Outsourcing the sales tax department has been a growing trend over the last several years. I’m basing this statement on the growth of my own firm over the same period of time. We’ve seen many companies leave their sales tax return preparation service providers in search of a more robust sales tax outsourcing service that includes return preparation services, and extends into a hand holding role where the service provider guides and advises the client. Small and mid-market businesses are also looking for flexibility and the ability to implement unique and custom processes in their outsourcing relationship. Aligning your business with the right type of service (sales tax department outsourcing vs. sales tax return prep outsourcing) can lead to success or failure in the engagement.
So if you’re looking to outsource for the first time or you are looking to change providers, here are some key questions to make sure you’re aligned with the service that will provide the most value to your business:
- To what extent do I have internal sales tax expertise in my business? If you’re like most small and mid-sized businesses, you’re likely stretched pretty thin and sales tax is one of the last items on your plate. Questions related to sales tax nexus, taxability, audits, registrations or exemption certificates are common for most multi-state businesses. A business that lacks internal sales tax expertise to address these day to day questions will be better served by an outsourced sales tax department that can bring a qualified professional to the table to address these questions.
- Does my data or business model require any unique process support? I frequently talk with companies about how they manage sales tax credits. This happens when a sale is made, tax is charged on the invoice, and the client short-pays the invoice and provides an exemption certificate. In this situation, if you’re an accrual based accounting company, you’ve likely paid sales tax on the transaction and now you have a sales tax credit. How you use this credit is often unique and different from company to company. The ability to implement custom processes and manage these unique scenarios will align more naturally with an outsourced sales tax department as they will take a more client-intimate approach to address this nuance.
- Is your business planning acquisitions, new ERP systems, restructuring, or other entity or systems changes? These are common situations with small and mid-sized businesses. The key characteristic in your outsourcing relationship to help manage through these changes is flexibility. A rigid, one-size-fits-all approach will feel constrictive. Whereas an outsourced sales tax department that adapts to the way you do business will provide the flexibility required.
- Do I want to manage one relationship or two relationships when it comes to sales tax outsourcing? Some firms are unable to manage the treasury or payment process for their clients. This is often a result of their audit relationships that preclude them from managing treasury related functions. Sometimes it’s a business decision to minimize their risk and push the payment process back to the client or to a third party. In either situation, it can become a hassle for the company that’s attempting to outsource their sales tax process. Generally, a firm that doesn’t manage the payment process internally will engage a third party to manage the payment of taxes to the jurisdictions. As a client, you end up with two separate providers, each responsible for a different portion of the process. You may want to ask yourself, “Who is responsible if a payment is late?” With this bifurcated process, you run the risk of acting as the project manager that coordinates the efforts of two separate vendors. An outsourced sales tax department will manage the return preparation and payment process under one roof – just as you would do it in your business.
This trend of moving toward an outsourced sales tax department makes sense. Companies gain access to sales tax expertise, the process is managed under one roof, and they are able to leverage a flexible, customizable process. I believe the trend will continue and will likely accelerate as businesses become exposed to this new approach to outsourcing sales tax.
Other recent “Sales Tax Outsourcing” posts by Robert Dumas:
- Outsourcing the Sales Tax Department: 4 Key Factors to Consider
- Sales Tax Outsourcing - You Can't Be Half Committed
- Sales Tax Outsourcing – Walking the Performance Tightrope
- Sales Tax Outsourcing - Cost Reduction Not the Priority
- What Does KPMG Sales Tax Buy Mean to Small – Midmarket?