Voluntary disclosure agreements are a useful way to mitigate past liabilities while becoming compliant for sales tax purposes. Nearly every state offers a VDA program for sales tax, and if you qualify and take advantage, it could save quite the headache. One of the challenges is that VDA programs vary widely by state, and keeping up with the changes and variations between the states is a handful.
In the state of Texas for example, a VDA will waive all penalties and interest associated with any back taxes you may owe, and they will limit themselves to a four-year look-back period. Hawaii, however, will waive penalties but will require a 10-year look-back period and no interest waiver.
Oklahoma offers a VDA program with a three-year look-back, and the department will also grant a full penalty waiver and will reduce the interest by half. Compare that with the state of Iowa, whose look-back period is dependent on the amount of time your business has been operating in the state and can be up to five years, while offering a penalty waiver with no interest waiver.
In addition to what they offer, states vary in their requirements to qualify for a VDA. The state of California for example, will only enter into a VDA with a taxpayer if they have not been contacted by the state or any of its offices, and the taxpayer cannot be under audit.
Contrast this position with Maine’s VDA, where taxpayers who have been contacted by the state are not automatically disqualified from the program unless they are under a criminal investigation.
Because of the variations between states, tracking down this information would be incredibly time consuming. To save you from the hassle we have composed a chart detailing the differences between the state VDA programs. This is not meant to be exhaustive, but it can give you some helpful information on how best to proceed in your situation. If you would like a copy of the chart, just let us know.
Recently a client asked us to comment on their proposed merger plans. Mergers are always happening, so I thought it would be worth your while for us to comment on this to our friends and clients at large.
The basic facts were that, for various reasons, our client planned to simplify their corporate structure. The old structure consisted of a number of limited partnerships, limited liability companies, corporations and even a US branch of a foreign corporation. They planned to get down to just a few legal entities in the US by contributing member interests in the LLCs and merging several corporations out of existence. The question for us to comment on revolved around what would be the sales/use tax impact of such a transaction.
Many states have specific provisions that treat whether assets transferred as a result of a merger are subject to additional sales tax at the time of the transaction. Keep in mind that tax has likely already been paid on these assets when they were originally purchased. Our intuitive reaction is that tax should not be due on these assets again. However, we all know that intuitiveness is not always a good predictor of taxability of a transaction right? In the case of a merger, though, it can be said that most states generally would not tax those assets again. BUT, caution should be exercised in this scenario. Some states leave the question unanswered while others specifically tax at least certain types of assets transferred in a merger.
For example, some states have specific rules on motor vehicles that tax is due on a transfer to another legal entity. Louisiana is one such state. Texas is another state that taxes motor vehicle transfers in most cases, except in the case where the transfer is due to a “statutory merger”.
If a state does not have specific statutory or regulatory guidance on assets transferred in a merger, then they may have issued informal guidance through letter rulings. Or, it may be in your best interest to seek a letter ruling in the case where significant dollars are at stake.
Mergers is one way to transfer assets, but another angle to consider is to structure a transaction as an “occasional” or “bulk” sale in order to avoid paying tax twice on the same asset. Many states have exemptions for bulk sales. Usually the seller cannot be a retailer (although some states allow retailers to have exempt bulk sales if they do not sell this type of item in the regular course of business). And usually, to be exempt, the seller must be selling all or substantially all of the assets.
Some states flat out do not exempt occasional sales — Colorado, Oklahoma and Wyoming come to mind. The states that do exempt them all have their own particular rules, so this is an area that needs to be researched carefully according to the particular facts and circumstances. The taxes incurred or avoided in these scenarios is usually significant so it pays to be careful here. Sometimes this occasional exemption helps out in an audit if you are being assessed tax on a large equipment purchase, you should review the specific facts of the transaction and see if the purchase might have been exempt as an occasional sale. Maybe you bought the item from a company who was liquidating their assets. It may sound far fetched, but we have actually used this idea several times over the years to the substantial benefit of our clients. Maybe it will help you.
Wish you had a chart showing which states tax occasional or bulk sales? We can help. We have a handy chart that we can share on this with you. If you would like a copy for your own information, please let us know and we’ll send it to you at no charge.