Washington expands VDP, plans tax amnesty for foreign retailers

Washington state is in a magnanimous mood. The Washington State Department of Revenue has temporarily expanded its voluntary disclosure agreement program and plans to offer a voluntary disclosure program specifically for foreign retailers in 2026 - the first program of its kind in the United States.

Key takeaways

• On July 1, 2025, the Washington State Department of Revenue launched a temporary expanded voluntary disclosure program (VDP) for businesses with unreported investment income subject to B&O tax. The expanded VDP will run in two 10-month phases: July 1, 2025, through April 30, 2026, and July 1, 2026, through April 30, 2027.
• Washington will offer a temporary voluntary disclosure program for foreign remote retailers starting February 1, 2026. Details are still being worked out, but it will likely include a one-year look-back period.
• The Streamlined Sales Tax Governing Board and Multistate Tax Commission are exploring methods to encourage voluntary tax compliance for foreign sellers with no physical presence in states.

What is the Washington state voluntary disclosure program?

The general Washington Voluntary Disclosure Program (VDP), also called a voluntary disclosure agreement (VDA) program, provides an opportunity for unregistered businesses that have nexus with Washington to reduce their back tax liability.

Benefits for participating in Washington's VDP include:

• A limited look-back period. The VDP restricts how far back the Washington Department of Revenue can reach for unpaid taxes, limiting a participant's back tax liability to four years plus the current year instead of seven years plus the current year.
  • For sales tax, the look-back period is typically unlimited if a business collected sales or use tax but did not remit it.
• Reduced penalties. The department may waive up to 39% of applicable penalties for eligible participants that voluntarily register and pay the back taxes due. For the most part, Washington applies a 5% penalty for underpaid tax, a 5% penalty for failure to register, and a 29% penalty for late payment and returns. (Participating in a VDP does not eliminate interest.)
  • For businesses that collected but did not remit sales or use tax, the 29% penalty will apply only to the amount of tax collected but not remitted.
• Streamlined reporting. The department can summarize a participant's unreported taxes in one tax assessment.

To qualify for full benefits, a business must never have registered with or reported taxes to the Washington Department of Revenue; never been contacted by the department for enforcement purposes; and never engaged in tax evasion or misrepresentation.

All good things come at a price, of course. Washington only offers the VDA benefits to businesses that 1) voluntarily register with the department and 2) pay all taxes due during the look-back period (plus interest). Also, participating businesses must pay all applicable taxes moving forward.

VDP applicants may apply anonymously but must disclose their name and contact information within 15 calendar days of the application date. You can find additional details about Washington's voluntary disclosure program in this FAQ.

What is Washington's expanded VDP?

SB 5167 requires the Washington Department of Revenue to temporarily provide a voluntary disclosure program for businesses with unreported investment income subject to business and occupation (B&O) tax. The department is calling this the Investment Income Voluntary Disclosure Program.

When is Washington's investment income VDP?

Washington's investment income VDP will be offered twice during the 2025-2027 biennium:

• July 1, 2025, through April 30, 2026 (Phase 1)
• July 1, 2026, through April 30, 2027 (Phase 2)

Who qualifies for Washington's investment income VDP?

The Washington investment income VDP is more generous than Washington's general VDP in three respects:

1. It's open to any business, registered or unregistered, with unreported investment income subject to B&O tax - unless the taxpayer was notified of an audit or agency enforcement action as of July 1, 2025.
2. It's open to affiliates of entities under audit that ordinarily wouldn't qualify for Washington voluntary disclosure treatment.
3. It waives interest as well as penalties.

Who doesn't qualify for Washington's investment income VDP?

The expanded VDP program is not open to businesses engaged in banking, lending, or security (as defined in RCW 82.04.4281).

And as noted above, businesses cannot participate in the investment income VDP if the Department of Revenue initiated enforcement activity on them on or before July 1, 2025.

What are the benefits of voluntary disclosure?

For qualifying investment income VDP participants that fulfill the terms of the program, the department will:

• Limit the look-back period to the prior four years (instead of seven years), plus the current year
• Waive up to 39% of potential penalties
• Waive interest
• Summarize unreported tax liability in a single assessment

As with Washington's general VDA program, the look-back period for businesses that collected but did not remit retail sales or use tax is unlimited. A 29% penalty will apply only to the collected and unremitted retail sales or use tax.

The goal of this temporary program is to encourage businesses to comply with Washington tax laws, pay prior tax obligations, and register (if necessary). If you decide this program is right for your business, there's a link to the online application on the Washington Department of Revenue website.

Washington pilot VDA for foreign retailers starts February 2026

The Washington Department of Revenue is planning to offer a temporary voluntary disclosure program just for remote foreign sellers starting February 1, 2026.

There's no published guidance on the program yet, but Bryan Kelly of the Department of Revenue described the VDA for foreign remote sellers at the annual meeting of the Multistate Tax Commission (MTC) Nexus Committee (July 21, 2025).

