Practical Ecommerce

Quick Query: Avalara Founder Rory Rawlings

Rory Rawlings is the founder and chief tax automation officer of Avalara, Inc., a Washington-based firm that provides sales-tax-compliance applications for ecommerce merchants.

PeC: Avalara helps ecommerce firms manage sales tax compliance. Could you explain?

ALT

Rawlings: There are over 12,500 sales tax regions in the U. S. These include states, counties and municipalities. Ecommerce merchants, those who sell products nationwide, potentially can owe sales taxes to any or all of these tax regions. Avalara’s web-based sales-tax applications integrate with online shopping carts and accounting systems to help merchants collect applicable taxes from their customers and pay the monies to the appropriate tax region.

PeC: Ecommerce merchants are responsible for collecting sales taxes?

Rawlings: Yes. Specific requirements vary from state to state. That’s where we come in.

PeC: Walk us through how your service integrates with ecommerce sites.

Rawlings: We establish a bridge between our sales tax service, called AvaTax, and the ecommerce site itself. To do this, we’ll first identify the merchant’s products, tax exceptions, shipping issues and the states in which the merchant has offices or employees, among other set-up variables. We’ll then link our AvaTax system to the merchant’s shopping cart. When customers purchase products online from that merchant, our system operates in the background and automatically detects where the customer lives and calculates if merchant should be collecting sales taxes from that customer. If so, the sales tax amount will be collected by the merchant from the customer during the checkout function.

PeC: How does the Streamlined Sales Tax Project fit into all of this?

Rawlings: The SSTP is comprised of 21 states at present. It’s a nonprofit entity whose mission is to simplify the collection and administration of sales taxes through policy changes and technology services such as ours. States and other taxing regions lose billions of dollars each year in uncollected sales taxes, and the SSTP is trying to help. Avalara is one of three SSTP Certified Service Providers.

PeC: You must be a CPA.

Rawlings: Yes, earlier in my career I was a practicing CPA. We also have many more CPAs on our staff.

PeC: How much does your service cost?

Rawlings: We charge an initial activation fee and an annual contract fee based on the size of the business. For a merchant doing, for example, 14,400 transactions per year, the activation fee is roughly $1,495 and the annual contract fee is roughly $3,990. The annual contract fee equates, in that example, to roughly 27 cents per transaction.

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Comments ( 3 )

  1. Legacy User September 11, 2007 Reply

    Rory,

    I'm sure that Avalara provides a great service, but in my experience the thousands of small businesses that have an e-commerce budget of under $2,000 a year might find the subscription a bit expensive (most hosted and licensed small business e-commerce packages are priced in that range).

    There is a solution that falls in between what Avalara provides and the simplistic approach of specifying a single tax rate for a state (which leads to tax calculations that are often incorrect). It might be of interest to some Practical eCommerce readers.

    The solution consists of manually uploading a regularly updated database of sales tax rates to a shopping cart that can properly look up the customer's tax rate from that database. In our experience, this solution works quite well, although it is certainly less automated than what Avalara delivers.

    For example, our shopping cart software provides such a feature in partnership with a company called Tax Data Systems (http://www.earlyimpact.com/productcart/support/updates/taxlink.asp). Web stores run by companies that only have 1 physical location – and therefore typically need detailed tax rates just for 1 state – only spend around $100 a year, which is a more manageable amount for a small business, especially when they are just starting out with e-commerce.

    This might be useful to some.

    Massimo Arrigoni
    Early Impact

    — *Massimo Arrigoni*

  2. Legacy User September 11, 2007 Reply

    Cost is certainly a very important consideration. However, accuracy and service are very important as well. The AvaTax service is priced, similar to a cell phone, based on the number of transactions and complexity of the products you sell. If you have a small volume of transactions, you pay less than $30/month.

    In terms of accuracy, the company you refer to bases their calculations on zip code. Zip codes are designed to enable accurate delivery of mail and do NOT coincide with jurisdictional boundaries. The WA DOR tells me there are 40% of the zip codes cross up to 5 different jurisdictional boundaries. Therefore, if you simply rely on zip codes, you will not be accurate — you will either over charge or under charge sales tax. If you under charge, you answer to the state. If you over charge, you answer to your customers, and in more and more cases, to a class action lawsuit. Accuracy is becoming more and more an issue in the world of sales tax. AvaTax is based on a sophisticated Geographic Information System that calculates taxes based on the street address and therefore accurately determines the appropriate sales tax — and is at a price that is affordable to small and mid sized businesses.

    There are other considerations when it comes to accuracy as well. The product or service can be sourced at different locations and in some cases, such as CA, the sourcing can be a hybrid. What that means is in some cases the applicable rate is base on where the product originates. In others, it is where the product is delivered. Finally, it can be a combination of both the origin and destination. It also depends on how the product is delivered and whether it is considered a product or service. Then there are complex tax rules such as rate overrides, caps, thresholds, etc. A rate product such as the one you reference, does not take these into consideration. There is a reason Avalara is one of the very few companies in this country that successfully completed the grueling 18 month certification process under the multi-state pact called the Streamlined Sales and Use Tax Agreement – We accurately calculate and remit sales and use tax.

    AvaTax also goes the extra mile by providing a Managed Returns Service — we automatically take the companies' transaction history and populate the returns, submit them to the appropriate authority and deal with the payments. This effort is a non-revenue generating activity required by statute that most small businesses are required to comply at a cost that greatly exceeds the cost of our service.

    Avalara believes rates to be a commodity — something we give away at no cost. Simply go to http://www.FreeTaxRates.com and you can get these rates at no cost. A full, end to end compliance service is the value we provide — something that is unique in the industry.

    You can reach me for further comment or discussion at (206) 780-7011 or rory.rawlings@avalara.com.

    — *Rory Rawlings*

  3. Legacy User September 12, 2007 Reply

    I will briefly post back here since the discussion might be of interest to some e-store managers in the US.

    I did not say that the tax rate calculation was solely based on the zip code. That would indeed lead to incorrect results in some cases, as Rory pointed out.

    A sophisticated shopping cart program like ProductCart will automatically detect that a zip code is associated with multiple tax rates (as that information exists in the tax database uploaded to the store) and will prompt the customer to select the city/county that they are shipping to.

    The customer is prompted to make a selection – versus an automatic detection based on the shipping address – to avoid issues triggered by misspellings.

    Anyway, the point of my posting was to indicate that there are alternative solutions to correct tax calculations in the United States. Tax calculation is definitely not a trivial matter, as Rory pointed out.

    And things are quite messy elsewhere too :-)
    Think about places like Canada (GST, PST, HST) and the European Community (different VAT rates for different product types, etc.). Maybe Practical eCommerce can run a series of articles about correctly calculating taxes in different countries.

    The reality is – based on my experience – that most entry level e-commerce systems are not geared to properly address tax calculations at all.

    Cheers,

    Massimo
    Early Impact

    — *Massimo Arrigoni*

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