No corporation wants to pay egregiously high fines or risk a government audit for violating sales tax laws. Outsourcing has become a good way to make sure someone knowledgeable is keeping up with the confusing welter of laws for companies doing business in more than one locale. Service providers also have the technology to calculate and monitor the tax faster and more accurately.
“Day-to-day tax management is a non-strategic activity that diverts staff focus,” says Patrick Grogan, Director of Marketing for Sabrix, which is part of Thomson Reuters Tax and Accounting. Sabrix delivers a managed service providing end-to-end transaction tax management (both sales and VAT taxes) for companies of all sizes. “But the negative impact of inaccuracies is considerable.” He points out there are over 13,000 taxing authorities in the United States. “You could cross the street and the tax laws can be different,” he points out.
Three years ago, Thomson Reuters conducted a study around compliance with sales tax laws. The CFOs surveyed reported the average annual cost to stay compliant was over $320,000 a year. A sales tax clerk typically earns $50,000 a year. A director of tax generally has a starting salary of $150,000. Then there was the challenge of training and then retaining these professionals.
“CFOs are constantly balancing these costs of compliance with the cost of a potential audit,” says Grogan.
Grogan says sales tax laws have so many nuances it’s difficult for a novice to make the correct decision. For example, states don’t tax licorice as candy because it has flour. On Halloween, states tax pumpkins as a food item unless they are decorated; the tax rate changes because the pumpkin is now a decorative item. “In the context of any product or service, if a company interprets a sales tax issue the wrong way, the impact can be huge,” he cautions.
Another option is to purchase software that calculates the correct sales tax. The study found if the company did not have the correct people and processes in place, the company still had trouble remaining compliant because its staff didn’t know how to take full advantage of the software. “They found they simply automated errors unless they had the tax expertise in house,” reports Grogan.
For many companies, especially small and medium-sized businesses (SMBs) that don’t have the financial resources to hire the requisite expensive experts, outsourcing is the answer.
Why a manufacturer needed to outsource sales tax management
That was the situation at Stulz Air Tech Systems, a Maryland company that manufactures air conditioning and humidification systems for corporate and computer room use. The company began growing rapidly; corporations from coast to coast wanted its HVAC units. “We were registered in just three states before the growth spurt,” says Michelle Holsinger, ERP Process Manager. Suddenly the manufacturer was doing business in 40 states. “Sales tax became a real problem,” she says.
In addition to the threat of fines, inefficiency became an issue. Every time someone entered an order into the system, they had to stop working and look up the proper sales tax. Sometimes they had to call the taxing authority. Then they had to calculate the amount. “This took forever,” Holsinger reports. The staff of four began to dread every time a salesperson wrote an order in a new county.
Using Sabrix MTS, Thompson Reuters’s outsourced sales and use tax solution, automated that process. “Just not having to do those calculations any more has been fantastic!” she says. It also increased the accuracy rate. “Doing the calculations by hand is fraught with error because it requires a non-tax expert interpreting complex tax law,” says Grogan.
Holsinger also likes the fact that outsourcing saved the manufacturer $50,000 a year in personnel salaries. Outsourcing also allowed Stulz to file “more accurate” tax returns, she adds. Grogan says some of his other buyers actually budgeted for state and IRS audits because “they knew they couldn’t avoid them because they couldn’t calculate the taxes accurately.”
The Stulz executive believes outsourcing the sales tax function has improved the manufacturer’s competitive standing. “We have been able to sign contracts in states we have never done business in before,” she says.
Grogan points out outsourcing this function also improves customer relationships. He says when companies sell big-ticket items like Stulz does, a mistake in the sales tax can add up to a significant sum. “The customers call and complain the merchant overcharged them. Companies don’t want to debate tax law with their customers. Our software makes sure they don’t end up in that situation,” he says.
While Stulz has never had customers complain about being overcharged, Grogan says that prior to using Sabrix MTS, quite a few of the service provider’s other buyers had to pacify upset and dissatisfied customers because of a sales tax miscalculation in their favor.
The Sabrix software-as-a-service (SaaS) model
The Sabrix solution has a tax engine its buyers can access on demand. The service provider integrates it into the buyer’s financial system or e-commerce platform. Every month companies like Stulz have to file a tax return in each state in which they do business. The software automates the preparation of this return. Then Thomson Reuters’s team of sales tax experts performs a three-step review process and makes any necessary corrections.
Holsinger says the manufacturer liked the fact Thomson Reuters was willing to customize its product for her SAP system; she wanted the sales tax reports broken out by state, and Sabrix had only offered a consolidated report. She appreciated the entire implementation only took two weeks. “The hardest thing was coding all our products,” she reports.
Sabrix delivers its solution in a SaaS model. A 2009 study by Saugatuck Technology found SMBs were “among the most aggressive adopters of SaaS overall.” It found 40 percent of SMBs made SaaS solutions “a part of their core business applications.”
In 2008, in the midst of a global recession, Sabrix (prior to being acquired by Thomson Reuters) made the Inc. 5000 list of fastest-growing companies. That year it had a 330 percent annual growth rate. Grogan attributes the growth rate to the fact that businesses, but especially the SMBs, needed to stay compliant “at a fraction of the cost with no up-front fees. We became an attractive option. In this environment, throwing more bodies at the problem didn’t make economic sense.”
This year municipalities are raising sales taxes in attempt to fund budget shortfalls. The drivers for outsourcing continue.
Lessons from the Outsourcing Center:
- It is difficult for businesses to correctly calculate sales tax when they do business in a multitude of municipalities. Outsourcing this function saves time and money, reduces the risk of audits, and provides the information for correct income tax returns.
- Outsourcing is successful when it combines useful applications with experts who make sure buyers are using the software correctly to come up with the right answers.
- SMBs are adopting software as a service as a useful and cost-effective business model.