The Compliance Division’s work contributes to the mission of the Department of Taxes by informing and educating taxpayers about complex tax laws, selecting and conducting audits, and collecting unpaid taxes. We have 55 auditors, collectors, technical, and support staff working on behalf of all Vermonters to ensure taxpayers are paying the right amount of tax.

One of our primary goals is to encourage “voluntary compliance” – that is, to enable Vermont taxpayers to accurately determine what taxes they are liable for and pay the correct amount on their own. Another goal is to provide a level playing field for Vermont taxpayers by making sure that everyone is paying their fair share, in accordance with current law.

Tax laws are complex, which can lead to honest mistakes and there are people and businesses who under report taxes or do not file tax returns at all. We work diligently to identify people and businesses who are not reporting and paying the correct amount of tax and help bring them in to compliance. This is achieved through educational outreach, fact sheets, regulations, and audits conducted from our office in Montpelier and field staff located around the state.

We are continually looking for ways to improve service to Vermont taxpayers, and we welcome your feedback. You can contact the Compliance Division by phone at (802) 828-2514 or send an e-mail.

Tips and News

Money Received Through Crowdfunding | November 27, 2024

Money received through Crowdfunding may be taxable; please reference IRS guidance for details | Internal Revenue Service.

Crowdfunding organizers and any person receiving amounts from crowdfunding should keep complete and accurate records of all facts and circumstances surrounding the fundraising and disposition of funds for at least three years. Taxpayers may want to consult a trusted tax professional for information and advice regarding how to treat amounts received from crowdfunding campaigns.

Business Expense Documentation | October 18, 2024

Expenses are the costs you incur to carry on your business. Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred and include a description of the item purchased or service received that documents the business expense. For more information, see What kind of records should I keep | Internal Revenue Service.

Credit card statements are often not considered sufficient or adequate records for the substantiation of most deductions. While they are sometimes helpful in supporting an expense, the original receipts from the vendors/sellers/providers are required for audit purposes, as credit card statements do not typically include a description of the item purchased, delivery location, and/or use.

Note: A combination of supporting documents may be needed to substantiate all elements of the expense.

Credit Card Surcharges and Fees | September 10, 2024

If you charge a "fee" at your business for the usage of a Credit Card as a payment method and that transaction is subject to any Meals & Rooms Tax or Sales and Use Tax, you MUST include this additional credit card “fee” as part of the entire taxable transaction and collect and remit the applicable tax per 32 V.S.A. § 9241(b), "An operator shall collect a tax on the sale of each taxable meal at the rate of nine percent of each full dollar of the total charge....”

Part-Year Residents | August 9, 2024

If you were a Vermont resident for only part of the tax year and are required to file a Federal Income Tax Return, you must do the following to determine whether you must file a Vermont income tax return:

Calculate your income for the part of the tax year you were a resident of Vermont.
Calculate your income earned during the part of the tax year you were a nonresident of Vermont.

Add the calculations for resident and nonresident earnings. If the sum is more than $100, you must file a Vermont income tax return.

Business Gifts | July 26, 2024

If you give gifts in the course of your trade or business, you may be able to deduct all or part of the cost. However, you can deduct no more than $25 for business gifts you give directly or indirectly to each person during your tax year. An exception is provided, if the gift is under $4 and has permanent branding of your business name on it. These gifts are not subject to any limitation and can be gifted as much as desired (for example, pens imprinted with your business name and website). Please refer to IRS Publication 463, Travel, Gifts and Car Expenses for additional details.

Avoid Late Filing Fees | April 2, 2024

File tax returns based on your assigned filing frequency, even if no tax is due. If you file timely, you will avoid late filing fees.

Don’t Forget to File an Income Tax Return | January 29, 2024

If you are registered for Sales and Use Tax (SUT), Meals and Rooms Tax (MRT), and/or Withholding (WHT) and doing business in Vermont, please check your filing requirements and do not forget to file an income tax return.

See more tips & news

Notable Cases

Public Law 86-272 | November 27, 2024

Recent audits have found companies claiming protections under this public law that were not allowable. Vermont considers activities like training, product demonstrations, and delivery through Vermont to be activities that exceed the protections of P.L. 86-272. Carefully review the activity of employees in Vermont to identify anything beyond solicitation of orders. Please refer to Technical Bulletin 70 for details.

