This article is the second of a three-part series regarding the State and Local Tax consequences of doing business in multiple states. This article will discuss Voluntary Disclosure, Part 1 discussed Nexus and Part 3 will discuss the Audit Process.
The Wayfair decision changed the landscape for nexus in the sales and use tax area. It lowered the bar to establish nexus with a state, which gives a state the right to require the collection and remittance of sales and use taxes. The Supreme Court’s decision changed the nexus focus from the existence of a physical presence to an economic presence—which generally may be based on sales into the state themselves. As a result, many taxpayers may have triggered the nexus threshold, especially if a state imposes a factor presence standard for income, franchise or gross receipts taxes.
The Covid-19 pandemic has impacted states economically. State tax collections have declined across the board, and state spending has increased. States are signaling that they will be aggressively enforcing their state tax laws, as states try to cope with budgetary deficits. Taxpayers that are not compliant with state tax laws may be subject to tax, interest and penalties, which may be costly to the taxpayer in the future. Such obligations may, for example, have an impact on selling a business or personal liability for the owner or officers of the company.
How can taxpayers be proactive and become compliant with state tax laws and rules and avoid aggressive tactics by states to collect unpaid taxes? Voluntary Disclosure.
What is Voluntary Disclosure? Voluntary disclosure is the process of reporting undisclosed liabilities for any tax administered by a state’s department of taxation or revenue (the “Department”). Generally, taxpayers can anonymously enter into agreements and voluntarily pay their taxes with a reduced or no penalty. In most cases, taxpayers enjoy a limited “look-back” period. The voluntary disclosure program helps coordinate the registration and payment process and provides general responses to tax-related questions.
Who is eligible? Generally, any taxpayer who has a filing requirement, for a qualified tax administered by the state’s Department, is not currently registered with the Department for the same tax and has not been previously contacted by the Department concerning their filing requirement is eligible for consideration of a Voluntary Disclosure Agreement (VDA).
Who is not eligible? Generally, a taxpayer who is registered but failed to file returns or who submitted returns, extensions, or payments for any tax for which the VDA is requested is not eligible for consideration. These taxpayers must file the appropriate original or amended return(s) and pay the tax, interest, and delinquent penalty due. However, the taxpayer may request a waiver of the delinquent penalty for a reasonable cause.
A taxpayer who has been contacted by the Department concerning a liability or potential liability of tax for which a VDA is requested generally does not qualify. This includes any contact made for the purpose of performing an audit of the taxpayer’s records. Disclosures relating to delinquencies or deficiencies that are obvious and would routinely generate a billing if not otherwise self-disclosed are not eligible for consideration. Disclosures related to the non-filing affiliates of a taxpayer who has been contacted for audit are not eligible for consideration.
What are the benefits to the taxpayer? After the tax and interest liabilities have been paid for the look-back period, penalties are generally waived unless the tax being disclosed has been collected but not remitted. In instances where tax is collected but not remitted, a request to waive some portion of the penalty would be considered on a case-by-case basis.
How far back will the Department look? The look-back period is the period for which the statute of limitations would not have run had returns been filed timely. Generally, this includes returns due during the current calendar year and the three immediately preceding calendar years. States vary on the look-back period. Failure to take advantage of a VDA program could result in the Department holding the taxpayer liable for all periods for which returns should have been filed, often going back 10 years. In the case of taxes collected but not remitted, the look-back period will include all taxable periods for which there were collected but unremitted taxes.