Establishing a business means thinking through tax and other compliance considerations. Important components of startup and financial planning include paying taxes and registering your business with the state. But the rules can be complicated and many business owners aren’t sure which taxes they need to pay.
Unfortunately, many businesses in Washington overlook their tax obligations, especially if the business isn’t yet registered. This can lead to steep penalties that any young business will want to avoid.
Something called the voluntary disclosure agreement (VDA) program was implemented to help ensure businesses are getting registered and filing and paying taxes. But how does the Washington VDA program work? What are the benefits? This VDA guide walks through all the key factors you need to know.
Key Takeaways: Washington Voluntary Disclosure (VDA)
- Look-back Period is limited to the prior four years plus the current year, significantly reducing liability compared to a standard audit.
- Penalty Waivers can eliminate up to 39% in total assessments, including the 29% late payment and 5% unregistered penalties.
- International Remote Sellers have a unique window until May 31, 2026, to utilize a shortened 12-month look-back for sales tax.
- Substantial Nexus is triggered by $100,000 in Washington-sourced gross receipts or any physical presence in the state.
- Interest Requirements remain mandatory; while penalties are waived under a VDA, statutory interest is always assessed on the tax owed.
What is Voluntary Disclosure in WA State?
The VDA program was created by the DOR to encourage new businesses to comply with all applicable tax laws, pay and file their taxes, and get registered with the state. The voluntary disclosure program lets you come forward voluntarily about unfiled taxes, and in exchange for coming forward, the DOR waives penalties and other consequences.Understanding VDAs in Washington
First is understanding the implications of failing to disclose your business. If you fail to notify the state of Washington of your business’s existence, and the Department of Revenue (DOR) discovers the business through its activities, you could be hit with tax owed plus up to 39% in penalties. The state has a “look-back” period that includes the current year plus the last seven to implement these fines. To help businesses avoid this risk, the state created the VDA program. VDAs limit the look-back period to just four years instead of seven and waive penalties up to 39% of the amount of tax owed in those past tax periods. This program applies to these types of taxes: business, occupation, retail sales, use, and any other taxes imposed in business transactions.Which Businesses Must Pay Taxes in WA?
To determine if your business is subject to WA State taxes, it’s important to understand something called substantial nexus. Businesses that have substantial nexus in Washington state are those that are required to pay state taxes because the business is:- Organized or commercially domiciled there, or
- Organized or domiciled in another state and brings in over $100,000 in gross receipts from Washington or has a physical presence in the state
Eligibility Criteria for a VDA in Washington
Not all businesses will qualify for a VDA arrangement. The Washington DOR states that a business must meet these criteria to take advantage of the state’s VDA program:- The business has never been registered with the DOR
- The business has never filed taxes with the DOR
- The business hasn’t been contacted by the DOR regarding enforcement
- The business has not engaged in tax evasion or misrepresentation regarding their tax liability
What Are the Benefits of a Washington VDA?
A big benefit of establishing a VDA is that the look-back period is a smaller time frame, so you only have four years plus the current year instead of seven plus the current year. This means a smaller window for review, a lower tax liability, and reduced penalties. Under a VDA, up to 39% of penalties can be waived. Here’s how that 39% is broken down:- 5% substantially underpaid tax assessment penalty
- 5% penalty for being unregistered
- 29% late payment of return penalty
How the VDA Application Process Works
Participating in the VDA and taking advantage of these benefits requires a submitted application. Here is a step-by-step look at what you need to do to apply:- Gather all required documentation: To apply with what the DOR considers a complete application, you’ll need these documents and information:
- The business’s name, address, and phone number
- Your gross income represented in a spreadsheet per their instructions
- A questionnaire regarding Washington business activities
- The Confidential Tax/Email Authorization form
- Reseller permits or exemption certificates
- Register your business: The DOR states you should register your business with them after submitting your VDA application. The DOR offers an online resource—the Business Licensing Wizard—to assist you with this process.
- Disclose business identity within 15 days: The DOR allows you to apply for VDA anonymously. However, you must provide business identity details within the following 15 days. Your VDA application cannot be approved until the DOR knows your business identity.
- Provide any missing information within 60 days: You have 60 days to send any additional documentation or information that an examiner notifies you is missing from your application.
- If approved, complete your agreement: The DOR will review your application, and if they approve your business, they’ll send you the VDA to sign and return within 30 days.
- If not approved, read the explanation: If for some reason the DOR rejects your application for the VDA program, they’ll notify you of their reasoning. This document will also give you instructions for next steps.
- Review your tax assessment: The department will then calculate what your business tax liability is. They’ll send you an assessment for review, followed by an invoice to provide payment. Follow all instructions on your invoice carefully as far as how and when to pay.
Terms and Conditions of the Washington VDA
The DOR offers a sample agreement online so you can see everything that the VDA will entail. Here’s a brief overview of all the terms you will agree to under the Washington VDA:- That you meet the eligibility requirements.
- That you will register with the DOR within 60 days.
- That you will comply with the terms of the Revised Code of Washington.
- That the DOR will waive tax liability for:
- Business, occupation, retail sales, use, and any other applicable taxes related to transactions before the VDA period.
- That you will provide gross income in a spreadsheet within 60 days.
- That you will, upon the DOR’s request, provide any applicable tax exemption certificates or proof supporting deductions or credits you claim.
- That the 39% penalties will be waived.
- That interest will still be assessed on the tax owed.
- That the DOR will calculate and send the tax assessment.
- That you agree to pay the assessment by the due date on the invoice or incur further penalties.
- That you will start filing the state’s combined excise tax returns starting with the next quarter after the VDA period ends.
- That the DOR will keep the agreement confidential.
- That if you violate the agreement terms or provide false information, it will be null and void, and the DOR can take necessary steps to ensure compliance.
- That any notices or modifications will be in writing.
- That the tax assessment under the agreement doesn’t involve a “detailed review of accounting records” and is thus limited in scope.