Net Operating Loss (NOL) | June 28, 2024

When auditing a taxpayer’s reported net operating losses (NOLs), multiple years of Federal and Vermont income tax returns were reviewed. Deeper review and engagement with the taxpayer revealed that NOL deductions taken were not substantiated. Moreover, several items of expense were double-deducted – i.e., included in 2 different deduction lines on the tax return - further reducing taxable income incorrectly. The taxpayer has agreed to pay the resulting income tax liability, homestead adjustment, interest, and penalty as a result of this audit review.

Taxability of Amusement | August 31, 2023

Recent business interaction with taxpayers has revealed that some places of amusement did not realize they should be collecting sales tax. Art studios fall under a taxable place of amusement. A charge for an in-person class that does not include materials and does not include access to the studio outside of the class is not subject to sales tax. A charge for materials is subject to sales tax. A charge for access to the studio outside of a class is subject to tax. One non-itemized charge for a class and taxable items is subject to sales tax. The department does not consider live online workshops to be specified digital products, therefore they are not subject to sales tax when offered without taxable products included.

Long-Time Business Not Paying Income Tax | July 19, 2022

A recent audit identified a business that had been active and profitable for many years, paying withholding and other trust taxes, but whose owners had not been filing income tax returns. When contacted by our auditor, the taxpayer engaged a tax preparer. The Department and preparer worked together to prepare accurate income tax returns using the best information available from Department data sources and taxpayer records.

The audit identified almost $60,000 in income tax that had not been reported, in addition to associated interest and penalties. Taxpayers should note that if you are conducting business, the revenue received must be reported on the appropriate return form (personal, corporate, or business income) depending on how the business is structured.

Unreported and Misreported Capital Gains | June 1, 2022

Taxpayers must calculate and report the correct amount of capital gains when they sell real property. In a recent case, the Vermont Department of Taxes identified an individual with substantial proceeds from sales of real property which were not reported on income tax returns. An audit of the taxpayer further revealed additional real estate transactions, rental activity, and disposal of property that was either not reported at all or not documented properly. These circumstances led to a substantial adjustment to income tax due, including interest and penalty. Taxpayers are reminded to maintain accurate records for real estate transactions in order to properly determine and report basis and gain or loss.

Hobby vs For Profit Activity | April 29, 2022

The Department recently identified multiple taxpayers who deducted losses from “business” operations to offset income from other sources such as wages, capital gains, interest, and dividends. However, audits which applied IRS guidelines revealed that the taxpayers were not conducting business with the intent of earning a profit. That is, the taxpayers were deducting business losses every year, but the activity fit the criteria of a hobby, not a for profit business.

When business activity is not engaged in for profit, taxpayers may deduct related expenses to offset the revenue generated but not beyond that to reduce taxable income from other sources. Reference the IRS guidance below to assist with determining when an activity is deemed to be engaged in for profit, as opposed to hobby activity.

NOL and Expense Deductions | February 1, 2022

In a recent Personal Income Tax (PIT) audit, multiple years of federal and Vermont income tax returns were reviewed. The review coupled with engagement with the taxpayer revealed that net operating loss (NOL) deductions taken were not substantiated. Moreover, several items of expense were double-deducted – i.e. included in two different deduction lines on the tax return - further reducing taxable income incorrectly. The outcome resulted in income tax and homestead adjustments to this taxpayer with applicable interest, and penalty. Please be sure claimed NOLs can be substantiated and deductions are properly accounted for when filing. To learn more about this topic, please read our Personal Income Tax: Net Operating Losses guide.

Bundled Transactions & Sales Tax | May 26, 2021

During a recent audit we found that a taxpayer did not collect sales tax on a bundled transaction. A bundled transaction is the retail sale of two or more products for one non-itemized price. Sales tax must be collected on the selling price of a bundled transaction if any product would be taxable if sold separately. For example, a raincoat has a retail price of $100 and umbrella a retail price of $20. A seller offers the two items to its customers for the single price of $120. Pursuant to subsection (C)(3), the entire charge is taxable – notwithstanding that clothing is exempt from the tax – because the products are sold for a single charge and the value of the umbrella is not de minimis because it exceeds ten percent of the total purchase price. Further information can be found in Reg. §1.9701(4)-3.

Misreported Deductions | October 15, 2020

The Vermont Department of Tax recently assessed personal income tax due as a result of misreported deductions from income on the Federal 1040.

