Nexus, Remote Sellers, and VDAs: Why Businesses Are Reconsidering Compliance Post-Wayfair
In this increasingly digital world, one thing is sure: We must be adaptable. Sales tax professionals know this all too well, as tax laws continually evolve to keep pace with technological advancements and shifting economic landscapes.
One of the most significant changes in recent years was the South Dakota v. Wayfair decision. This landmark decision changed the game for e-commerce platforms and businesses selling interstate. From trying to understand transaction vs. revenue thresholds to uncertainty over economic nexus effective dates in each state and misunderstanding marketplace facilitator laws—it can be easy to fall out of compliance. Minimizing risk and correcting past errors becomes even more challenging if you add a lack of internal resources to manage multistate tax filings.
Programs like state tax amnesty offer relief, but one of the most effective tools for addressing historical non-compliance is the voluntary disclosure agreement (VDA). VDAs are state-defined programs that formally allow for settlements between a taxpayer and tax authority.
In this article, we will explore why VDAs are an essential compliance tool for remote sellers—and how they can help businesses mitigate risk while achieving compliance resolution.
The Post-Wayfair Compliance Challenge
The 2018 ruling expanded the definition of nexus, requiring remote sellers meeting specific economic thresholds to collect and remit sales tax—even without a physical presence in a state. Economic nexus joined physical nexus as the standard for determining tax collection obligations.
Years later, sellers are still navigating the complexities of economic nexus and how to apply it. The guidance around how economic nexus is defined changes as states work to match online activity. For example, South Dakota originally had a transaction threshold of $100,000 or 200 transactions as a rule of thumb. But SD removed the transaction threshold as of July 1, 2023.
The challenge does not stop at the state level—local jurisdictions can create individual rules, adding another layer of compliance for businesses to manage.
Even states like Alaska who do not have a state-level sales tax, have waded into the world of economic nexus through individual municipal regulations. In 2019, the city of Nome became the first to enforce economic nexus rules on remote sellers. To simplify compliance, the Alaska Municipal League (AML) introduced a plan to centralize remote sales tax collection across participating municipalities—allowing businesses to register and remit taxes through one unified commission rather than dealing with each local jurisdiction separately.
How VDAs Can Help Remote Sellers Catch Up
With all these varied understandings of economic nexus and the persistent updates to those definitions, as well as business changes that create physical presence, how can you limit your exposure? Thankfully, VDAs exist to help.
These solutions give businesses the opportunity to come clean about prior period tax liabilities, opening the door to negotiations with the state to receive certain benefits. These voluntary programs demonstrate that the business is acting in good faith to improve your ability to negotiate. Some states even offer anonymity during the beginning stages of the process to encourage hesitant businesses to come forward.
VDAs can limit the lookback period for unpaid taxes, which is especially beneficial since lookback periods are rarely limited when a business hasn’t filed returns.
Navigating the VDA Process as a Remote Seller
Now that you understand the benefits of VDAs, you may be wondering where to begin. Below are the steps you will follow in the process but consider consulting with tax professionals to ensure you do not miss any valuable information.
Evaluate Nexus: Evaluating nexus requires reviewing your sales activity as well as physical presence through the lens of the ‘measurement’ period, which establishes when nexus is present. Study how state laws and policies have changed over time, as these affect transaction thresholds and whether inventory in a third-party warehouse can trigger nexus.
Conduct an Internal Audit: Review your history of transactions in the state to determine whether you do, in fact, have unpaid taxes. Be sure to determine and apply any possible exemptions. Outreach to customers to see if they have self-assessed use tax, have an exemption or paid the tax under their own audit can reduce your liability. If you did collect sales tax but were unregistered, you may be guilty of criminal fraud. But don’t panic; certain states will waive criminal penalties as part of the VDA. But any tax collected regardless of when must be remitted to the states.
Consider Timing: If you have had nexus for an extended period, VDAs are your best route to compliance. However, if it has only been for a short period of time, you could opt to register in the state, as many states will eliminate penalties upon request.
Get Educated: Each state has different VDA requirements, so research will be essential if you move forward with your VDA. Key areas for evaluating the next steps include knowing the lookback period, penalties, and any additional terms and conditions you must meet within that jurisdiction.
Contact the State: To begin the VDA process, you will reach out to the state tax authority. Some states have a formal VDA program, while others require you to initiate a self-disclosure.
Submit the VDA Application: After completing the form or initiating the VDA process, you will usually need to provide details from your nexus evaluation and self-audit. This typically includes your sales activity, the period of non-compliance, and your plan to remit future taxes.
After this process, you will negotiate terms to settle your tax liability. A payment plan for paying back taxes may be possible, and you will have to register for sales tax to collect appropriate taxes going forward to remain compliant.
Potential Risks and Considerations
Weighing the potential drawbacks is just as important as understanding the advantages of VDAs. While VDAs offer significant benefits for catching up with compliance, there are risks to consider before entering into these agreements with the state.
States often reserve the right to audit other tax types not included in a VDA, meaning your business could be subject to additional liabilities. If you are subject to other tax, your VDA will need to address more than just a single tax type, like income and excise taxes. Pennsylvania and Texas, for example, automatically include the income tax VDA with the sales tax VDA application. States like Washington and Ohio may consist of their unique taxes, such as the Ohio Commercial Activity Tax (CAT) and the Washington Business & Occupation (B&O) Tax.
Some states are more rigid in their enforcement of VDAs, employing stringent policies and proactive measures in their approach to tax compliance. California and New York do not accept a consolidated spreadsheet; they require complete tax returns for each period. New York also doesn’t allow anonymity, so you must disclose your company name and tax ID during the application process.
Additionally, there are ways that your VDA can be nullified. If you have previously been subject to an audit or investigation in that state, you likely won’t qualify for the VDA. A company that has collected sales tax without remitting it to the state may lose eligibility for key VDA benefits, including a limited lookback period and penalty waivers on the collected tax amounts and related periods. And if under an audit, the state determines that you misstated the facts which materially impact the VDA terms, your agreement can be voided resulting in the loss of all the benefits of the agreement including any forgiven tax liabilities.
Closing the Compliance Gap
Navigating the complexities of sales tax compliance in the post-Wayfair era requires a proactive approach, especially for remote sellers managing a maze of state-specific regulations. Still have questions about VDAs and other programs to address potential risks? The Sales Tax Institute is here to guide you!