Sales Tax Voluntary Disclosure

Economic Nexus and Voluntary Disclosure Agreements

In the summer of 2018 the United States Supreme Court South Dakota v. Wayfair, Inc., et al (“Wayfair”) decision upheld South Dakota’s law that imposed nexus for sales tax purposes on a business that delivers more than $100,000 of goods or services into the state or engages in 200 or more separate transactions for the delivery of goods or services into the state. Since the decision was published, many other states have implemented similar economic nexus standards.

This may seem like old news now, but many businesses around the world are just coming to terms with their obligations to file sales tax returns in many US states and some local jurisdictions.

Depending on facts and circumstances, some businesses may decide to comply with sales tax requirements prospectively, others will be well advised to seek out voluntary disclosure (or similar) agreements in those jurisdictions that allow them.

Voluntary disclosure (or similar) agreements (“VDA”) are offered by many states and some local jurisdictions. While terms vary from place to place, most VDAs offer taxpayers limited look-back (the time period in the past during which a company agrees to pay back sales tax, usually limited to three or four years) and no penalties.

Some states also offer a reduction or elimination of interest. VDAs can be costly because, unlike collecting sales tax from customers when making a sale, the tax paid to the state is usually paid by the business itself. However, the VDA offers the benefit of penalty waiver and knowing that a state cannot pursue back tax periods at some later date. These benefits are not available when a business elects to comply with sales tax requirements prospectively.

Typically a taxpayer with no physical presence in a state would look to when a state first implemented an economic nexus standard and when the business first exceeded that standard, then pay prior period sales tax from the later of the two times forward. From a compliance perspective, VDAs with states that only implement one level tax are generally relatively straightforward to complete. States with complex local rates can require significant compliance efforts.

If your business makes sales in multiple jurisdictions and you have not considered whether or not you also have to file sales tax returns in those jurisdictions, then you should engage a tax professional to help determine the best path forward.