Noncash charitable contributions on Schedule A, “Itemized Deductions” were reported but the taxpayer was unable to provide records, documentation, or explanation of what the contributions were.
Deductions reported on Form 2106 – “Employee Business Expenses”, were also disallowed. Expenses on this form are only allowed in limited circumstances. In this case, deductions were taken for vehicle and travel expenses (which are not allowed for the cost of commuting to work), a home office (not used for the generation of income), and travel and meals expenses – in all circumstances the taxpayer was not able to provide an explanation or records to support the noted deductions.

These adjustments resulted in assessment of over $5,000 in unpaid tax over 2 tax years. As a result, the Vermont Department of Tax has undertaken some systemic data analysis to identify individuals that may be incorrectly using the charitable contributions lines to reduce their taxable income.

Please note:

Detailed records must be kept for all charitable contributions. Taxpayers should note that donations of volunteer services and time are not allowed to be deducted from income.
Effective 2018, the Federal Form 2106 has been discontinued as part of the Tax Cuts and Jobs Act. The Vermont Department of Taxes will be analyzing return information to identify misreporting of these types of expenses as part of our ongoing work.

Further guidance on these deductions can be found at:

Shareholder Loan Transactions | September 15, 2020

The Vermont Department of Tax recently disallowed what an S-Corporation had reported as loans to its shareholders. The substance of the loan transactions did not meet the IRS qualifications for loans. The loans were determined to not be ‘bona fide’ and were reclassified to be considered as distributions of income to the shareholders, creating taxable income. This determination was based on the lack of loan documentation, lack of interest being accrued or paid, and minimal, irregular repayment of principal. The taxpayer did not dispute the Department’s findings, and the audit resulted in nearly $100,000 in tax, interest, and penalty.

Note: Businesses making loans to shareholders need to ensure the loans meet the criteria of the Federal “Bona Fide Indebtedness Factors”. These criteria have been established through case law and include (but are not limited to) written loan documents, an established and appropriate interest rate, maturity date, payment schedule, and legal enforceability.

Further guidance on S-Corporation shareholder loans and federal interest rates can be found at:

Taxable Fees | July 20, 2020

During a recent audit we found a taxpayer that did not recognize that certain fees are taxable when those fees are required to complete a sale. This law is explained in our sales and use tax regulations:

…“sales price” for purposes of calculating tax means the total amount of consideration, including cash, credit, property, and services for which personal property or services are sold, leased or rented….

Even where stated as a charge separate from the charge for the property or service, the sales price includes charges for labor to create the product sold, charges for services necessary to complete the sale, and delivery charges.

Examples include:

Fee charged for “damage” or “insurance” when renting a piece of equipment
Fee charged to pick up (or deliver) or empty rented port-o-lets
Fee charged to pick up (or deliver) set up rented tents, tables and chairs
Fee charged to pick up (or deliver) set up rented equipment
Fee charged to “set-up” a print job prior to printing tangible personal property
Cleaning charges on rented tangible personal property
Additional “optional” fee for fitness or pool access when renting a room
- If the amenity fee is itemized, and charged to guest whether or not the guest choose to use the amenity, this fee is subject to rooms tax.
- If the amenity fee is itemized, and charged to guest only when the guest elects to take advantage of the amenity, this fee is subject to sales tax.

Additional fee for fitness or pool access when renting a room (subject to rooms tax when non-itemized, subject to sales tax when itemized)

Fuel surcharges associated with sales or rentals of tangible personal property or amusement
Web fees associated with sales of amusement tickets or tangible personal property

This is not an all-inclusive list, so we encourage you to reach out to the tax department for advice on fees you may be charging which are associated with amusement sales or the sale or rental of tangible personal property.

See more Notable Cases

Current Work

Net Operating Loss (NOL)

The Department has begun work reviewing how net operating losses (NOLs) are reported on Vermont personal income tax returns. Preliminary review of data has identified many taxpayers that may be making rudimentary errors in calculating, tracking, or reporting NOLs.

Event Organizers and Vendors Outreach

In an effort to help event organizers and vendors alike, the Vermont Department of Taxes has created the new Vermont Tax Tips for Event Organizers and Vendors fact sheet. This fact sheet will be helpful to anyone who operates or sells tangible personal property such as prepared food, goods, and services at farmers markets, flea markets, craft fairs, shows, exhibitions, and elsewhere.

