Avalara Rockets Ahead with Sales Tax Software while Amazon, Big Retailers Battle

11/22/11Follow @curtwoodward

After a year of epic battles with politicians and brick-and-mortar competitors, Amazon.com has made sales-tax policy a relatively sexy topic in the business world. But another Seattle-area technology company has been working for years to navigate complex sales tax systems—and it’s growing like a weed.

That company is Avalara. Started by an accountant/developer and based on Bainbridge Island, WA, the company provides web-based software that helps businesses automatically calculate and pay sales taxes with precision, no matter where the sale takes place.

How big a problem is that? There are about 11,000 different taxing districts in the U.S. alone, with overlapping boundaries, shifting rates, and long lists of exemptions. Selling the same item to two homes in the same neighborhood could actually mean charging two different amounts for sales tax, if they’re on opposite sides of a tax boundary. And retailers are deputized as the tax collectors, taking in all the revenue up front and sending the government its cut.

It’s the kind of complex, constantly shifting set of data that has been practically begging for a software solution for years. But even businesses that were already using accounting software to keep their books traditionally had to punch in the nitty-gritty details of sales tax data manually.

Avalara makes it automatic by tracking the sales tax zones nationwide, tying them to a sale’s location, and plugging in the information exactly where it’s needed in accounting or e-commerce software. And since the Internet has expanded the sales footprint of virtually any business, making it possible for even a small retailer to find customers nationwide, making those calculations has become increasingly necessary.

It’s also downright fun, if you ask the Avalara guys. Even though their particular island is of the more frigid San Juan variety, the company embraces a pretty lighthearted culture that counters the potentially dry subject of sales tax policy. The executive team donned tropical shirts for their official headshots, and when we met recently at the company’s Seattle office, CEO Scott McFarlane’s shirt stripes, watch face, and laptop skin were all being employed to display Avalara’s signature bright-orange color scheme.

“Some people want to put a computer on everybody’s desktop. I just want to calculate everybody’s transactions,” McFarlane says with a powerful laugh.

Avalara got its start in 2004, and now has about 250 employees worldwide. The company, which has raised $21 million in financing this year, is led by three co-founders: CEO McFarlane, technical chief and board chairman Jared Vogt, and tax chief Rory Rawlings, the accountant-developer who has also been instrumental in helping to develop national sales tax policy through the Streamlined Sales Tax initiative.

Avalara’s rise has been quick enough to land it on the Inc. 500 list of fast-growing companies in 2010. It made the larger Inc. 5,000 list this year (No. 682), with last year’s revenues pegged at $16.7 million. This year, the business will grow again by 50 to 75 percent, McFarlane says, putting Avalara’s sales in the neighborhood of $25-$30 million.

There could be more growth ahead if national tax policy gets an overhaul. The sales tax battles that Amazon has waged with state governments have spurred possible action by Congress, in the form of a new bipartisan bill that could set up, for the first time, a national system for taxing Internet sales.

Right now, most online purchases have escaped local sales taxes in the U.S. because there simply isn’t a national system for collecting them. States have tried—see the aforementioned tax spats with Amazon—but most of it has been for show, because only Congress has the power to regulate interstate commerce.

Amazon is vocally behind this latest push to get a federal law. As Amazon CEO Jeff Bezos recently told Wired, “We want federal legislation. That’s what we’ve been working on. And I think we can get that done this year.”

If that happens, it could dramatically increase the amount of sales tax collections occurring nationwide. Even in Washington state, where Amazon already collects sales taxes because of its Seattle headquarters, state officials estimate they’re missing out on about half of all the sales taxes that should be collected. That amounts to hundreds of millions of dollars a year, in a state that is heavily dependent on the sales tax and—like many others—chronically low on revenue following the Great Recession.

Avalara’s happy to be on the edge of this national spotlight. But it’s not depending on the wheels of political process to grind out an answer to drive its growth.

“We know that this is going to be a big business. When you stop and look at it, we have 7,500 customers that use our product around the country in various forms. And you can’t tell me why I can’t have 100,000 or 500,000 customers by the time that this is done,” McFarlane says.

“Businesses have had this problem forever,” he adds. “And whether there’s an Internet tax or not an Internet tax, there’s 11,000 taxing jurisdictions in the United States, and businesses have to solve that problem. So we look at what’s happening with interest. We’re obviously swimming with the tide.”

There is some irritation that the big players like Amazon have argued that collecting sales tax around the country is just too big a burden. “What chafes me is when people say that there’s not a solution out there, it’s too hard. The reality is, it isn’t. It’s a statutory requirement. We have the technology,” McFarlane says.

“Don’t get me wrong—we would love to calculate sales tax for Amazon, right?” McFarlane adds with a laugh.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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