Are you sitting on a state tax time bomb? Keep reading to learn about what risks may be lurking and how Voluntary Disclosure Agreements may be able to help!

If your business operates across state lines, you may be sitting on hidden state tax liabilities—whether you know it or not.

Perhaps your company has expanded into new markets, hired remote workers, acquired another business, or begun selling online. All of these can trigger tax obligations in states where you may not be registered or filing. Over time, the risks add up: back taxes, penalties, interest, audits, and even reputational damage.

The good news? There’s a way to address these issues before states come knocking: the Voluntary Disclosure Agreement (VDA) process.

How Businesses Overlook State Tax Obligations

Many companies discover too late that they’ve triggered state tax obligations without realizing it. This isn’t usually due to willful neglect—it’s often the result of misunderstood rules, overlooked activities, or missed filings. Here are some of the most common ways it happens:

1. Misunderstanding Nexus

Many businesses still rely on outdated rules governing physical presence. But under economic nexus standards adopted since the Supreme Court’s Wayfair decision in 2018, states can assert tax obligations based on activity—not location. Common triggers include:

• Crossing economic thresholds (e.g., $100,000 in sales or 200 transactions)
• Storing inventory in third-party fulfillment centers (e.g., Amazon FBA)
• Hiring remote employees, even for a short time or for non-sales roles
• Providing services (consulting, tech support, design) to out-of-state clients
• Licensing software or digital platforms used by customers in other states
• M&A activity, where you inherit a company’s tax liabilities along with its assets

Failing to regularly reassess the nexus as your operations evolve—expanding into new markets, launching new products, or acquiring companies—is a key driver of hidden exposure.

2. Overlooking Sales, Use, and Gross Receipts Tax Obligations

Sales, use, and gross receipts taxes are some of the most frequently overlooked state-level obligations—especially for e-commerce, SaaS, or service-based businesses.

Sales Tax

Sales tax is collected from customers and remitted by the business. However, many companies incorrectly assume they aren’t responsible if they lack a physical presence. Nearly every state now enforces economic nexus, and thresholds as low as $100,000 in sales or 200 transactions make it easy to trigger obligations. If you don’t collect tax when required, your business becomes liable for the uncollected amount, plus penalties and interest.

Use Tax

Use tax applies when sales tax wasn’t collected by the seller on taxable goods or services. Businesses owe use tax on items like:

• Software or subscriptions from out-of-state vendors
• Equipment bought from non-registered sellers
• Technology purchases made online

Unlike sales tax, where the liability is passed on to the customer, use tax comes directly out of the company’s pocket. Many businesses either aren’t aware of this obligation or fail to track their purchases closely enough to self-assess correctly.

Gross Receipts Tax

Gross receipts taxes are based on revenue, not profit. Under these regimes, even businesses that report net operating losses for income tax purposes can still owe significant gross receipt tax.

• States like Ohio and Washington impose gross receipts taxes instead of income tax.
• Oregon and Tennessee impose them in addition to income tax.
• Cities such as San Francisco also levy their own gross receipts taxes.

These taxes are often overlooked because they aren’t tied to income and don’t follow the traditional corporate tax model. Businesses expanding into new states or localities may not realize they’re subject to an entirely different tax structure based on top-line revenue.

3. Misclassifying or Underreporting Taxable Transactions

Even when a business is registered and filing, errors in tax calculation or classification can create exposure:

• Assuming software, SaaS, or digital services are non-taxable in all states.
• Failing to charge sales tax where economic nexus has been met.
• Incorrectly handling exemption certificates, leading to uncollected tax on taxable sales.

4. Falling Behind on State Tax Law Changes

Tax laws evolve constantly—especially around digital goods, services, and marketplace sales. Businesses that fail to track changes can fall out of compliance without realizing it:

• New gross receipts taxes and updated rates may not be well-publicized.
• Shifting marketplace facilitator laws can change who’s responsible for collecting tax.
• Expanded definitions of taxable services mean professional service firms can now face exposure.

The Cost of Doing Nothing

Ignoring these issues won’t make them go away. States are getting more aggressive—and more sophisticated—about identifying non-compliant businesses. If they find you before you come forward:

• There’s no limit on how far back they can assess taxes.
• You’ll likely face full penalties and interest.
• You could trigger a multi-year audit or even legal action.
• The impact on your business’s reputation and valuation, especially if you plan to sell or raise capital, can be significant.

What is a VDA—and Why Do States Offer Them?

A Voluntary Disclosure Agreement is a formal program offered by most states that allows businesses to proactively report and resolve prior state tax liabilities—typically for sales and use tax, income tax, or gross receipts tax. In return for coming forward voluntarily, states typically offer:

• Limited lookback periods (often 3–4 years instead of open-ended audits)
• Waiver or reduction of penalties
• Avoidance of audits for the disclosed periods
• Anonymity during the initial stages (when using a representative)

Interest is generally not waived, but the savings from reduced penalties and limited exposure can still be significant.

States offer VDAs because they’re a cost-effective compliance tool. Rather than chase non-filers through lengthy audits, they incentivize voluntary compliance and bring businesses into the system.

When VDAs Make the Most Sense

• You discover you’ve had nexus in a state for several years but haven’t filed.
• You’re preparing for a sale, and due diligence turns up potential tax issues.
• You’re entering a new state and want to clean up past exposure first.

Situations Where a VDA May Not Apply

A VDA isn’t right for every situation. You may not be eligible, or it may not be worth the cost if:

• The state has already contacted you (e.g., audit notice or questionnaire)
• Exposure is minimal, and compliance costs outweigh the benefit
• Nexus doesn’t exist, or filings were already made properly
• Fraud or willful noncompliance is involved—VDAs don’t protect against bad-faith actions

How KNAV Helps Businesses Navigate VDAs

VDAs aren’t one-size-fits-all. Each state has different forms, deadlines, and lookback periods. KNAV can manage the process from start to finish:

• Exposure Assessment: We identify where you may have nexus and quantify potential liabilities.
• Strategic Guidance: We help evaluate if a VDA makes financial and operational sense.
• Anonymity: We represent your business in discussions with states to keep you protected so you can explore your options.
• Full Execution: We handle state-specific filings and rules, correspondence, deadlines, and negotiations.

Don’t Wait Until the State Contacts You

If you suspect unfiled state tax obligations, waiting only limits your options. Once a state reaches out, a VDA is likely off the table.

KNAV can help you take control before the state does.

Reach out for a confidential assessment to determine if a VDA is the right fit for your business.