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Sales Tax Outsourcing - Cost Reduction Not the Priority

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I’ve often thought about why a company outsources their sales tax process.  Large enterprises with dedicated sales tax staff can hinge their decision on staff and cost reductions.  This doesn’t work for the small and mid-market business though. In most small and mid-market businesses, sales tax is managed by the accounting department, the Controller, or VP of Finance.  These positions are not eliminated when they outsource sales tax.  It’s true that the cost of outsourcing will be less expensive than the cost of hiring a full-time sales tax expert.  However, in the short-term, there will be an increase in expenditures associated with sales tax outsourcing.

So why outsource at all?  For the small and mid-market business, sales tax outsourcing is usually preceded by some type of change in a company’s business.  This change could be a poor audit result, a new line of business, a new sales channel, receipt of a nexus questionnaire from a state, or expansion into new jurisdictions.  I often think of the analogy of the frog in the boiling water.  A company starts out in one state and things are simple.  They expand into two or three more states and they’re able to get by.  Before they know it, they look up and they’re in ten states and each one is different in their application of sales tax rules, and they are spending a significant amount of their time on sales tax issues.  Sound familiar?

While the change in business is the catalyst to sales tax outsourcing, the following benefits are used to justify the decision:

  • Gain access to sales tax expertise that may be lacking in the business
  • Shift risk from the business to the outsourcer
  • Realign internal resources that are distracted by sales tax compliance
  • Increase control by accessing a well defined process

Absent from this list is cost reduction.

For small or mid-market businesses which are experiencing a change in their business operations, sales tax outsourcing can be an effective solution to manage the activities associated with that change. While the specialized support offered by outsourcing can reduce the risk associated with the changing business environment, it is not likely to reduce the expense.

 

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