Time Is Not on the Buyer's Side: Why VDAs Must Begin Immediately After Closing

Buyers who negotiate the right to require voluntary disclosure agreements (VDAs) for a target's historic sales tax exposure often treat that right as a piece of paper, a protection that exists in the purchase agreement, ready to be exercised whenever convenient. That assumption is a mistake. When it comes to sales tax exposure, delay is not a neutral, cost-free choice. It is an active transfer of liability from the seller to the buyer, month by month, for as long as the VDA process is postponed.

Understanding why requires looking closely at what a standard tax indemnification provision actually covers, and, just as importantly, what it does not.

Indemnification Covers Pre-Closing Liability, Not Ongoing Liability

Most purchase agreements provide that the seller will indemnify the buyer for tax liabilities attributable to the pre-closing period. That structure makes sense on its face: the buyer is acquiring a business, not agreeing to absorb tax exposure created before it owned the company. But sales tax nexus does not stop accruing at closing. If the acquired company had unregistered nexus in a state before the transaction closed, that same unregistered, unremitted exposure continues to accrue after closing, except that now, the buyer owns the company generating it.

This creates a critical distinction that is easy to overlook in the rush of closing a deal:

• Pre-closing exposure is generally covered by the seller's indemnity.

• Post-closing exposure, the additional tax liability that accrues for every month the company continues operating in a state without registering or remitting tax, is not the seller's liability at all. It belongs to the buyer, because it arose while the buyer owned the business.

If the acquired company continues selling into a state with known, unaddressed nexus for six months after closing without initiating a VDA, the buyer has not simply delayed dealing with a pre-existing problem. The buyer has allowed six additional months of exposure to accrue that the seller has no obligation to cover under a standard indemnification provision.

The Math of Delay

The practical effect is that every month a VDA is not pursued, the buyer's own share of the exposure grows, while the seller's indemnified share stays fixed at whatever existed as of closing. Consider a simplified illustration:

• At closing, the target has accrued exposure in a state, covered by the seller's indemnity.

• The company continues making the same volume of taxable sales into that state for the next twelve months while the buyer has not yet initiated a VDA.

• That twelve months of additional, uncollected and unremitted tax is now the buyer's liability, not the seller's, because it was generated entirely post-closing.

• If and when a VDA is eventually pursued, the applicable look-back period will typically capture some portion of this post-closing period as well, meaning the buyer is now paying tax, interest, and potentially penalties on exposure that a prompt VDA could have avoided or substantially minimized.

The buyer does not need a state audit to materialize for this cost to be real. It accrues silently, in the ordinary course of the company's post-closing sales activity, whether or not anyone is tracking it.

Why "We'll Get to It" Is a Costly Default

In practice, the VDA process is often delayed for reasons that feel reasonable in the moment: post-closing integration is consuming management's attention, the tax advisor engaged during diligence has not yet been formally retained for the VDA work, there is disagreement about which states to prioritize, or the parties are still finalizing escrow mechanics. None of these are good reasons to delay, because none of them stop the exposure clock from running.

This is precisely why the purchase agreement provisions discussed in connection with VDA rights and escrow are not sufficient on their own. A contractual right to require a VDA is only valuable if it is exercised promptly. The purchase agreement should be paired with an operational commitment, ideally documented as part of closing deliverables or an immediate post-closing action item, to engage a tax service provider and begin the VDA process without delay, rather than treating it as something to circle back to once other integration priorities are resolved.

Engaging a Tax Service Provider That Moves Immediately

Because the cost of delay is measured in months, the choice of tax advisor matters as much as the decision to pursue a VDA at all. Buyers should look for a provider that is prepared to:

1. Begin work immediately upon closing, rather than treating the VDA engagement as a project to be scheduled weeks or months out.

2. Move quickly from nexus confirmation to submission. Much of the delay in VDA processes comes from open-ended nexus studies. A provider who can move efficiently from confirming exposure in the states already identified (particularly those already scheduled in the purchase agreement) to submitting anonymous VDA requests minimizes the window during which post-closing exposure continues to accrue.

3. Submit requests in parallel across multiple states, rather than sequentially, where the company has exposure in more than one jurisdiction. Sequential state-by-state submission can stretch the process out over a year or more, while a provider capable of managing simultaneous submissions materially shortens the buyer's exposure window.

4. Coordinate directly with the buyer, consistent with the buyer's contractual control over the process, so that submissions are not delayed by needing to loop in the seller or wait for sign-off from parties whose priorities may not be aligned with moving quickly.

5. Provide a clear, dated engagement and submission timeline as part of the initial engagement, so that the buyer has a concrete basis for confirming that the process is actually moving rather than stalling after an initial round of data requests.

Building Urgency Into the Purchase Agreement Itself

Because the financial consequence of delay falls on the buyer, it is worth considering purchase agreement language that goes beyond simply granting the buyer the right to require VDAs, and instead builds in an expectation of promptness:

• A defined outside date by which the buyer must engage a tax advisor and initiate VDA outreach for scheduled states following closing.

• A cooperation obligation requiring the target to provide the tax advisor with the data needed to prepare submissions within a specified number of days of request, so that the seller's continued cooperation obligation does not itself become a source of delay.

• Confirmation that post-closing exposure is excluded from the seller's indemnity, made explicit in the agreement so that all parties share the same understanding of why prompt action matters, removing any ambiguity that might otherwise lead the seller (or an unmotivated internal team) to treat the timeline as flexible.

The Bottom Line

A purchase agreement that gives the buyer the right to require VDAs and establishes an escrow to fund them addresses the legal mechanics of the exposure, but it does not, by itself, stop the exposure from growing. Because indemnification is generally limited to pre-closing liabilities, every month a VDA is delayed shifts additional exposure onto the buyer's own books. The only way to minimize that cost is to treat the VDA process as an immediate post-closing priority, engaging a tax service provider capable of moving quickly from nexus confirmation to submission, ideally in parallel across all identified states, rather than allowing the process to compete with other integration priorities on an open-ended timeline.

This article is intended for general informational purposes and does not constitute legal or tax advice. Buyers should consult with qualified M&A and state and local tax counsel and a qualified tax service provider promptly following closing to address any identified historic sales tax exposure.