Sales Tax VDA Denied? Lesser-Known Alternatives to Reduce Your Liability.

When a business is behind on its sales tax obligations, almost all states across the United States offer businesses a lifeline: the Voluntary Disclosure Program or, more commonly referred to as, the Voluntary Disclosure Agreements (VDAs). In short, these agreements allow businesses to self-assess their sales and use tax liability, limit the lookback period, and avoid significant tax penalties. VDAs come with substantial benefits, strict rules, and a big question: what does a business do if it’s disqualified?

Most tax professionals will advise a business that if its sales and use tax VDA was disqualified, the business’s only form of recourse would be to register from the moment that nexus was established, or registration was required, and seek discretionary penalty abatements thereafter. Sales Tax Helper, on the other hand, does not always agree with this recommendation. The answer depends on the state that issued the denial, as various states have alternative programs that are not widely advertised by the taxing agency. In this blog, we will explore some alternatives and their benefits.

Sales and Use Tax VDAs, Their Benefits, and Disqualifying Events

Voluntary Disclosure Agreements (VDAs) are a state’s structured olive branch to businesses that have been avoiding its sales and use tax obligations. VDAs are eligible for other tax types as well. Let’s take the following scenario: you’re an online seller, shipping and selling widgets across state lines. You suddenly realize that your business has established economic nexus across a multitude of states, in which you have neither collected tax nor have been registered. Knowing that the sales tax exposure is large, and penalties are looming, you recognize that an audit would be a material financial impact on your business. That’s where a VDA steps in.

In short, a VDA is a formal agreement where a taxing state lays out a clear path to compliance. Here’s how it works: you file an application, usually through a state tax commission or revenue department, disclosing your unpaid taxes. The state reviews it, sets a statutorily imposed lookback period—typically 3 to 5 years—and calculates what you owe, focusing solely on that given window. This is what is referred to as the lookback period[1]. Once or simultaneous to the tax being paid, sometimes with interest, penalties will be abated, assuming that the taxpayer has timely complied with the requirements of the VDA program. In some states, payment plans are permissible to satisfy the obligation as well.

The benefits are a lifeline for the unprepared. Penalty abatements are significant, often 25% or more of the tax owed, get eliminated, saving your business a fortune if your tax obligation is material. Furthermore, the tax savings can even be more substantial, as if there was a requirement to register 20 years ago, you are typically only required to report 3 to 5 years of sales. Additionally, the limited lookback period prevents the state from investigating periods of non-compliance spanning a decade or more. For a business struggling with sales tax compliance, this can truly be a golden ticket. With VDAs, your disclosure stays off the public radar; in some cases, states even trim the interest. It’s a structured, predictable way to address non-compliance, especially for multistate sellers handling nexus issues post-Wayfair.

However, disqualifying events from participating in a state’s VDA program due exist and can prevent a business from obtaining VDA benefits. For example, if a business is already registered with the state, this may trigger disqualification from a VDA program, depending on the state. Further, if a taxpayer has a sales tax collected, but not remitted issue, this can further trigger disqualification, depending on the state. Normally, VDAs are built for the unregistered who’ve never stepped into the state’s taxing system. Collected sales tax from customers but failed to remit? Certain states may view this as a betrayal of trust and should not get VDA protection.

Further, prior contact from the state is also typical disqualifying event. When determining prior contact, consider audit notices, phone calls, and nexus questionnaires received from a given state and its department of revenue. The whole point of a VDA is for a business to voluntarily disclosure its inadvertent, non-intentional accounting error, prior to the state discovering a business error. Some states consider if you’ve misrepresented your tax status or dodged obligations intentionally. Each state has different disqualifying events.

If a VDA is off the table, DO NOT WORRY. Other remedies and options are available. These remedies need to be approached with caution and ideally, through one of ours sales tax attorneys. Why? Because through our dedicated staff, research team, seasoned attorneys, and tax experts, we have gathered data points on various sales tax circumstances, each of which is unique. By doing so, we are able to provide, guide and engage your business in making sure that the best option would be granted for your business.

