I recently had the opportunity to visit staff from Avalara at accounting-focused technology trade shows in New Jersey, Los Angeles and Las Vegas, as well as at their offices in Seattle and nearby Bainbridge Island, Washington. With a view of the Seattle Space Needle (coincidentally painted Avalara Orange), I was able to learn about what the company is doing, what they’re working on for small businesses, and equally important, how those advances can help accounting firms, too.
The Sales Tax Compliance Challenge: It Can be a Headache
Almost every state is facing a budget crunch or crisis, and they are getting tougher on sales tax audits to find revenue that has been decreasing as more and more consumers are shopping online. Many states are even adding more auditors and increasing collection activities, including Vermont, Idaho and Oklahoma. For the smallest businesses with a footprint in only one location, sales tax compliance is a pretty minor inconvenience, but for retailers that are growing either in locations or through web-based sales into an increasing number of jurisdictions, the pain can build into a significant challenge that can be expensive in terms of staffing and potential penalties.
The largest companies have managed these processes for years, either with proprietary technology or with large internal departments focused solely on reporting to the nearly 11,000 sales taxing jurisdictions in the United States. Small and mid-sized businesses simply don’t have those resources.
If it were just the 50 states and assorted territories, the task would be much, much simpler. It’s not that easy, though. Not only does each state have the ability to tax sales, services, rentals and even labor, at their discretion, many also delegate that power to their counties, cities and other districts, such as transit and port authorities. To make it more complex, these rates can change frequently, and each state and jurisdiction has different reporting requirements and deadlines, making it nearly impossible for smaller businesses to keep up.
The headache becomes a migraine when taxability issues are considered, because taxable items vary widely in each state and jurisdiction. A pack of gum may be considered untaxable in one, while taxable in another; Fruit in California is taxable if it’s from a vending machine, but not from a grocer; New York City businesses have to collect sales taxes on bagels, but only if you eat it in the restaurant – take it to-go and it’s exempt; and in Wisconsin, plain yogurt and raisins are individually exempt from sales taxes, while raisin-flavored yogurt is not. These are just a small sample of the peculiar and volatile laws across the country, and then there are other issues, such as sales tax holidays when some states or localities exempt certain items, types of items or purchase amounts from sales tax.
The final piece of the sales tax puzzle comes down to nexus, of course. Before the internet and ecommerce, it was a pretty simple concept: If you had a physical presence in a jurisdiction, you were responsible for collection and remittance of taxes on transactions that occurred there. But the definition of nexus is changing with technology, and many states are looking at affiliate relationships (such as with Amazon or eBay) as construing a presence across thousands of jurisdictions.
The Remedy: Sales Tax Automation
Small and mid-sized retailers have a relatively new option, however, because technology has caught up to the need, and it is finally affordable. The AvaTax system from Avalara integrates with small businesses' accounting and sales systems to automatically look up the rate for a sale or estimate in any location in the U.S., then determines special taxability rules, posts tax line items to transactions and the GL, and offers drill-down capability to subsidiary jurisdictions like counties and cities.