A slow economy and tight labor market make SaaS-enabled outsourcing a good option to manage sales and tax use compliance.

by Steve Adams

Sales and use tax compliance is a headache for most companies. It is a legal obligation costing hundreds of thousands of dollars each year to manage across people and processes, yet is not strategic to core business operations. Staying on top of changing tax rates and rules is overwhelming. However, if not done accurately, businesses risk significant exposure in audits, interest, and penalties.

How can a business cost-effectively establish a world-class process for an initiative that is complex, time consuming and doesn’t help grow your business? For many companies, the answer lies in outsourcing enabled by Software as a Service: SaaS. SaaS-enabled outsourcing offers the marriage of on-demand software efficiencies with the domain expertise of trained professionals and compliance best practices. Through this trifecta, companies can lower the total cost of compliance while maintaining the integrity of the compliance process.

The Market Factors
Like many back-office functions, sales and use tax compliance has been handled in-house. But with over 13,000 taxing jurisdictions in the U.S., each with its own tax laws and regulations, the complexity and resources required to remain compliant have businesses reevaluating their approach. For years, finance executives have outsourced payroll, benefits administration, expense reporting and more. Now sales and tax compliance is emerging as the next logical business process to outsource.

With the economy on the brink of recession, cutting operational costs and conservation of capital is a critical mandate. Surveys show that businesses are spending $130,000 to $327,000 annually on staff, consultants, returns preparation, tax rate updates, and more—and still get hit with $10,000 to $30,000 in penalties and interest each year.

A 2008 survey commissioned by Sabrix Inc. revealed that 42 percent of small- and mid-sized companies have two or more FTEs supporting sales and use tax compliance initiatives. And as financial executives look to reduce overall costs, this process—often riddled with inefficiencies—has become a prime candidate for optimization.

The financial crisis has created state budget shortages. To address the shortfall, states are not only hiring more auditors to enforce compliance with sales and use tax obligations, but also introducing new taxes and tax laws.

Last year alone, there were more than 1,400 state tax rate changes. And as of July 2008, there have been over 700. Even for a small company this could mean thousands of tax rates and tax tables to manage.

As compliance becomes increasingly complex, a shortage of experienced accounting and finance professionals continues to affect employers around the world.

The talent shortage in accounting is partly due to new regulations, such as the Sarbanes-Oxley Act. But Sarbanes-Oxley does not fully explain the shortage. During the boom market of the 90s, interest in accounting dwindled, which means there are fewer qualified accountants now.
To address this “perfect storm” of conditions, many organizations are turning to SaaS-enabled outsourcing. SaaS-enabled outsourcing offers the synergistic combination of SaaS technology with deep domain expertise and best practice processes to achieve cost-effective compliance. Each of the three components is critical:
• SaaS technology effectively automates the tax compliance process for efficiency, without the need for heavy IT support, providing access to software solutions and up-to-date tax content that have traditionally been restricted to large, global companies. But automation alone isn’t enough, especially if you automate errors.
• Tax domain experts provide the multi-disciplinary expertise in tax law, tax policy, research and audit to ensure that your business achieves the highest degree of compliance and stays compliant, even as it grows. Companies benefit from the expertise of trained tax professionals at a fraction of the cost to maintain this in-house.
• Best practice processes ensure that your company achieves streamlined compliance across the complete tax lifecycle from tax determination to return preparation to rapid reconciliation and preparation of audit reports. As compliance requirements change, your company is automatically kept up-to-date.
The maturation of the outsourcing model means companies no longer have to pick one or the other of these critical components or balance compliance costs against audit risks. Many progressive organizations are choosing to outsource the entire sales and tax use process. Doing so has enabled them to cut costs, eliminated the need to boost headcount to support growth, and freed existing staff to focus on core business. As corporate America continues to grapple with the changing economic environment, SaaS-enabled outsourcing is an increasingly strategic option.

Steve Adams is CEO of Sabrix, an outsourced sales and use tax service.