Per his slides, Washington's temporary foreign remote seller VDA program will include:

• A four-year look-back period plus the current year for B&O tax
• A one-year look-back period for retail sales tax
• A waiver of all penalties

Washington may be the first state to offer a VDA for foreign remote sellers, but it certainly isn't the only state keen to increase sales tax collections from foreign remote sellers. The lack of compliance by foreign remote sellers has been a known issue since the Supreme Court of the United States authorized states to tax remote sales in South Dakota v. Wayfair, Inc. (June 21, 2018).

Wayfair ruling and remote seller nexus

Prior to the Wayfair ruling, states could only require a business to collect and remit sales tax if the business had a physical connection to the state. Wayfair overturned the physical presence rule, enabling states to base sales tax nexus on economic activity in a state. This is known as economic nexus.

Physical presence in a state remains one of the most common nexus triggers, but every state with a general sales tax also has an economic nexus law. A remote seller can establish sales tax nexus by making 200 separate transactions in Maryland, for example, or $500,000 in sales in Texas.

Many businesses - including foreign retailers - now have sales tax obligations in states where they don't have a physical presence. The states want those retailers to register. Voluntary disclosure programs can help encourage these businesses to step forward.

The challenge of collecting tax from foreign remote sellers

Mere months after the Supreme Court's ruling in Wayfair, the MTC recognized that having the authority to tax foreign remote sellers doesn't ensure states have the ability to enforce remote sales tax collections. Indeed, MTC acknowledged that "collecting tax debts from out-of-state taxpayers whose assets are located outside of the taxing jurisdiction has never been an easy matter."

Likewise, the Streamlined Sales Tax Governing Board (SSTGB) is exploring how member states can encourage foreign sellers to register and start collecting sales and use taxes. In August 2024, then SSTGB Executive Committee President Mike Walsh said there was general agreement that a voluntary disclosure program specifically for foreign remote sellers impacted by the Wayfair decision could make it easier for those businesses to come forward.

Issues discussed by an SSTGB workgroup focused on improving foreign remote seller compliance include:

• Would SST member states be required to participate in a foreign remote seller disclosure program, or would participation be voluntary?
• What if a foreign seller has nonremote affiliates?
• What would states need to offer to encourage foreign sellers to step forward?

"There is a large amount of money out there for states with foreign compliance," per the Executive Committee's meeting minutes, "if there is a way to get them in with limited look-back."

But that also raises questions of fairness. Should states offer better terms, such as a shorter look-back period, to remote foreign sellers than the terms they offer in-state sellers or remote domestic sellers?

"Every tax agency takes it for granted that someone somewhere isn't in compliance with the law," observes Scott Peterson, VP of Government Relations at Avalara. "Knowing that and knowing how to find that person is how tax agencies spend their days. Offers like Washington's VDP are a great cooperative way of helping businesses become compliant."

Remote foreign seller VDP vs. other Washington VDPs

Here's a breakdown of Washington's three different VDA programs.

Bottom line

If you're not sure whether your business has past tax liabilities and could benefit from participating in a VDA, a nexus study can help. Avalara offers a free sales tax risk assessment for economic nexus as well as a full nexus study. Learn more about our nexus study options.

Washington VDA FAQ

What is the purpose of a VDA?

A voluntary disclosure agreement, or VDA, helps unregistered businesses that may owe back taxes come into compliance with state tax laws. By voluntarily stepping forward and disclosing tax liabilities, businesses can reduce penalties, limit the look-back period, and potentially avoid enforcement actions from the state.

Do all states offer a VDA program?

Most states offer some form of voluntary disclosure program for businesses with prior tax exposure, but the details for each state's program vary. Some VDA programs are more generous than others, and eligibility criteria can differ depending on the tax type and business situation.

What's the difference between amnesty and a VDA?

A VDA is an ongoing program through which businesses voluntarily disclose past liabilities. Tax amnesty is typically available for a limited time only and may provide broader relief in exchange for full payment of back taxes. Amnesty is often used to attract a larger pool of noncompliant taxpayers quickly.

Will other states offer amnesty for foreign retailers?

If Washington's pilot VDA program for foreign retailers proves successful, other states will likely follow its lead and offer similar programs. The Multistate Tax Commission and the Streamlined Sales Tax Governing Board are already discussing how to increase voluntary compliance among foreign sellers, and Washington's VDA could set a precedent.

Should foreign retailers participate in Washington's VDA?

That's up to the business. However, foreign retailers that have significant tax exposure in Washington should weigh the pros and cons of participating in Washington's VDA for foreign remote sellers.

What are the penalty and interest considerations?

Washington's foreign remote seller VDA could waive all penalties and offer a shortened look-back period for eligible participants, but details of the program have yet to be officially provided.