Costs, penalties may spur outsourcing.

Small-to-mid-sized companies pay more than $327,000 annually, on average, to manage sales and use tax compliance. And, despite this significant investment, these companies still average $32,000 each year in penalties and interest due to errors.

These are among the findings of an independent survey of more than 500 finance executives at small-to-mid-market companies commissioned by Sabrix. The companies ranged in size from $20 million to just under $1 billion in revenues.

The survey concludes that changing tax rates and rules and expensive manual processes are key drivers of compliance costs. With more than 11,500 tax jurisdictions in the U.S., companies struggle to remain up to date on the latest tax regulations. And, rates change: there were 478 rate changes to sales and use taxes in the U.S. during the first half of 2006.

According to the survey, mid-sized companies file an average of 86 sales tax returns each month, although numbers can reach into the hundreds as companies grow or expand into new tax jurisdictions. In a typical month, the average mid-market company experiences a change in 16.4 percent of the jurisdictions in which its files, while some companies experience as much as 50 percent churn.

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The survey also reveals that senior finance professionals are not always aware of the total cost of transaction tax compliance and actually underestimate their total cost of compliance by as much as 50 percent. Costs are typically spread across company personnel, tax research subscriptions, third-party tax return preparation and tax consulting.

Nearly 60 percent of finance executives participating in the survey indicated a strong interest in outsourcing sales and use tax compliance, citing the need to free themselves from the complexity of sales and use tax management, as well as the desire to lower compliance costs. More than 75 percent of the survey respondents have already outsourced other financial and administrative processes, such as payroll, benefits administration and expense reporting. They acknowledged that transaction tax compliance is a financial process that they would outsource, to remove the hassle or lower costs, or both.