Avalara expands into new tax areas
Avalara has been growing into new fields beyond sales and use taxes, thanks to its successful IPO last year and increased demand from e-commerce vendors in the wake of last year’s Supreme Court decision in the case of South Dakota v. Wayfair, which allowed states to levy taxes on online purchases from out-of-state sellers.
“Wayfair has added another check mark in that decision making,” said Amit Mathradas, president and COO of Avalara, who joined the company earlier this year after working at PayPal. “My sense is, even before Wayfair happened, Avalara was growing at a steady pace. So the other triggers are really driving it. What Wayfair did was help accelerate some of that. Now, at the end of the day, if you asked me the question, ‘Is Wayfair short term or long term?’ my sense is there have been a ton of merchants that have been in a little bit of a wait and see mode because states are only now realizing what limits they need to set, and that has come toward the end. But I think you'll start seeing a lot of adoption over the next couple of years.”
The Seattle-based company has been steadily building connectors with other systems to help handle taxes on e-commerce transactions. It now has built more than 700 connectors. But it has plans to grow beyond that number.
“We have a target list of 3,500 companies,” said Mathradas. “We think if you can get those 3,500, you have a really good shot of being a part of every transaction in the world. Our goal is set. We know that we want these partners.”
Meanwhile, Avalara has been expanding its presence in areas such as communication taxes, fuel taxes, excise taxes, and beverage and alcohol taxes. It has also been expanding into areas such as the taxation of streaming video and audio.
“We have different types of taxation, and that's what makes part of this super complex,” said Alison Hill, senior manager of the Communications/Excise Group at Avalara. “When does it cross straight state lines? How do we determine access?”
Another expanding area has been the taxation of craft beers and wines, thanks to its acquisition in January of Compli. “Beverage alcohol is our newest baby here,” said Hill. “Primarily this is going to be wine, craft beers, spirits and imports, but 90 percent of that is going to be wineries because that's where the complexity is. If you think about it, most of your craft breweries aren't going to be shipping across state lines, and it's when you cross state lines that nexus becomes complicated. Wineries also have the ability to do direct-to-consumer with wine clubs, so that has a level of complexity as well.”
Another expanding area is the field of communications taxes, which can include extra charges on streaming video and audio services.
“If it has anything to do with core telecom or cable, almost guaranteed, you're going to have a communications tax component,” said Hill. “If there's any voice or video technology or text functionality, there's a good chance there is going to be some sort of communication tax attached to that functionality.”
She is starting to see some jurisdictions imposing taxes on services like Netflix. “Chicago was one of the first ones to do that, where they actually had a municipal-level tax called an amusement tax, and they started taxing streaming services,” said Hill. “If you are a national provider and you are providing service in one of these jurisdictions, then you need to go ahead and make sure that you have the capability to calculate communications tax. You can't just rely on sales taxes only. That's kind of what we preach, because it takes an entirely different set of processes and rules and knowledge to be able to do communications tax.”
Some communication providers may find themselves subject to additional taxes as 5G wireless technology emerges and connected devices and sensors that are part of what is known as the Internet of Things, or IoT. “If it's anything that has a sensor attached to it, there is a good possibility that there could be communications taxability,” said Hill. “The rules are very fuzzy and gray. There are a lot of questions that need to be answered about how the connectivity is provided, how it attaches to that connectivity, what the supply chain is, things like that. It's going to be pretty difficult for the layperson to understand that.”
Avalara has also been expanding internationally, adding managing directors for the EMEA (Europe, Middle East and Africa) region, as well as Brazil and India. “We were born and raised in the U.S., particularly in the SMB and mid-market,” said Pascal Van Dooren, chief revenue officer at Avalara. “We knew very early on that we would go to market through partnerships with those platform publishers like ERP companies, and e-commerce and shopping cart companies. The minute you say that, it sets a whole host of things in motion. We were in India very early on, in 2006, and we’ve continued growing in India ever since. I think we’ll have close to a thousand people by the end of this year in India. We went in there with a center of excellence mindset, which was supporting the company’s growth with engineering, content and various other areas that needed enablement to allow the company to grow. But we also knew we would use that area for Asia Pacific growth. All three of our managing directors are new to the company this year.”
They include Steve Lomax, the managing director of EMEA, who is based in Brighton, England; Manjula Muthukrishnan, managing director of Avalara Technologies Private, Ltd., Avalara's Indian subsidiary; and Alessandra Almeida, managing director of Latin America, who is based in Sao Paulo, Brazil.
“Brazil is probably the most complex market in the world in terms of compliance for companies to deal with,” said Van Dooren. “They're also very advanced. Because it was so complex in Brazil, we decided to go ahead and buy four or five companies. And the reason we picked those companies is because when you think about compliance in Brazil, there are about seven or eight things that need to happen in the management of a compliance requirement for a transaction. And each one of those companies had one or two pieces of that portfolio of solutions that need to be there for an end-to-end offering. So we were able to to acquire those companies, the people and the assets and develop a full end-to-end offering for the Brazilian market.”
“More and more, we understand the importance of having one unique calculation engine for e-commerce buying on many channels,” said Almeida. “The more we can increase the content, the better. There are some trends where the sellers are held accountable for calculating and retaining the taxes, so more and more this is a trend for us. Everything we do in Brazil is aiming for automation and simplification.”
Avalara has set an aggressive growth strategy, which is likely to include more M&A deals in the future. “That has always been a very important part of how we grow, both organically and inorganically,” said Marshal Kushniruk, executive vice president of corporate development at Avalara. “We have over 700 partners, and we want to partner in every transaction in the world. If you partner in every transaction in the world, you really have to be part of every software publisher that builds a product that allows a business to buy or sell something. So we’ve got to partner with 3,000 software products to get to that goal. But to drive into every transaction in the world, you need to be able to support the different kinds of marketplaces that are out there, and the different kinds of industries. In the early days, we bought a couple of exemption certificate companies because we needed to get into the exemption certificate side and do tax calculation. Then we bought a fuel company because we wanted to get into fuel tax. Then we bought a telecom company because we wanted to get into telecom tax. Then we bought a lodging company to get into lodging tax and get into that market space. Then we bought wine technology and for beverage alcohol, Compli, because that’s part of our goal, to be able to sell into hotel chains. And then we’re getting into cross-border, with all of the cross-border taxes."
The company has more plans for similar deals ahead. "My job, when I think about M&A, is to think about the gaps in our product line and to go out and find the right company that’s building a technology or amassing content or IP that serves that industry," said Kushniruk. "Then we go and try to find the right partner, build or buy. In some cases, it’s buy, and then we merge them into the greater Avalara suite of products.”