Avalara aims to make the process of calculating sales tax less taxing and more relaxing.The company is so serious about their message that they’ve adopted an island theme for their exhibition booth at technology trade shows, complete with tiki-hut-like decorations and margaritas.

A private company founded in 1999 by a veteran team of tax and software industry experts, Avalara provides an automated sales tax compliance system for small and midsized businesses through its flagship product, AvaTax. Built from the ground up as a Web-based system and priced as a monthly subscription with an annual set-up fee, AvaTax has original equipment manufacturer agreements with business accounting systems such as those from Sage Software, Microsoft, Epicor, QuickBooks and NetSuite.

Currently, Avalara has more than 20,000 registered users and works with more than 650 resellers. The company has unveiled plans to roll out its product to 170 countries beginning in January 2008.

“The traditional solutions up to now have been status quo,” said Marshal Kushniruk, vice president of strategic accounts and customer experience at the Bainbridge Island, Wash.-based company. “We believe the status quo is our biggest competitor. People are still doing [sales tax] the old way because they are not aware they can do it any other way.”

The company began eight years ago, when Rory Rawlings, a Washington CPA, and his wife Patti started Advantage Solutions Inc., a consulting firm that focused on writing custom tax engines for Fortune 100 companies. Realizing that many of their clients were facing complicated sales tax requirements with no affordable solution readily available, Rawlings developed a North American sales tax calculation engine.

“Two things were happening,” Kushniruk explained. “The Internet was becoming much more accessible, so the model of software as a service was actually physically possible, as opposed to sort of a cloud in the sky. At the same time, [Rory] realized that there was this vast marketplace of small and medium-sized companies that really couldn’t afford $500,000 tax solutions. So Rory started to see that the Internet was a way he could build a product to go after this new market.”

Teaming up with personal friends Scott McFarlane and Jared Vogt, both of whom had extensive knowledge of how to deploy technology over the Internet, Rawlings began discussions to kick-start a company. McFarlane and Vogt are still with Avalara as president and chairman of the board, respectively, while Rawlings serves as chief tax automation officer.

Deciding that the best way to enter the market was through ERP systems, the trio recruited Kushniruk, who has more than 20 years of experience in the accounting software space. He joined the team in February 2004. A month later they attended a Microsoft Convergence conference armed with a beta version of the company’s first sales tax engine connection to integrate with Great Plains.

“We were there to show what we had, to listen and learn,” Kushniruk said. “We took our head development people and they actually stood around the booth and listened to people’s questions. We went there as a learning experience and the response was overwhelming.”

HOW IT WORKS

AvaTax is offered in three forms: AvaTax Connect, a quick-start Web-based system that is integrated with a number of accounting applications; the AvaTax Software Developer’s Kit, an integration tool kit for businesses that are running e-commerce, third-party or custom-built systems; and AvaTax Onsite, a site-installed system for large businesses that are processing more than 50 million invoices a year.

There are two ways that customers are plugged into AvaTax, Kushniruk explained — through a connector, which is used to integrate the Avalara sales tax engine with a company’s accounting application, or through an administrative dashboard, a secure sign-on portal that “talks” to the AvaTax engine on products, as well as reporting information.

“They sign into this dashboard and the beauty of AvaTax is that one person can effectively go in and totally control how taxes are calculated across the entire company or set of companies,” Kushniruk said. “So, if they only have to collect in Washington, California and Alabama, those are the only three states they tell AvaTax to collect on. And any time a transaction comes through for any other state, we know we don’t have to collect sales tax. We actually keep an audit trail that we did not collect tax on this particular transaction because this company is not required to.”

Perhaps the biggest benefit to business owners is the relief from having to worry about keeping up with constantly changing tax codes from varying jurisdictions. “If they do business in several or more jurisdictions on a regular basis, they’ve got research to keep up on,” Kushniruk said, adding that the industry of the user company needs to be taken into account as well. “The more volume they do, the more complex the routing, because they’re selling to more locations. If you sell jewelry into one state that has a single rate and you don’t ever have to collect tax anywhere else, you have no need for my product. But if you sell software into 11 states, you’re crazy if you don’t buy it. Software, the food industry, the clothing industry, the medical-device industry — if you sell service, warrantee, maintenance of any kind of product, [there are] huge issues around taxability.”

Roughly six months ago, Avalara started an offering called the Managed Returns Service, which, according to Kushniruk, “essentially closes the loop.” He compared it to what ADP does for payroll — taking care of reporting, fulfillment and payment of sales tax. The company receives a single liability worksheet that reports the total sales tax burden for the entire month, the customer checks the details, adjusts entries if necessary, and transfers the amount to a secure bank account, from which Avalara then redistributes the necessary amounts to each jurisdiction where the company owes money, along with the correct return.

If the state is able to accept checks electronically, Avalara will pay that way; if not, it will cut a check on the customer’s behalf, manually print a return with a signature, and send it along. “It’s what the customers really want the most,” Kushniruk said. “They want to be able to get rid of their sales tax statement, but the most important part is actually getting it right. We’re getting it right in the beginning, and then submitting the correct amount to each state.”

GROWTH

While Kushniruk wouldn’t disclose the company’s revenue, he said that it is experiencing more than “200 percent growth quarter over quarter.”

“We’ve actually had more revenue Jan. 1 of this year than we had all of last year, because of our recurring revenue model,” he added. He said that Avalara earned about 40 percent of its total revenue from the VAR channel this year. The company’s approximately 50 OEM agreements generate the rest of its earnings.

Roughly 60 percent of Avalara’s customers come through its ERP connectors, and the remaining 40 percent from the SDK tool kits.

Recently, it acquired Baton Rouge, La.-based Trustfile, a software provider that automates sales tax e-filing and e-payments. Trustfile processed approximately $8 billion in business tax payments annually for its 6,000 customers. With this purchase, Avalara will be processing an aggregate of more than 17,000 sales tax payments a month.

Avalara offers three partner programs: an Alliance program for their OEM relationships with vendors; the Infinity program for accounting system resellers; and a relatively new Professional Accountants Network designed specifically for CPA firms.

“CPAs can be great influencers and recommenders,” said Kushniruk, noting that roughly 100 firms of varying sizes are participating. “Many of them also can consume this product internally for their own business, so we have a deeply discounted rate for CPAs. So when they join our PAN program, they essentially get two copies of AvaTax for their business. They get one copy with credentials for demo servers so they can go show their customers demo transactions, and they get a production license so they can actually run their business.”

PRICING

Avalara’s Web site, online at www.avalara.com, features a pricing page for AvaTax Connector that asks a potential customer to choose their accounting, ERP or e-commerce host application. Customers are charged a one-time activation fee, an annual service fee based on transaction volume, and an overage charge if they go over their selected allotment of invoice transactions. Kushniruk compares the model to that of a cell phone agreement. An offering such as their Managed Returns Services would be an additional cost.

“Anytime during the year, our customers can go and look at how many transactions they have used and anytime during the year they can move up a level; they simply pay the difference,” Kushniruk said.

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