Sales Tax Outsourcing - A Service or a Technology Solution

I was recently meeting with clients and prospective clients about sales tax compliance outsourcing and had an epiphany.  Basically, I realized that there are two types of sales tax compliance services.  One is described as a fully automated service and one is described as a service that uses automation as a tool.   Companies looking to purchase a sales tax outsourcing service must understand the very subtle distinction between these two types of providers in order to make a decision about the type of service that bests fits their needs and expectations.

After 20 years in the sales tax compliance business, with more than a few mistakes along the way, I know that automation works predictably only when the data inputs are consistent going into the system.   We all know that as a general rule, sales tax data inputs are completely opposite of consistent.  Specifically, the various tax calculation systems, and the implementation of those systems, vary greatly from taxpayer to taxpayer.  As a result, it is challenging to get one consistent automated input from the disparate data outputs from these systems.

If you’re a sales tax outsourcing service provider that believes in a fully automated solution, the data inconsistencies coming out of the various tax calculation systems is further complicated by the challenges of maintaining rates, rules and forms subject to frequent changes in the return preparation software.   The energy and resources that are required to develop and maintain a comprehensive “one size fits all” sales tax compliance system define the business model.  The company’s culture, IT resources, and metrics are all focused on a fully automated sales tax compliance service bureau.   Having lived in the business model of an automated service solution, I know first-hand that despite great expectations otherwise, basic customer service takes a back seat to the goal of automation. 

In our rapidly changing world of technological advances, I see old-fashioned customer service being replaced by IVR, automated processes and electronic communication.   In other words, it seems impossible to talk to a live person anymore.  The fully automated sales tax solutions follow this trend as well.   More specifically, the automated service solutions create so many specialty layers in the process, it is difficult to get a single point of contact that is knowledgeable about your business and your data and is empowered to make decisions and get things done.   As a result, the automated service providers are slow to respond to questions and generally respond electronically to avoid hearing the frustration in the customer’s voice.   The automated solution is not conducive to customer-intimacy.

The primary benefit of an automated solution is price.  The providers of automated solutions try to substitute technology for an experienced person, charge less for their service, leverage the technology investment and more rapidly scale their business.  This is a good business model and a reasonable “service” for some companies.  Specifically, I think the automated service solution works best for companies with sufficient internal sales tax functions to manage the outsource provider and carefully review their output.

In contrast to the automated service solution, a service provider that uses automation as a tool generally must have an experienced sales tax and accounting professional to manage disparate data inputs and the automated tools.   The accounting professional must have a breadth and depth of knowledge and experience to understand and navigate the intricacies of the customer’s data and the tools necessary to manage the data and prepare the tax returns.  To complement the service professional, the provider must have strong processes and technology to manage the predictable pieces of the sales tax management and compliance, such as filing and remittance (or treasury).  The downside to a service provider solution is the risk associated with losing the primary point of contact that learns and maintains legacy knowledge of the company.  However, this risk exists with any competent professional or vendor with a specialty skill.

The bottom-line is that sales tax compliance requires a combination of automation and competent human resources.  When you select the outsource vendor, make sure you get the degree of both that meets your needs and expectations.