What is a Voluntary Disclosure Agreement (VDA) and when should I use one?

A Voluntary Disclosure Agreement lets a seller come forward on their own terms: pay the back tax for a limited period, get penalty relief, and move forward without the threat of a full lookback audit. It’s the most controlled way to resolve historical sales tax exposure.

How VDAs work

The standard VDA process:

1. Anonymous inquiry: The seller (or their representative) contacts the state’s DOR anonymously to propose a VDA. The identity is withheld until terms are agreed upon.
2. Negotiation of terms: The state and the seller (through their representative) agree on the lookback period, which taxes will be covered, and what penalty/interest relief the state will offer.
3. Formal agreement: Once terms are agreed, the seller’s identity is disclosed and the agreement is executed.
4. Filing and payment: The seller files returns for all periods covered under the VDA and pays the tax owed, along with any interest the agreement doesn’t waive.
5. Going-forward compliance: The seller registers in the state and begins collecting and filing correctly from the VDA date forward.

What VDAs typically offer

Lookback limitation: Most states agree to limit the lookback period under a VDA to 3-4 years rather than the full statute of limitations (which can be 6-7 years or longer if there was fraud or non-filing). This is often the most valuable term.

Penalty waiver: Most states waive all or most penalties for periods covered under the VDA. Interest is less frequently waived: the seller generally still owes interest on the unpaid tax.

No audit for VDA periods: Once the VDA is executed and payments made, the state agrees not to audit the covered periods for the disclosed tax types.

When to use a VDA

A VDA is appropriate when:

• The seller has nexus in a state but has never registered or collected
• The exposure spans multiple years (1-2 years or more of uncollected tax)
• The seller wants penalty protection and a defined end to historical liability
• The seller is considering an M&A transaction and needs to clean up tax exposure

A VDA is generally not necessary when:

• Exposure is limited to a few months or a very small dollar amount
• The seller is already under audit — VDAs are typically not available once an audit has been initiated
• The state in question has a formal amnesty program running (which may offer better terms)

VDA vs. doing nothing

If a seller has nexus in a state and doesn’t file, the state can eventually find them, through 1099-K data from Amazon or PayPal, through marketplace reporting, through business registration data, or through audit. A state-initiated audit carries full penalties, full lookback, and no protection. The VDA converts a worst-case scenario into a controlled resolution.