Sales-and-Use Tax Becomes Increasingly Challenging for Companies
Seven questions you should ask before choosing the right returns outsourcing provider.
October 28, 2010
According to a study done by KPMG in 2007, the number of companies turning to a third-party to handle sales-and-use tax returns increases by nearly 15 percent annually. Behind this steady increase are a number of trends; growing tax rate complexity, the increasing frequency of audits and the growing workload for tax and finance staffs that are shifting how corporate tax and accounting professionals manage the sales-and-use tax process.
The bottom line for these professionals is that the risks and penalties associated with inaccurate sales tax compliance have become too great. As a result, companies turn to outside providers to manage the complexity and volume of data more effectively while reducing their risk. These providers also free up time spent on the returns process for higher value activities.
But it’s not as simple as turning over data and forgetting about it. Choosing the wrong partner to handle returns could actually increase the likelihood of underpayments, overpayments and even material weaknesses.
Sales-tax Rates Continue to Set Records
While the economy may be officially out of recession, the fallout continues to be felt at many levels. Over the past two years, state tax revenue has plummeted across the country, resulting in sizable budget shortfalls.
States and cities have faced budget challenges in the past couple of years at levels not experienced since the early 1940s. The resulting shortfalls have meant making difficult and oftentimes unpopular choices from cuts in services, to tax increases (including sales taxes.)
The economy’s impact on sales tax was on display at the end of 2009. A record-breaking seven states — in addition to one district — increased their sales-tax rate during the year. The average number of sales-tax rate changes from 2008 to 2009 increased by more than 30 percent, compared with the average number of changes from 2000 to 2007.
As we enter the final quarter of 2010, sales-tax rates continue to test record levels. The average U.S. state sales-tax rate increased to a record average of 5.52 percent in the first nine months of 2010, exceeding the former record of 5.48 percent for the full year 2009.
All this activity has resulted in an explosion of tax rules and regulations. There are currently more than 99,000 tax laws and requirements with which a business may need to comply in the U.S. alone.
While the impact for consumers is significant, fluctuations in sales tax also cause issues at the corporate level, especially for tax and accounting professionals tasked with measuring, managing and monitoring the returns process. Increasing complexity makes it extremely difficult for corporate tax and finance teams to double-check tax calculations and process monthly returns for the required jurisdictions, accurately and on time. This is where outsourcing the returns process comes into play.
Risk and Reward: Choose the Right Partner
While the decision to outsource the sales-and-use returns process is compelling from a risk standpoint, there’s also a measurable return on investment (ROI) for companies and employees alike in the time and resources outsourcing saves.
These benefits are measured in cost reductions and the “higher value” activities tax and accounting staff can now focus on with the sales-and-use returns processes safely outsourced. These include managing audits, finding and reclaiming overpayments, improving upstream tax data accuracy and improving relationships with line of business operations in support of their customers in sales, customer service and finance.
To see these benefits, tax and accounting professionals should research outsourcing partners thoroughly. The right partner does more than take transaction data and generate returns. They provide deep expertise not only in sales-and-use tax, but also in tax technology.
The following questions are recommended when evaluating and choosing the right returns outsourcing provider:
1. What does your service include? Not all returns outsourcing providers offer the same scope of service and many charge a la carte fees above and beyond the base return preparation fees.
2. Do you outsource any part of the process? Some outsourcers offshore entire steps of the process like funds management or notice management adding potential risk to the process.Will you help us prepare for an audit? Many tax outsourcers believe that their responsibility ends when they generate returns or submit payments. Ask what audit support is offered and get it in writing.
3. What is the experience level of your staff? Will our company have a dedicated account executive? Look for a provider with experienced professionals who can identify issues early, make strategic recommendations, head off problems, help make informed decisions and ensure continuity of knowledge about your business.
4. How accurate is your tax data and what is the quality of your returns technology? Most corporations use a manual or disjointed process for determining taxability and calculating sales-and-use tax, increasing the likelihood of errors. Look for an outsourcing partner with recognized expertise in sales and uses tax and technology.
5. What security will you provide for our company’s data, our funds and our access to your system? Security must be a top priority when selecting a returns outsourcer, especially if you are entrusting the provider with funds to pay your tax bills.
6. How much of our data will you store after returns filing? Can we access our data at any time? Find out what types of tax data the provider stores and look for a partner that gives you real-time, self-service access to your tax data.
7. How will you manage communication with tax authorities? A good outsourcing provider can act as a knowledgeable intermediary with taxing authorities, helping you negotiate accountability for past oversights to minimize interest and payments.
8. How can we monitor your work so we remain in control? Look for a provider with a robust, Web-based portal that gives you access to comprehensive workflow management, a real-time view into everything that is happening with each jurisdiction and return and a complete audit trail.
One thing is certain: A wave of change is underway in sales-and-use-tax compliance driven by larger trends in the economy. Outsourcing the returns process has emerged as a valuable tool for corporate tax and accounting professionals for not only managing risk and compliance, but also freeing up much needed resources to handle increased workloads.
These same professionals should stay diligent when evaluating an outsourcing partner. Ask the right questions and ensure the returns processing solution is not more costly and complex than the original challenges.
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Mark Sergas is the services line leader for Vertex Inc. He has worked directly with more than 300 tax departments to meet their unique challenges and help them deliver more value to their organizations. He has been recognized by the ITSMA for excellence in New Services Development and has a record of fostering the strategies and organizational changes necessary to achieve new and expanded lines of service business.