Although the financial crisis of 2007 to 2009 is well behind us, the fallout from it continues to have an impact for businesses that are faced with doing business in an environment that is even more heavily regulated. To comply with the additional compliance requirements established by federal and state agencies, many businesses are forced to increase their in-house compliance staff, or outsource the obligations to a third party. This article provides a discussion of the various considerations that go into outsourcing sales and use tax compliance matters. Understanding these factors will help enable you or your client to make the right decision when considering the outsourcing option.
Factors that will be discussed in the article include:
- Available services
- Weighing the options of handling obligations In-house or Outsourcing to a third party
- Selecting the right firm if outsourcing is the best option
There are a variety of sales and use tax services offered to businesses, and it’s a good idea to become familiar with what’s available so you can make an informed decision. Services include return preparation, exemption certificate management, taxability reviews, nexus studies, transaction analysis, audit management and appeals services. Some of the services, like nexus studies, generally don’t have to be performed on an ongoing basis.
It’s a good idea to start by making a list of the services your company may need currently, and services it may need in the future. For example, a business that operates in multiple states may need all of the aforementioned services, in addition to consistent legal support for direction on how tax applies to new and different projects. A business with lower complexity may only require return filing services. After you’ve identified the services that your business requires, you’ll want to weigh the option of keeping the obligations in-house with hiring a firm that specializes in sales and use tax matters.
Weighing your options
One of the first considerations people look to when making a business decision is the direct costs, but don’t stop there when it comes to tax matters. It’s important to consider the indirect costs and benefits of having the necessary expertise. The differences in direct costs between keeping the obligations in-house in comparison to outsourcing can be established in a few fairly straight forward steps. First, consider how many employees it will require (or currently requires) to handle your sales and use tax matters. There’s generally a direct correlation to the size and complexity of the business, and the number of people that will be required. With increased size and complexity, the number of employees will go up. Smaller businesses with lower complexity may not even require a single full-time employee, a part-time employee may be sufficient. Once you’ve established the number of employees required, compute the yearly average cost of hiring the necessary staff. Or, if you already have the required staff in place, review your current employment costs. Costs to consider include salary, employment taxes, health insurance, management time, training, and overhead. According to Robert Half, a human resource consulting firm, a well-qualified sales and use tax manager will typically command a starting salary between 85 -135k. A qualified sales and use tax associate salary typically starts around 55k and can be as high as 80k.
To establish the cost of hiring an outside firm, seek out proposals from at least two qualified firms (see below for more on how to identify a qualified firm). Make sure you clearly identify the services you require, and provide some relevant details about the operation of your business. When you receive the proposals, review them carefully and don’t be afraid to ask questions about how the pricing was established and about the specific services that will be included, or may be excluded. Ask how you will be charged for services that may fall outside of the normal scope of services, e.g., the occasional sale or acquisition of a business division.
Once you’ve established reasonably accurate direct costs for each of the two options, consider indirect costs. There’s a benefit to having well-qualified people involved in your sales and use tax matters, because doing things right upfront can save a significant amount of time and money later. Our firm has represented thousands of businesses in audits and claims for refund, both of which can get expensive if problems arise. Having the right person in-house, or the right outside practitioner is important and is a factor that should not be overlooked. In other words, don’t just seek to hire the least expensive option, consider the potential savings you will realize over time by working with the right person!
Identifying the Right Firm
There are several factors to consider when selecting the right sales and use tax firm. First, you should spend a sufficient amount of time to identify at least two candidates. Some threshold factors you should look at include the duration of the firm’s existence, the individual qualifications of the firm’s practitioners, and breadth of services provided.
The firms you consider should be well established to help ensure that your partnership will not end abruptly. It is generally recommended that you work with a firm that can assign at least two practitioners to your business. That allows more prompt responses to your questions and requests, and will help avoid problems that can arise if one individual is unable to perform the work due to personal issues.
Take time to thoroughly review the qualifications and credentials of the professionals that work with the firm. Don’t just rely on advertising, it can be misleading. Unlike income tax, sales and use tax practitioners are not regulated and do not require a professional license. Firms that include CPA’s and attorneys are required to follow ethical and professional guidelines, and they will likely carry professional liability insurance (something you should inquire about). Communications with attorneys are protected under the attorney-client-privilege which allows you to communicate openly, knowing that the law protects your confidential matters. State agency experience as an auditor or compliance specialist is a big plus because sales and use tax education and training isn’t generally available through colleges and universities. The benefit of having former auditors on your side is that they have a working knowledge of the internal policies and procedures of the taxing authorities. They know what can trigger an audit since they have likely been involved in the audit selection process, and they know what to expect during an audit and how to avoid costly problems.
Finally, you’ll want to make sure the firm you select will be able to address any sales and use tax needs you currently have, in addition to needs that may arise in the future. Having a full-service firm will help avoid the need to parse out services between multiple firms which can increase costs and hinder effectiveness. In addition to return preparation and audit management services, try to find a firm that is familiar with the appeals process and can also offer other compliance-related services, including the following:
- Nexus reviews to determine if you should be registered in other states;
- Registration services for states in which substantial nexus exists;
- Multistate taxability studies to accurately identify how tax applies to your activities in various states (tax rules can vary widely between different states);
- Voluntary disclosure services for rectifying past activity in different states;
- Claims for refunds;
- Merger and acquisition analysis and advise;
- Special project and contract reviews;
- Exemption certificate management;
- Internal audits.
Finding the right solution for your business is key to making sure you operate in compliance. Operating in compliance will help avoid costly mistakes and enable the business to focus on profit generating activities.