For organizers, the fact sheet includes guidance on:

Rental of booth space or supplies such as tables
Taxation of entry fees
Use of tokens
Event staff income tax withholding
Submitting vendor lists to the Department of Taxes

For vendors, the fact sheet includes guidance on:

Which foods and goods are taxable
Whether Sales and Use Tax or Meals and Rooms Tax applies
What to do when tax is included in the sale price
Alcohol tax
Local Option Tax

On May 10, 2023, the distribution of an informational fact sheet to over 700 individuals and entities was initiated, with additional ongoing distributions planned. The guidance can also be accessed on our website.

Campgrounds Outreach

Operating a campground can be a complex operation, as it touches many areas of Vermont tax laws. To help, the Vermont Department of Taxes has developed guidance centered around helping campgrounds better understand the taxability of camp sites rentals, sleeping accommodations, food sales, use of certain facilities, amusements, and more.

On April 5, 2023, an informational flyer was released to over 200 individuals and entities associated with this industry.

Personal Income Taxes – Net Operating Losses (NOL) Outreach

Net operating loss is a very complex area of tax law. Recent changes to federal tax law in the Tax Cuts and Jobs Act (2017) and CARES Act (2020) have complicated things even further at the state level.

On January 26, 2023, the Vermont Department of Taxes initiated an outreach campaign to provide educational information about Net Operating Losses for personal income tax to a broad population of individuals who have incurred and used NOLs in recent years. Receipt of this information does not indicate that we have identified mistakes with a tax return – rather, that we wanted to share the information with the people who were most likely to immediately benefit from it.

For more information about NOL, please reference the Vermont Department of Taxes Personal Income Tax: Net Operating Losses guide.

Vermont Sales Tax and Maple Production Outreach

As part of the Vermont Department of Taxes education assistance initiative, a Vermont Sales Tax and Maple Production fact sheet and industry guidance page was developed, to help maple producers and processors understand their Vermont tax obligations.

Subjects covered in the fact sheet included:

Determining taxability of agricultural machinery, equipment, and supplies used in maple production
Exemptions for fuel used in farming
Taxability and exemptions for food and beverages

On December 28, 2022, a factsheet was released to nearly 300 individuals and entities associated with this industry. The guidance can also be accessed in the industry section of our website.

Business Outreach Program

The Vermont Department of Taxes will be launching a Business Outreach Program in February 2021. The program is designed to help newly established businesses better understand tax collection and filing obligations that may apply to their business. A representative from the Department’s Compliance Division will be reaching out to selected businesses that have recently registered with the Department of Taxes to provide the optional educational assistance. If you are interested in being considered for this outreach program, please contact us via email sent to tax.officeaudit@vermont.gov or by calling (802) 828-2514.

Business Income Tax (BIT) Non-Filers and the Voluntary Disclosure Program (VDP)

The Department has had success using data matching to identify businesses and individuals who are conducting business in Vermont, but not filing Business Income Tax returns. The identified non-filers are contacted to confirm business activity. The Department uses available information from state, federal, and public resources to estimate and assess tax liability. In recent months, several cases have been closed resulting in the filing of many returns and payment of significant delinquent taxes. The Department intends to continue to use this information to ensure everyone with an obligation to file and pay income taxes is doing so, and to provide a level playing field for those conducting business in Vermont.

In some cases, people have acknowledged that they have fallen behind, and are working cooperatively with our audit staff. If this is the case for you or one of your clients, know that you can reach out through the Department’s Voluntary Disclosure Program (VDP) to get into compliance. To be considered for the Voluntary Disclosure Program, the disclosure applicant must not have been contacted by the Department prior to initiating the disclosure process. Coming forward before the Department contacts you could have financial benefits in the form of penalty relief. Find more information about the Voluntary Disclosure Program.

Ideally a Voluntary Disclosure request contains the following information:

The type of entity (corporation, partnership, etc.)
A brief description of the company's business including its specific activities in the state Vermont
Date the company began business and date the company began business activities in Vermont
Disclosure of the tax type (Sales and Use Tax, Meals and Rooms Tax, Corporate Income Tax, Withholding Tax, etc.) for which an Agreement is requested
Specifying tax types the entity is already registered for in Vermont
Whether the company has been contacted by the Vermont Department of Taxes
Whether the company has collected, but not remitted, Vermont Tax
An estimate of the amount of taxes due
Any additional information or extenuating circumstances to support the request

Real Estate

The Compliance Division has recently invested resources in reviewing capital gains on real estate transactions. We are using information from multiple state and federal data sources to ensure that sales are reported correctly and that the proper amount of tax is paid to Vermont.

