Transforming business functions to meet complex sales tax challenges
I have interviewed many companies across the country in many sectors, from the largest multinationals to small and midsized enterprises. My focus was on whether and how these businesses are evaluating their tax operating models and reconsidering how their tax teams approach increasing regulatory, talent, technology and other challenges in order to build a future-ready tax compliance operating model.
I have found that some companies, particularly the larger ones, have evolved in recent years to keep pace with technology advances. However, tax and finance leaders are now dealing with some unprecedented pressures, coming from several sources. Specifically, they are facing ongoing issues from the Tax Cuts and Jobs Act of 2017, and the Supreme Court’s landmark 2018 decision in Wayfair resulted in the move in most states from physical presence to economic nexus as the basis for being subject to state sales tax.
Considering these and other mounting compliance challenges, together with talent gaps, and the speed of technology change, businesses are struggling just to keep up, let alone transform their tax functions. Terri La Rae, a partner at Deloitte Tax LLP and leader of Global Operations Transformation for Tax, said recently, “Conditions now are leading many companies to step back and challenge everything from talent capabilities and operational processes to technology and data collection as they redefine their tax operating model.”
What to do? For many companies, it makes good sense to consider the use of experienced, third-party firms to outsource some or all of their tax services in general, and sales and use tax compliance services in particular, to reduce costs, increase efficiencies and minimize the substantial risk of noncompliance. But why now more than ever?
Here are some of the key drivers making the reconsideration of indirect tax compliance operating model more urgent than ever:
- The impact of Wayfair significantly increased the exposure and burden from sales and use tax compliance.
- There’s a growing need for states to find additional sources of revenue as a result of the TCJA.
- States and localities are conducting more frequent and more comprehensive sales and use tax audits.
- Sales and use tax rates and rules are changing rapidly.
- Companies are having difficulty finding and keeping talent.
- States are making greater use of software, big data and other sophisticated tools to identify businesses that have not registered with the states in which they do business.
- Businesses need to replace labor-intensive processes with automated processing to reduce costs, increase efficiency, get more competitive and avoid disruptive state tax audits. They also need to save money, reduce risk and avoid potential liabilities.
- Businesses and their executives are facing a significantly enhanced risk of no or inaccurate sales and use tax compliance. The risk is both financial and reputational. Some states are looking back years, placing the ongoing viability of small business at risk.
The above factors have led to greater complexity and increased accountability in sales and use tax compliance, which in turn has led to increased audit exposure, resulting in the potential for significantly increased and unanticipated liability both for businesses and, potentially, key executives.
An example of aggressive state sales and use tax audit behavior was recently reported in the Philadelphia Inquirer. A relatively small business based in Pennsylvania that sold goods in California on a marketplace facilitator website was hit by California tax authorities with a proposed adjustment of $1.6 million, going back six years to 2012.
Businesses are also facing increased costs of operations, and a substantially more competitive business environment. They are also dealing with increased difficulty and cost of finding, training and keeping qualified staff. There are a greater number of complex rates and rules changes, occurring not only at the state level, but also at the local level.
There has also been an increase in class-action lawsuits from overcharged customers. There have been two noteworthy class action suits in recent years: Walmart had to pay $5 million to establish a sales tax settlement fund and provide eligible class members with $3 to $15 Walmart gift cards. In the other case, a Madison County, Illinois, circuit court judge granted final approval of a settlement in a class-action alleging that Papa John’s Pizza wrongly charged sales tax on delivery fees.
What to do about all this exposure and the risk?
The increased complexity and financial risk of a failure to accurately comply have led businesses to re-evaluate their entire sales and use tax compliance process — the operational manner in which business is tracked, computed and reported for sales and use tax purposes, but also how returns are completed and filed. These sales and use tax processes include nexus, rates and rules, tax computations, exemption certificate management, document and return preparation, and audit preparedness and representation.
What is the most efficient, cost-effective way to conduct this needed review of current sales and use tax processes; to recommend changes as needed; to implement these changes; and to maintain the quality of sales and use tax processing on an ongoing basis? Should you employ an in-house solution only, an outsource solution only, or something in between (such as hybrid outsourcing or co-sourcing)?
Who can better assist businesses in providing best-practices solutions to minimize or eliminate these risks — internal staff alone with reduced in-house resources, third-party experts, or outside consultants — working with a reduced number of internal staff or assuming the function entirely? In this “create or buy” decision process, a growing number of both large and smaller companies have chosen to either outsource their tax compliance activities completely or selectively. If the fit is right, outsourcing can offer both quantitative and qualitative benefits, enabling tax departments to focus on more value-added activities for the company, such as business and tax planning, enhanced audit defense, risk management, and other company-defined priorities.
How do businesses and their advisors determine if the fit is right for sales and use tax compliance outsourcing? There is no one answer to the “inhouse or outsourcing” decision.
There are several reasons to choose an in-house only solution:
- Time to develop and deepen key internal and external relationships;
- Broader career development, with the ability to provide internal staff with the training needed to meet new demands specifically tailored to the needs of the company;
- Better work-life balance;
- Role of internal staff as trusted advisors to the company;
- Short-term cost savings — no initial layout of outsourcing fees.
There are also benefits to choosing a co-sourcing solution:
- Reduced headcount and other cost savings;
- Reduces the impact on other departments in the organization that have roles in the compliance process such as accounts payable, treasury etc.;
- Improve compliance accuracy, which will reduce audit exposure and financial risk to you and your business;
- Improve efficiency and accuracy, and reduce risk while freeing up key resources to focus on higher-value tasks, such as business and tax strategy and planning in an ever-increasing competitive and regulatory landscape;
- Introduce and implement new technologies, such as artificial intelligence, the Internet of Things, data analytics, and bid data to your business reducing costs and improving productivity;
- Look objectively and with “fresh eyes” across your industry and your competitors and quickly share new information to make you more competitive;
- Work directly with tax and revenue authorities in all jurisdictions;
- Leverage the knowledge gained from other clients and leverage those relationships
- Bring rates and rules tracking, sales and use tax compliance and audit preparation and defense together under a single, expert source.
For many companies, investing in the legal, tax and accounting expertise of outside consulting experts with a proven track record has proven to be a good option for sales and use tax compliance. These consultants, often working closely with internal staff, will recommend and implement best practice solutions that will enable the business to have immediate access to subject matter and industry expertise. Companies can also have industry-leading software implemented to increase efficiency, ensure greater accuracy and reduce risk. They will be able to meet all the sales and use tax reporting and record-keeping requirements of the state, operate more profitably, position themselves competitively now and into the future, and meet their business objectives, currently and as they evolve.