Prominent Sales Tax Outsourcing Provider Creates Risk for Clients

We recently transitioned a client from a large, well known sales tax outsourcing service provider to TaxConnex.  As part of the transition, we discovered several critical issues.  On the surface, these issues don’t appear to be significant; however, they point to a process that pushes the risk of non-compliance back to the client.  This seems contrary to one of the primary goals of outsourcing which is to not only shift the work, but to also shift at least some of the risk to the service provider.  Here’s what we uncovered:

• The client had to approve all returns prior to submission. This sounds like it would be a good control mechanism for the client, but the time to review the returns was insufficient to apply any type of scrutiny to the returns.  In order to meet the deadline for approval, the client would automatically check each box as approved without reviewing the return.  Once they checked the “approve” box, the risk of an error shifted right back to the client. 

• The client was also responsible for maintaining changes to the tax calendar. This doesn’t seem like a big issue but let’s take a closer look.  Jurisdictions will change filing frequencies and also the method of filing from time to time.  If the returns are not filed in accordance with these updated frequencies or methodologies then penalties and interest are generally incurred.  By requiring the client to be responsible for updating the tax calendar, the service provider shifted more risk to the client. 

• In situations where the service provider did accept risk, they limited that risk through a limitations of liability clause rather than provide full indemnification for certain errors. More risk pushed back to the client.

When you are considering outsourcing for the first time or perhaps looking to change service providers, be aware of how much of the process (and risk) you will continue to own.