Alternatives When a Sales Tax VDA is Denied

Getting denied or disqualified from a VDA is not the end-all-be-all. Alternatives are available. Some states offer alternative plans when you’re disqualified, due to prior registration or a tax collected issue, but these alternatives come with their own sets off rules and tradeoffs. Below, we will explore some general concepts across a variety of states. If your state is not listed, please consult with our sales tax experts.

California

California has a workaround if a VDA is not eligible, which is tied to its nexus enforcement efforts. It’s not a formal program; an investigative branch steps in to help unregistered taxpayers or taxpayers that were previously registered to become compliant. The process is similar to a VDA, in that a business starts by filing all backdated returns through the states online services portal. Then, once the tax and interest are paid, you submit Form CDTFA-735, Request for Relief from Penalty, detailing why you’re late on sales tax collection or payment. An assigned auditor reviews it and will likely recommend penalty abatements, sometimes 25% or more of the tax owed. Generally speaking, and as part of the state’s administrative standard process, limited lookback is not afforded here; you’re liable from day one of nexus. However, the likelihood of penalty abatements supersedes simply back-filing and registering.

Louisiana

Louisiana is a homerun state for taxpayers facing a VDA denial. Prior registration, for example, triggers a disqualifying event for a sales and use tax VDA. However, if the liability owed is material, the state, at its discretion, is able to provide a workaround. The taxpayer should request a VDA/Settlement through the state’s legal division, in an effort to get around the ineligibility of the state’s VDA program. The state will require a sales spreadsheet, similar to the one administered through the VDA program, so that the legal division can draft a settlement offer. Here, penalty abatements are on the table and our team has been successful in negotiating limited lookback periods. Why? Because unlike other tax professionals, all we do is sales tax.

Michigan

Michigan calls it “Taxpayer-Initiated Disclosure” when a VDA is denied. Businesses can contact the Treasury, disclose their tax history, and file its overdue returns. Administratively, the taxpayer, through represented counsel, should attempt to secure or negotiate a limited lookback period and penalty abatements. It’s less formal than a VDA; it's just a direct request for penalty relief. You’ll pay the tax plus interest, and they might waive penalties.

New York

New York has a penalty abatement process if a VDA is unavailable. You file all delinquent returns, pay the tax and interest, then request relief through Tax Professional Online Services or Form TR-2000, arguing “reasonable cause”—think honest mistakes, not willful neglect. The Tax Department reviews it; if your excuse holds (lost records, lousy advice), they’ll abate penalties. No anonymity, no lookback cap—you’re liable from your first taxable sale. It’s tougher than a VDA’s clean slate but valuable for companies looking to avoid harsh tax penalties.

Texas

Texas offers a penalty waiver path when a VDA is denied. The business is required to file back returns, pay tax and interest, submit Form 89-224, Request for Waiver of Penalty, within four years of the due date. The business will need a sound reason, and if they agree, penalties can vanish under Tex. Prop. Code § 74.707. There is no lookback limit unless you negotiate; if you collected but did not remit, the state will investigate further. It’s less forgiving than a VDA’s penalty-and-interest waivers, but certainly better than the alternative of paying full penalties for non-compliance. However, it's important to note that the state, depending on the facts and circumstances, does in fact accept tax collected, but not remitted cases through its VDA administration. If you are experiences a sales tax collected but not remitted issue, please approach the state through engaged counsel.

Benefits of VDAs and Why They Remain Superior to Alternatives

Ultimately, Voluntary Disclosure Agreements stand as the premier tool for resolving sales tax liabilities efficiently and effectively. While alternatives in states like California, Louisiana, Michigan, New York, and Texas provide viable pathways when VDAs are unavailable, they fall short of the comprehensive relief and strategic advantages VDAs deliver.