Taxpayers and preparers should note that almost all real estate sales, including many primary residence sales, are subject to reporting for capital gain. Most primary residence sales will not have a capital gain tax liability due to IRS exclusion amounts. However, if you receive a 1099-S for any sale, you must account for the transaction on your income tax return and schedules. Primary home sales will generally be reported directly on federal Schedule D – “Capital Gains and Losses,” while investment property sales should flow through federal Form 4797 – “Sale of Business Property.” Review the resources listed below or consult with your tax professional for further information.

Publication 523 – Selling Your Home
Form 1099-S – Proceeds from Real Estate Transactions
Schedule D – Capital Gains and Losses
Form 4797 – Sales of Business Property

Properly completing all required forms and schedules will dramatically reduce the possibility of the Department contacting you to confirm or clarify transactions. Taxpayers should keep records about all their properties (including primary home) for 3 years after the sale of that property.

1099K Data

Businesses should be aware that the Vermont Department of Tax receives Federal 1099K merchant information. This information allows the department to run discovery programs to ensure that businesses are remitting the proper amount of tax. The discovery program compares your credit card sales (adjusting for taxes and tips) to your filed meals and rooms tax (MRT) and/or sales tax (SUT) returns. Businesses who fail to report their sales, based on our analysis of this data, may be flagged for audit. To avoid this, always ensure that you have reported all of your sales and that you have remitted all of the taxes you have collected.

Corporate/Business Income Non-Filers

In general, any business that operates or has any presence in Vermont is required to file an Income Tax return with the state, or report on 1040 Schedule C if it is a sole proprietor or single member LLC. Our Office Audit and Discovery teams have been working on ways to identify companies that are operating in Vermont, but not filing the required returns for Corporate or Business Income tax.

We have identified dozens of businesses that fall into this category. Recently, we have been using various information sources that indicate companies that have employees working in Vermont, or own or rent property in Vermont, to conduct business. Going forward, we have more data stores and avenues to uncover other companies similarly operating, but without filing or paying Income Tax.

We want to share this information for two reasons. First, to let businesses and preparers know that if they are conducting business in Vermont, to be aware that there is generally an entity-level Income Tax filing requirement, and that the Department is actively working to find companies that are not meeting this responsibility. Second, and equally importantly, we want to assure all taxpayers – Vermont businesses and beyond – who voluntarily report and pay the correct tax, that we are diligently working to ensure your colleagues and competitors in the business community are doing the same. We want all businesses to be on a level playing field and be paying the correct amount of tax.

For more information review our Corporate and Business income tax web page, as well as Technical Bulletin 70 on this topic.

Discoveries

Personal Income Tax Discoveries

The Vermont Department of Tax regularly conducts the following four Personal Income Tax (PIT) discoveries:

Homestead/Property Tax Credit Discovery: This discovery covers situations where the taxpayer has filed a Vermont Homestead return to receive a Property Tax Credit and it is believed there may be under reported financial income. This estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file an amended return or advise why they believe they do not have to amend.
CP2000 Discovery: A notice containing preliminary findings is mailed to a taxpayer based on information the Internal Revenue Service (IRS) has identified as being under reported, which information appears to not be considered on the Vermont tax return filed.
IRMF Non-Filer Discovery: A notice is mailed to the taxpayer when the Department has information that indicates a strong possibility a Vermont Personal Income Tax return should have been filed. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
IMF Non-Filer Discovery: This discovery covers situations where the taxpayer has filed a Federal return but did not file a Vermont Income Tax. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file a return or let us know why they believe they do not have a filing requirement in Vermont.
Discrepancy Discovery: This discovery covers situations where the taxpayer has filed a Federal return and a Vermont Return, and it’s believed there is under reported financial income. The estimated tax liability on the preliminary notice is based on data received from the IRS and other information available to the Department. The preliminary notice indicates the taxpayer needs to file an amended return or let us know why they believe they do not have to amend.

Over the course of the year, the Department plans to release various mailings involving these programs.

Compliance Corner