VDA vs. registering retroactively without a VDA: which is safer?

If you discover you should have been collecting sales tax in a state for the past two years, because FBA inventory was there, or a remote employee created nexus, or you crossed the threshold and didn’t register in time, you have two options for getting right with the state. Each has meaningfully different consequences.

What each path involves

A Voluntary Disclosure Agreement (VDA) is a formal process where you approach the state proactively, disclose your unregistered activity, and negotiate the terms of repayment. In exchange for coming forward, states typically offer:

• A limited lookback period: usually 3 years, sometimes less
• Penalty abatement: most or all failure-to-register and failure-to-file penalties are waived
• A formal agreement that settles your liability for the disclosed period

You can apply anonymously through an advisor before committing to disclosure, which lets you assess the exposure first.

Registering directly without a VDA means going to the state’s portal, filing for a permit, and starting to collect, without formally disclosing the historical backlog. On the surface, it looks like the same first step. The difference is what happens next: a direct registration flags you in the state’s system as a new filer, which can prompt a retroactive audit going back to the date nexus actually began, with no lookback limit, full penalties, and full interest.

The core difference: lookback protection

The VDA’s most important benefit is the lookback cap. Without it, states can audit back to the beginning of your nexus, potentially 5, 7, or 10 years. With a VDA, the lookback is typically capped at 3 years. For a seller whose FBA inventory arrived in California in 2019, the difference between a 3-year and a 7-year lookback is the difference between a manageable settlement and a company-threatening one.

When to use a VDA

A VDA is the right path when:

• You’ve had unregistered nexus in a state for more than 6–12 months
• Your estimated back tax exposure is material: generally $5,000 or more in uncollected tax
• The state has not yet contacted you: VDA is only available for voluntary disclosure, not after a state initiates contact
• You want to cap your exposure and resolve the liability cleanly

The most common scenario: an FBA seller discovers they’ve had inventory in 8 states for 3 years with no registrations. Each state is a separate VDA negotiation. The Multistate Tax Commission (MTC) runs a joint VDA program that covers multiple states simultaneously, which can streamline the process significantly.

When direct registration may be appropriate

Registering without a VDA may be reasonable when:

• Your nexus is very recent: you crossed a threshold last month or inventory arrived in the last 60–90 days and there’s genuinely minimal backlog
• Your back tax exposure is small: if you owe less than a few hundred dollars, the VDA process overhead may not be worth it
• You have clear documentation that your nexus started recently and the risk of retroactive audit is low

Even in these cases, it’s worth a conversation with a tax advisor before registering. The cost of a consultation is small relative to the cost of getting the sequencing wrong.

The mistake to avoid

The most common error is registering directly because it seems like the faster, simpler path, and then getting a retroactive assessment notice because the registration triggered an audit. At that point, the VDA window is closed. You’re negotiating a settlement without the leverage of having come forward voluntarily.

“We got a letter from the state” is one of the most common trigger events that brings businesses to sales tax compliance providers. Almost all of them had the opportunity to do a VDA first, and didn’t know it was an option.

A note on timing

Once a state contacts you (a nexus questionnaire, an audit notice, a compliance letter) the VDA option is gone. The only path is negotiating the assessment directly. The leverage is much lower, the penalties typically stand, and the lookback is uncapped.

If you have unregistered nexus and haven’t been contacted yet, time is the one resource working in your favor. The VDA option is available today. It may not be available in six months.

See: What happens if I was supposed to register earlier and didn’t? for the step-by-step VDA process.