A hallmark of VDAs is their provision of automatic penalty abatement. Upon entering a VDA, states waive civil penalties—typically ranging from 25% to 30% of the tax liability—without requiring the protracted justification demanded by alternative processes. In contrast, states like New York and Texas mandate detailed “reasonable cause” submissions via forms such as TR-2000 or 89-224, with no assurance of relief. Similarly, Michigan’s taxpayer-initiated disclosure and Alabama’s informal waiver program hinge on discretionary approval, often leaving penalty abatement uncertain.

Equally compelling is the limited lookback period VDAs enforce, generally spanning 3 to 5 years. This constraint caps a client’s liability, contrasting with the unbounded exposure under some alternatives. Michigan’s disclosure process, for instance, may not lookback limitation, potentially obligating clients to remit tax and interest from the inception of nexus—a burden that could extend a decade or more. California’s nexus-related filings and New York’s abatement procedures similarly lack temporal boundaries, exposing clients to full historical liabilities. VDAs, by fixing the assessment period, provide a quantifiable scope to shield clients from the financial strain of indefinite back-owed sales taxes.

The structured nature of VDAs further enhances their appeal for tax professionals and taxpayers. The process is standardized: clients submit a disclosure application, negotiate terms with the state, and secure a binding agreement delineating and bifurcating tax, interest, and penalty relief. This contrasts sharply with the ad hoc nature of alternatives—California’s reliance on post-filing auditor recommendations, Alabama’s case-by-case waiver reviews, or Texas’s discretionary relief assessments. VDAs offer confidentiality and finality unlike the open-ended exposure inherent in some states.

VDAs frequently include protections against criminal prosecution for non-willful noncompliance, a safeguard embedded in the agreement’s terms. This assurance is absent from the alternatives. VDAs mitigate these legal risks, offering a layer of security that alternative pathways cannot replicate.

Washington State VDA – Approach Carefully

When applying for a Washington VDA, it should come with a sign: “Buyer Beware”. In the state of Washington, a denial of a VDA will lead to an automatic disqualification, and, in turn, will become a desk examination. Alternative strategies should be considered, but more importantly, ensure VDA qualification in Washington prior to submission. If not, you will voluntarily subject your business into a desk examination, with extremely limited form of penalty relief that is not always applicable. Therefore, examine eligibility carefully, review Washington’s disqualifying events, and consult with our experts to determine a reasonable and equitable sales tax approach in Washington.

Contact Our Sales Tax Professionals

Sales tax Voluntary Disclosure Agreements (VDAs) offer businesses a structured path to address past liabilities. As outlined, they typically provide automatic penalty relief, limited lookback periods, and a streamlined process that state-by-state alternatives struggle to match.

Expert guidance is available for tax professionals and business owners facing these challenges. Whether assessing VDA eligibility, exploring alternatives, or tackling state-specific hurdles, the stakes are high, and the rules are intricate. For personalized advice and proven solutions, contact the tax professionals at Sales Tax Helper. Our team specializes in sales tax strategy, and only sales tax strategy.

FAQs

1. Question: “What is a Sales Tax VDA?” Answer: A sales tax VDA is a program offered by taxing authorities where a taxing state lays out a clear path to compliance. By participating in, businesses can typically avoid penalties, reduced interest charges on occasion, and settled their tax obligations, generally limited to 3-5 years, depending on the state.
2. Question: “Can I still get penalty relief if my VDA is denied?” Answer: Yes, alternatives are available. However, these alternatives are less formal and not guaranteed. So, if a sales tax VDA is eligible, it is recommended to be considered. However, NOT ALWAYS is the answer register, file and seek penalty abatements. There are alternatives to a VDA. Please consult with one of our experts.
3. Question: “How do different states handle sales tax VDAs?” Answer: Different states vary on the defined lookback period (the period of what sales need to be reported), whether penalties and interest are abatable, and if a VDA is eligible for sales tax collected, but not remitted cases. Further, each state has a set of unique disqualifying events, which would not allow you to participate in a state’s VDA program. Contact Sales Tax Helper Today so that we can guide you on the VDA process!