How Outsourcing SALT Compliance Work Can Support a Strategic Tax Team

Corporate tax professionals today face more demands in their roles than ever before. The 2024 BDO Tax Strategist Survey found that tax leaders say their performance is measured not only by traditional metrics of success, such as compliance reporting timeliness and accuracy, but also by their ability to train and retain employees and manage the company’s reputation through tax transparency reporting. Despite these additional demands, tax leaders often spend a majority of their time meeting compliance and reporting deadlines. How can tax professionals find the resources to engage in strategic tax planning, employee training, and technology implementation when so much of their time is spent in the minutia of compliance and financial reporting? 

For many tax professionals, state and local tax (SALT) obligations require a disproportionate amount of time and resources. For example, a tax professional is able to comply with its filing obligations only after determining where it has nexus. Further, even after confirming where the business has a filing obligation, many tax practitioners struggle with whether what the company sells is subject to sales tax in a given state. What may be taxable in one state may be tax exempt in another. With the state sales tax treatment of goods and services changing every year, many internally prepared taxability matrices become out of date the same year the work was performed.  

For this reason, many businesses should consider outsourcing their SALT work to leverage the extensive capabilities and knowledge of the right provider. In doing so, they will free up resources to support a more strategic tax function.   

How Outsourcing or Co-Sourcing SALT Work Can Benefit Your Business

Businesses should understand the differences in outsourcing and co-sourcing so that they know what to expect from a particular engagement.

• Outsourcing: The tax function is fully delegated to an external service provider. This allows businesses to focus on their core activities while the service provider manages the entire tax process. 
• Co-sourcing: This is a collaborative approach. The business retains some control and responsibility over its tax functions while leveraging the experience of an external service provider. The relationship allows businesses to combine their internal resources with the external provider’s knowledge and capabilities.  
  
  

Determining which arrangement is best for your company often depends on the internal tax resources (including budgeted external expenses) at your disposal. 

Concentrating Knowledge Creates Risk

Many businesses use in-house tax professionals to handle SALT compliance, believing it will be more cost-effective than working with a tax provider. 

However, organizations that rely on an in-house tax professional or team risk leaving organizational knowledge in the hands of just a few individuals. For example, if the person in charge of timely remitting sales tax payments is unavailable, on leave, or no longer with the company, the remittance of millions in tax payments could be delayed. That could cost the business a commensurate amount in penalties and interest.

State Tax Apportionment May Be Too Demanding for Internal Teams

State tax apportionment requires gathering data from multiple sources in varying formats and then leveraging that data to comply with tax rules, transactions, restructuring, and other scenarios to determine tax liability. These calculations are complex. For example, a business that sells services may be required to report the same sale in three different states versus just reviewing the customer bill-to address. Requirements like those are often overlooked or are known but not complied with. This often leads to filing incorrect returns, which leads to penalties and interest being incurred on audit, overpayment of tax, and related errors in financial statement reporting. Tax-related items are among the leading causes of restatements contributing to approximately 10% of all restatements by SEC registrants in recent years. 

By engaging with a co-sourcing or outsourcing advisor to assist with state tax apportionment, businesses may be able to reduce their tax risk and free up internal resources to help with more strategic tax work.

Outsourcing Allows In-House Professionals to Drive Strategy

When in-house tax professionals spend too much time on SALT compliance and reporting, involvement in business strategy conversations is significantly hampered. Tax leaders should dedicate more time to strategy by being involved at the start of business conversations to help decision-makers understand the tax implications of potential decisions. The 2024 BDO Tax Strategist Survey reveals that the most strategic tax leaders are already increasing their involvement in business areas such as supply chain, geographic expansion, cybersecurity, and product/service development. Ultimately, involving tax in business decisions may help improve the company’s total tax posture. 

