What Is a Lookback Period in a VDA, and How Does It Affect Liability?

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A lookback period in a Voluntary Disclosure Agreement (VDA) refers to the number of past years for which a business must pay unpaid taxes when it voluntarily comes forward to correct noncompliance. In a sales tax VDA, most states limit this period to three or four years instead of auditing all the way back to the date the business created nexus. This limitation dramatically narrows exposure and directly affects the tax liability period a business will be required to pay.

Under state sales tax laws, if a business creates nexus but does not register or remit tax, the state typically has no statute of limitations. That means liability may reach back 8 to 10 years or more. By contrast, the lookback period in a VDA acts like a negotiated cap that protects companies from paying the full outstanding amount. This is especially important for businesses with Multi-State Sales Tax Exposure, where unregistered nexus could accumulate risks in multiple jurisdictions.

How the Lookback Period Limits Risk

Most states offer a limited VDA lookback period if the taxpayer is not already under audit or has not been contacted by the revenue department. For example:

• California generally limits the lookback to three years of unreported liabilities for eligible participants (California Department of Tax and Fee Administration, Publication 178).
• Texas offers a four-year limit for sales tax if voluntarily disclosed before state contact (Texas Comptroller, Voluntary Disclosure Program Guidelines).
• Washington – Washington generally limits the VDA lookback to the prior four years plus the current year for eligible taxpayers who were not previously contacted by the Department of Revenue. (Washington Department of Revenue, Voluntary Disclosure Program).
• New York State – New York allows a limited lookback period  typically up to six years or the period taxes were collected or withheld  when taxpayers voluntarily disclose before state contact. (New York State Department of Taxation & Finance, Voluntary Disclosure & Compliance Program).
• Florida – Florida limits the lookback to three years of unreported liabilities for applicants who voluntarily come forward before being contacted by the Department of Revenue. (Florida Department of Revenue, Voluntary Disclosure Program).

Without a VDA, these same states may assess taxes back to the first nexus-triggering event, such as storing inventory in a fulfillment warehouse or hiring a remote salesperson. Since states increasingly enforce economic nexus rules after the South Dakota v. Wayfair decision, businesses that never registered may accumulate liabilities across many years. States have intensified enforcement following pandemic-driven budget shortages, which increased audit activity and reduced grace-period allowances. According to the U.S. Census Bureau, state sales tax collections increased more than 12 percent between 2021 and 2023 due in part to improved compliance enforcement by revenue agencies.

Taxes Covered Under a VDA Program

States typically require that businesses disclose every obligation relevant to their operations, not just sales tax. In fact, the taxes covered under a VDA program may include use tax, business activity taxes, or excise taxes depending on the jurisdiction. For instance, Ohio often requires reporting of its Commercial Activity Tax (CAT) along with sales tax when nexus is established. Because disclosing one tax type can expose additional liabilities, businesses should carefully evaluate how a voluntary sales tax filing could also trigger reporting for other state taxes.

Lookback Periods vs. Other Options

A VDA is not the only path to compliance. Certain states periodically offer sales tax amnesty programs, allowing businesses to register and pay back taxes with reduced or eliminated penalties. However, amnesty windows are short, may not limit lookback periods, and do not typically offer anonymous negotiation. Another option is a managed audit. Voluntary Disclosure vs. Managed Audit programs differ significantly because managed audits do not always reduce penalties or limit past periods owed. Thus, the VDA usually provides greater liability protection.

Why Timing Matters

States only approve VDA applications before they contact a business for audit or discovery. Once contacted, the taxpayer loses eligibility, making it critical to examine exposure early. The Typical Timeline for the VDA Process depends on the state, but the steps usually include an anonymous inquiry, determination of eligibility, disclosure of identity after terms are agreed upon, remittance of tax for the lookback period, and current registration.

Conclusion

The lookback period is a core form of state tax relief within a VDA, because it limits how far states can assess past liabilities and significantly lowers the cost of becoming compliant. For businesses with unregistered nexus, especially those selling across multiple states, using this limited period can turn a potentially expensive exposure into an affordable and proactive compliance strategy.

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