Is outsourcing property tax compliance right for you?

There is a natural desire by Chief Financial Officers and other corporate executives to maintain strict internal controls over every aspect of their financial system. After all, allowing a third party, however trusted, to process invoices or issue payments on the company's behalf is tantamount to handing over the keys to the corporate vault.

Nevertheless, there is a growing trend of Business Process Outsourcing (BPO) in American business as corporate executives experience increasingly positive results from engaging third-party experts to handle selected non-core tasks. This success has prompted companies to search for similar returns from other areas. As one manufacturing executive recently commented, "We make pants. If we're doing something internally that doesn't directly contribute to making pants, I'm going to find a way to outsource it."

The term "outsourcing" has been hijacked by politicians and the media to the point that it has become nearly taboo in today's politically-correct environment. Regrettably, it has been misconstrued as being synonymous with layoffs and the export of high-paying American jobs to India, Mexico, and other third-world countries. True outsourcing, however, is no more than the shifting of one company's non-core functions to a third party that makes those functions its core competency and thereby delivers economies of scale to the benefit of the first company.

Outsourcing does not always mean a net loss of American jobs. In fact, it often leads to employment increases on the domestic front. Consider an early example of outsourcing--janitorial services. In 2006, it is unlikely that many corporations, regardless of size, employ their own janitorial staff. Why? Because companies long ago realized not only that hiring outside contractors to clean their offices was more cost-effective but that often quality improvements could also be achieved because of the introduction of the competitive marketplace. Initial concerns over outsiders' access to confidential files and other corporate materials, while legitimate, were addressed by the bonding of contractors and the institution of commonsense security precautions. Obviously, too, no American jobs were shipped to Asia in the process. To the contrary, a thriving new commercial cleaning industry was created in the United States.

Fast forward several years, and few corporations think twice about engaging third-party contractors to manage their payroll, even though they'd be hard-pressed to identify internal data more sensitive and proprietary than employee compensation and related personnel information.

Should property tax compliance be any different? More and more American businesses are discovering each day that it is not. Indeed, property tax compliance represents an ideal opportunity for Business Process Outsourcing for several important reasons:

1. It is complex. With more than 10,000 state and local taxing jurisdictions scattered across the country, few if any corporate tax department, regardless of size, can optimally analyze the data, research the tax laws and rulings, and effectively negotiate with so many governmental bodies to minimize their property tax burden.

2. It is voluminous. The sheer volume of tax bills, renditions, filings, and non-uniform deadlines is virtually impossible to track with complete accuracy by corporate tax departments.

3. It is repetitive. Successful property tax compliance requires following the same processes over and over hundreds, often thousands, of times each month. As with most repetitive tasks, the best solution is an automated one. Many corporations have chosen an in-house technology application to manage their compliance process in-house. While this is a sound approach for many companies, it stops short of the full value of a BPO solution.

4. The costs are significant. Most major corporations spend millions each year on property taxes. The vast majority overpay these taxes by 5 to 20 percent, or more. Add in penalties and interest when returns are filed incorrectly or tax bills are paid late, and costs can quickly spiral out of control.

5. The risks are substantial. Not only do companies risk incurring interest and penalties for compliance errors, but if their processes lack the required transparency in respect of every facet of the compliance function, management runs the risk of running afoul the rigorous requirements of the Sarbanes-Oxley Act.

6. It is a non-core function. Unless a company is in the tax business, property tax compliance will not be one of its core function. Its tax department staff could be more effectively deployed to strategically-significant, value-added functions if they were freed from the burden of such complex, high-volume, highly-repetitive tasks. What is more, by outsourcing property tax compliance, a company can minimize the ongoing costs and risks associated with staff attrition, training, and investment in technology, since that burden is shifted to a third-party provider.

Outsourcing the property tax function to an outside specialty firm addresses each of these factors with a world-class solution. Because state and local tax compliance, reduction, and recovery are all such a firm does, it is in a position to manage and document the processes more efficiently and effectively with a combination of the best people, processes, and technology in the industry. Tax executives would be well advised to investigate whether and which property tax outsourcing solution could work for them.

JOHN M. DYSLIN is a Vice President with Burr Wolff L.P, a full-service provider of state and local tax reduction services, compliance co-sourcing and tax software. The views expressed in this article do not necessarily represent the views of Tax Executives Institute.