Let’s consider, for example, an organization wants to expand its manufacturing function in a state where it has not historically had a presence. If the CFO consults with the tax director early in the process, the tax director can model the potential tax implications of the new facility, identify potential credits and incentives, and even work with an advisor to negotiate credits and incentives. This is why it is critical for CFOs and tax directors to communicate regularly. 

While tax implications should not be the sole deciding factor for charting business strategy, decision-makers should understand how potential actions could affect the company’s tax liability. By devoting more time to building a relationship with their CFOs and business leaders, tax professionals can demonstrate how the tax team can deliver added value – in addition to increasing compliance and reducing risk. 

How to Select the Right Service Provider

For a successful outsourcing relationship, select a service provider that will take an ownership mindset toward your business and offer a perspective beyond the immediate scope of your engagement. Work with a provider that prioritizes you as a client. 

Does Your Engagement Team Have an Ownership Mindset?

Instead of selecting a provider based on the size of the firm, businesses should select a provider based on the value it can bring to the engagement. Companies should look for a firm that brings a perspective beyond the immediate project to help set their business up for long-term success. Often, that means looking for a firm that will work as an extension of your team in terms of the leverage model it uses to service its clients. In many cases, the involvement of senior-level providers helps the service delivery team better understand how the returns they prepare allows a business to meet its overall goals and challenges. It also reduces the chances that the delivery team will get lost in details and deadlines. In this relationship, the provider becomes fully invested in the business’s success and functions as a true trusted business advisor.

To illustrate how a firm can bring added knowledge beyond the engagement, consider a company that has engaged a service provider for SALT compliance work. The old adage of the output being only as good as the input applies, and in many cases, data is not where it needs to be to produce a useful output. However, some firms can work with your business to develop a process for structuring your data, as well as for implementing data automation solutions. Specifically, some firms offer a solution for sales tax compliance that integrates directly with your business’s ERP system to manage calculations, guard against the risk of overpayment, and reduce indirect tax audits. Data automation solutions can improve data accuracy and reduce the time necessary to pull and share data.

Looking beyond services such as data automation, the right service provider may be able to help the business implement artificial intelligence and machine learning to use and understand tax data to drive strategic insights and transform the business. This is different from using technology to improve tax processes and instead analyzes tax data to inform better business decisions. 

For example, an e-commerce retailer may want to work with its sales tax advisor to develop a technology solution that will analyze the data so that the company can better understand the “who,” “what,” “where,” and “why” behind its customer base and buying habits. These insights can help inform sales, marketing, and product development strategies. 

At BDO, we refer to this ownership mindset as our Total Tax Approach, in which we consider the sum of taxes a business owes across all jurisdictions. We consider opportunities for streamlining data management and compliance in order to use tax data and insights to drive business decisions. 

It’s a Two-Way Street

It is critical that a business understand the scope of work and communicate with its service provider. If a business engages a tax accountant to prepare state income tax returns, it should discuss issues related to other areas of tax. If the company is not communicating business changes (or even potential changes) with its advisor, it becomes nearly impossible for the advisor to effectively identify opportunities stemming from said changes and manage risk. 

In an ideal situation, the provider regularly meets with company leaders to understand what is going on with the business before a key decision is final. For example, if your business is planning an expansion project with anticipated job growth, your tax advisor may be able to help you enhance your hiring strategy by negotiating or taking advantage of statutorily available employment tax credits. 

Outsource SALT Work to Enhance Your In-House Tax Team

For businesses at varying stages in the growth cycle, outsourcing or co-sourcing SALT work will not only reduce the likelihood of surprises in the form of penalties for late payment, overpayment, or audit assessments, but it may also allow in-house tax professionals to focus on proactive tax planning that results in significant savings. 

When selecting a tax provider, companies should engage a team that not only meets the need for which it was engaged but is also a strategic advisor in the business. 

The right SALT provider will allow your tax team to focus on reducing your tax liability, enhancing your tax function, driving growth, and providing value to your stakeholders. 

To learn more about how BDO helps businesses with their SALT needs, contact us.