What to Do When You Find Unexpected Sales Tax Exposure

A nexus review turns up exposure more often than firms expect once they start actually looking.

A client has been selling into a state two years past a threshold and never registered. That moment, right after the finding, is where a lot of good work goes sideways, because the instinct is to fix it fast. Register the client, start filing, move on. The instinct is understandable. It's also usually the wrong first move.

Map the exposure before you touch it

Before registering anywhere, get a clear picture of what actually happened. How long has the client had nexus in this state? What's the estimated liability across that period? Are there other states with the same pattern, since exposure rarely shows up in exactly one place?

Here's the part worth being precise about, because it's the most expensive thing to get wrong. Most states condition voluntary disclosure on the taxpayer not already being registered and not having been contacted by the state. Register first, and in a lot of states you've just disqualified your client from the one program that would have capped the look-back and waived the penalties. The order of operations isn't a preference. It's the whole ballgame.

The options once exposure is confirmed

There are a few paths, and which one fits depends on the size of the exposure and how much risk the client is willing to carry.

Registering going forward only, with no disclosure of past activity, is the fastest option and the riskiest. It leaves the past exposure sitting there, discoverable any time the state cross-references data from a marketplace or a fulfillment provider. For small, recent exposure that can be a reasonable call. For anything with real history behind it, it's a bet that rarely pays.

A voluntary disclosure agreement (VDA) is the option most firms should be walking clients toward when the exposure is meaningful. Most states run some version of a VDA program: the business comes forward before the state makes contact, and in exchange gets a limited look-back period, commonly three or four years, plus a waiver of penalties. Interest is statutory in most states and generally survives the agreement. The value isn't that the liability disappears. It's that the look-back gets capped and the penalties come off, which on a multi-year exposure is often the difference between a manageable number and a genuinely damaging one.

When the same pattern shows up in several states, the Multistate Tax Commission runs a multistate voluntary disclosure program that lets a taxpayer approach member states through a single, anonymous point of contact instead of negotiating each one separately. There's no cost to the taxpayer to participate. For a client with exposure scattered across a dozen states, that's usually the difference between a contained project and a year of parallel correspondence.

Some states also run amnesty programs periodically, with their own terms that can beat a standing VDA when the timing lines up. Worth checking before assuming the VDA is the only formal path.

What not to do

The mistake I see most often is a client, or an advisor, registering and filing current periods while quietly hoping the past doesn't come up. States are increasingly pulling data from marketplaces and fulfillment networks to identify unregistered activity, and a brand new registration with no history behind it is exactly the pattern that draws a follow-up question. Silence isn't a strategy. It's a delay on a conversation that's going to happen anyway, usually on worse terms.

What a VDA actually looks like in practice

The process is more procedural than most firms expect once they've run a few. It typically opens with an anonymous inquiry, where the taxpayer isn't named yet, and the state responds with the general terms it's willing to offer for that type of exposure. Once the terms are acceptable, the disclosure moves forward with the client identified, a liability computation goes in for the agreed look-back period, and the state issues a closing agreement once filings and payment are complete.

Timelines vary, but this is rarely fast. Weeks to a few months is common, longer for larger or messier exposure. That matters for how you set expectations. A VDA resolves the past cleanly, but it doesn't move at the pace of a normal filing, and clients should hear that up front.

Handling states that don't offer favorable terms

Not every program is equally generous, and a few states have limited or no formal program for certain tax types. There the choice narrows: register going forward and carry the past as a monitored risk, or negotiate directly with the state's audit or collections division. Neither is as clean as a standard VDA, which is one more reason to map the full multi-state picture before committing to a single approach. The right strategy in one state isn't always the right strategy one state over.

Who should own this conversation?

This is squarely advisory work, and it needs someone who can walk a client through tradeoffs rather than someone just executing a registration. The client needs to understand what a VDA buys them, what it doesn't cover, and what the realistic liability range looks like before deciding anything. That's not a task to hand off without context. Done well, it's the kind of conversation that turns a stressful discovery into a client who trusts the firm more than they did before it happened.

Exposure isn't rare. How it gets handled once it's found is what separates the firms clients keep coming back to from the firms that just process the bad news.

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