Equipment finance companies are a vital part of the economy, providing businesses with the equipment they need to operate efficiently. But like all businesses, lessors are subject to a complex and ever-changing array of state and local tax laws and regulations. The presence of leased assets or customers in a particular state—even if the lessor doesn’t have an office there—can be enough to create the necessary connection a state needs to assess tax. Businesses that do not comply with these laws may face significant penalties and interest charges if they are audited by a state or local taxing jurisdiction. Creative new taxes such as the Tennessee Business Tax and the relatively new Oregon Corporate Activity Tax (which are both forms of gross receipts taxes and apply to many types of businesses) are constantly being added to the list, making the challenge of keeping up ever more difficult. In the wake of high-profile state tax cases like Wayfair vs. South Dakota (a sales and use tax case), state auditors are casting wider nets that catch many businesses by surprise. Fortunately, many states offer voluntary disclosure agreements (VDAs) that can help businesses come into compliance and avoid the penalties imposed for noncompliance.
What exactly are VDAs?
VDAs are agreements between taxpayers and state tax authorities that allow taxpayers to come forward voluntarily and disclose any past tax liabilities they may have. The purpose of a VDA is to encourage compliance with state tax laws and to provide a way for taxpayers to resolve their tax liabilities without facing penalties or prosecution. VDAs can be utilized for multiple tax types: income, franchise, gross receipts, sales/use, etc. and are contracts between the taxpayer and the taxing jurisdiction that are legally binding on both parties.
Who is eligible for a VDA?
To be eligible for a VDA, a taxpayer must meet certain criteria. The taxpayer must have a tax liability that has not been reported to the state, and it must not be currently under audit or investigation by the state or the Multistate Tax Commission. By signing the Agreement, the taxpayer asserts that it has not been contacted by the jurisdiction; if it later turns out that this was not true, the VDA will be deemed invalid, and additional penalties may apply, so it is important to confirm that the taxpayer has not received any correspondence that would jeopardize the VDA. The taxpayer must also be willing to cooperate with the state tax authorities and provide all necessary information to timely resolve the tax liability.
What are the benefits of a VDA?
VDAs provide benefits to both taxpayers and taxing jurisdictions. The obvious benefit of a VDA for taxpayers is the waiver of penalties on unpaid or late taxes, but generally not the interest. Taxpayers can also avoid the risk of criminal prosecution for non-compliance and can negotiate a payment plan with the state tax authorities to resolve the tax liability over time. An additional benefit of most VDAs is a limited lookback period (usually three to four years, or in the case of California, six years), which limits the number of years for which the tax can be assessed, even if no tax has been paid for many years. The primary benefit to the taxing jurisdictions is additional tax revenue and taxpayer voluntary compliance without the expenditure of scarce audit resources.
How do I participate in a VDA?
VDA programs vary by state, but they generally offer similar benefits and eligibility criteria. Most states permit companies to submit a request to participate in the states’ VDA programs on an anonymous basis. This can be accomplished through a third party, such as an accounting or law firm, which will either send a letter with some basic facts and the request or complete a specialized form or online application on behalf of the future taxpayer. Once the application is approved and the company is accepted into the VDA program, the name and federal identification number of the company is disclosed and an agreement is executed, first by the state, and then by the taxpayer.
A handful of states require the disclosure of the taxpayer’s name and an estimate of the liability before the jurisdiction will accept the taxpayer into the program. In either case, the taxpayer agrees to file three or four years’ worth of tax returns, pay the tax and associated interest, timely file future returns and make future payments, and cooperate with potential audits of the submitted returns. The state will also require the taxpayer to file returns and pay the tax and interest due within a specified period of time—usually 30–90 days.
What are some potential drawbacks of VDAs?
While VDAs offer many benefits, there are also potential drawbacks to consider. For example, the company must disclose potentially sensitive financial information to the state tax authorities. In addition, the company may trigger audits or investigations by coming forward voluntarily. Finally, the professional service fees may exceed the benefits of the VDA, so companies should carefully analyze the pros and cons before deciding to participate in a voluntary disclosure.
Bottom Line
Equipment finance companies that have not been compliant with state tax laws should consider participating in a VDA program. VDAs offer many benefits, including the avoidance of penalties and interest charges, the avoidance of criminal prosecution, and the ability to negotiate a payment plan. However, lessors should also be aware of the potential drawbacks of VDAs and carefully consider their options before participating in a program. State tax professionals can assist with both the analysis and the execution of a VDA; if your business is operating in multiple states but not necessarily filing in them, now would be a good time to reach out to a SALT professional and ask them about a VDA.
