often straightforward, taxpayers can find themselves handling multiple VDAs simultaneously. One solution is for them to pursue VDAs under the Multistate Tax Commission’s national nexus program’s VDA initiative, which provides a central point of contact at the commission for entering into VDAs in multiple states.

This may be a good solution if all the facts are straightforward and there is nothing out of the ordinary. But what about when there are gray areas, such as the taxability of a product, or situations where taxes have been collected for periods before the VDA lookback start date?

The Multistate Tax Commission recently circulated a survey to state tax departments about their interpretations of the lookback period when a taxpayer has collected, but not remitted, tax for periods before the VDA lookback start date. The commission provided two possible interpretations of how taxpayers should handle unremitted tax for periods prior to the standard applicable lookback period.

The general fact pattern in the survey concerned a sales tax VDA where the taxpayer had collected tax in periods prior to the start of the lookback period and hadn’t remitted such tax, and then ceased collecting tax for periods before the start of the lookback period.

States won’t generally permit a taxpayer to keep sales tax or withholding tax that was collected and unremitted. There were two interpretations of this situation:

Interpretation A: The applicant would need to file returns for the normal lookback periods as well as any months where tax was collected. No filings were needed for the gap period between when unremitted tax was collected and the start of the VDA periods. New Jersey and Wisconsin chose this interpretation.

Interpretation B: The applicant would have to file returns (and pay tax) for all periods going back to when the tax was first collected. Alabama, Arkansas, Arizona, Colorado, Florida, Hawaii, Idaho, Kansas, Massachusetts, Missouri, North Carolina, Nebraska, Oklahoma, Oregon, Tennessee, and Washington, D.C., chose this option.

Are these differences significant or much ado about nothing? Under Interpretation A, the applicant would owe for the VDA periods and the periods where tax was otherwise collected. Under Interpretation B, the applicant also owes tax any gap periods between tax collection and the VDA.

These additional months could result in a significant amount of additional liability as well as dissuade applicants from seeking to come forward.

Nuances such as these often lead applicants to avoid the MTC program and seek to negotiate with each state individually, which may benefit taxpayers seeking to settle on appropriate lookback and filing periods. Other areas that are ripe for negotiations include proper treatment of exempt sales when certificates weren’t received, the taxability of certain revenue streams that fall in the gray area of taxation, revenue sourcing for apportionment calculations, and the applicability of income tax adjustments.

State tax authorities are generally open to reasonable negotiations when it comes to VDAs because their goal is to help applicants get in compliance (and remain so) with their laws in addition to filing and paying taxes in a timely manner.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Gary C. Bingel is partner-in-charge of EisnerAmper’s national state and local tax group.

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