The State Doesn't Know You Owe. Keep It That Way.

What a VDA Is

A Voluntary Disclosure Agreement is a formal process that lets a business come forward and resolve unreported sales tax obligations before a state finds them on its own. In exchange for disclosing and paying what is owed, the state agrees to limit how far back it can look, typically three to four years instead of the full statute of limitations, and to reduce or waive penalties entirely.

The agreement is binding. Once it is executed, the state cannot reopen the covered period for those taxes. While the state usually has the ability to audit, they very seldom do.

What makes a VDA powerful is not just the lookback limitation. It is the opportunity to be genuinely aggressive on your exposure in a way you simply cannot be once a state audit begins. During a VDA, you control what gets submitted and there is very little scrutiny from the state. You can challenge the taxability of what you sold, push back on how the liability is calculated, negotiate a shorter lookback period, and pursue full penalty abatement all at the same time. The savings go well beyond just limiting the years they look at.

Businesses that approach a VDA the right way walk away with a fraction of what an audit would have cost them, not because the state was generous, but because the terms were dictated before the state ever had the chance to set them. That distinction matters more than most people realize.

A well-known tax software company once advised a client on a VDA across 30-plus states. They ran the numbers without doing any real diligence on the business itself. Following their approach, the liability would have been seven figures. We came in, got to know the business, and found that the client's industry qualified for exemptions in several states the software company never identified. The final liability came in at roughly 30 percent of the original estimate. The client got everything cleaned up and closed an M&A deal shortly after with no exposure hanging over the transaction. That is the difference between someone who knows tax software and someone who knows the business.

Who Needs a VDA

Any business that has sales tax exposure it has not yet addressed is a candidate. The most common situations:

• •You sell into multiple states and have not registered or filed in all of them. Post-Wayfair, every state with a sales tax has economic nexus thresholds. If your business crossed $100,000 in annual sales or 200 transactions in a state, you likely had an obligation to register and collect. Many businesses crossed those thresholds years ago and never knew it.
• •You sell on Amazon using FBA. Amazon stores your inventory in fulfillment centers across the country. Every state where your inventory sits creates physical nexus, regardless of your sales volume there. If you use FBA and have not assessed your nexus footprint, you almost certainly have exposure in states you have never filed in.
• •You have employees, contractors, or sales reps working in other states. Physical presence creates nexus. A single remote employee in Illinois or New York is enough to trigger an obligation.
• •Your accountant flagged potential exposure. If a CPA or advisor raised this in a review and it was never resolved, the exposure did not go away. It compounded.
• •You are involved in an M&A transaction. Unresolved sales tax exposure is a deal risk on both sides. For the seller, undisclosed liability can reduce the sale price, trigger escrow holdbacks, or kill the deal entirely once a buyer's due diligence team finds it. For the buyer, acquiring a company with unaddressed exposure means inheriting that liability on day one. Cleaning it up through a VDA before a deal closes protects both parties. Waiting until after the deal is signed is almost always more expensive and more complicated.

What the Process Looks Like

1. 1Exposure review. We start by mapping your actual liability. Where you sell, where you have employees or inventory, what your transaction volumes by state look like, and what you have filed. This tells us which states have real exposure and how large it is before any decisions are made.
2. 2State selection and strategy. Not every state with exposure gets disclosed at the same time or in the same way. We prioritize based on risk level, enforcement aggressiveness, lookback rules, and penalty structures. The goal is the best possible outcome across all states, not just checking a box.
3. 3Anonymous inquiry. Most states allow a pre-disclosure inquiry before your business is formally identified. We use this window to negotiate the terms of the agreement before you are on the record. This is where significant leverage exists and where experienced counsel makes a material difference in the outcome.
4. 4Liability calculation. This is where the real work happens. We calculate what is actually owed using the most favorable taxability positions available, challenge how the numbers are built, and push hard on every legitimate reduction. A VDA is not about paying whatever the state says you owe. It is about establishing what you actually owe on your terms.
5. 5Filing and resolution. We prepare the back returns, negotiate the final agreement, and manage all state communications from start to close. You do not deal with state agencies directly.
6. 6Compliance going forward. Once the VDA closes, we set up proper registration and ongoing filings so the problem does not come back.

VDA in an M&A Transaction

Sales tax exposure is one of the most commonly missed liabilities in business acquisitions. It rarely appears on a balance sheet until a buyer's tax due diligence team looks for it, and by then the negotiating dynamics have shifted entirely.

A VDA executed before a deal closes gives both parties a clean, documented resolution of past exposure at a fraction of what an audit would cost. The lookback is limited, the penalties are addressed, and the buyer is not inheriting an open liability. For sellers, it removes a leverage point that buyers routinely use to reduce the purchase price or demand escrow holdbacks. For buyers, it means knowing exactly what was owed and that it has been resolved.

If you are preparing to sell your business or are in early-stage acquisition discussions, a VDA review should happen before the deal gets to due diligence, not during it.

What a VDA Saves Compared to an Audit

A VDA limits the lookback period, reduces penalties, and gives you control over how liability is calculated. An audit does none of those things. The state sets the terms, chooses the audit period, uses its own sampling methodology, and applies full statutory penalties.

If your annual exposure is $50,000, the difference between a VDA and a full audit on a six-year lookback is potentially $150,000 or more in additional tax alone, before penalties and interest are added. In an audit, penalties of 25 to 50 percent on top of the base tax are common. Our VDA work is fixed-fee pricing. You know the cost before you commit to anything.

Common Questions