Follow the Big-time Avalara Money – $100 Million!

Talk about following the money.  Avalara, who I believe is the largest of the Certified Solutions Providers for the Streamlined States has just received additional funding of $100 million dollars!!

Link to Avalara Press Release

Highlights:

Avalara, Inc. (“Avalara” or “the company”), a leading provider of cloud-based software for sales tax and other transactional tax compliance, today announced it has raised $100 million in a financing round from an affiliate of Warburg Pincus, a global private equity firm focused on growth investing.”

““This investment by Warburg Pincus will allow us to put more dollars to work in our growth initiatives.  It also validates our fundamental belief that sales tax compliance automation is inevitable, and Avalara is at the forefront of this movement”

“Including this investment by Warburg Pincus, Avalara has raised more than $200 million in capital since 2004 from a list of investors that includes Sageview Capital and Battery Ventures, as well as other entities and individuals.”

Sure is a lot of money to pour into the company when only a few hundred remote retailers will be affected by the MFA 🙂  Not.

 

Avalara Webinar: “Managing Sales Tax Exemptions in an Audit-Happy World”

“Dealing with “certs” can be a nightmare.”

“Managing Sales Tax Exemptions in an Audit-Happy World” is the title of an upcoming webinar by Avalara, one of the 6 CSPs for the streamlined states.
Yes, by all means.  Pass MFA so ALL remote resellers (including manufacturers) will suddenly be faced with audits from up to 45 more states than they used to.

Again with the interesting messaging.  To retailers/manufacturers… the truth about the challenges of compliance.   When promoting the Marketplace Fairness Act?  It’s going to be all fine…

Revolving Door from State Government?

I guess it’s not a total surprise when people switch from the private sector to the public side… but boy it seems to be a revolving door.  Reading the who’s who in the Streamlined Sales Tax papers, I occasionally forget if I read about them as a state employee, or as a private employee working with the states.  Nothing automatically wrong about it, but it seems to be a pretty cozy group.  A few examples I’m aware of:

Scott Peterson

Was:  Executive Director of the Streamline Sales Tax Governing Board  & was director of the Business Tax division for the South Dakota Department of Revenue and Regulation.

Now: Director of Government Affairs, Avalara.

Joan Wagnon

Was: President of the Streamlined Sales Tax Governing Board (See what I mean?), Secretary of Revenue for the State of Kansas.

Now: Executive Vice President, Fedtax

Russ Brubaker

Was: President of the Streamlined Sales Tax Governing Board (A Trifecta!)

Now: Vice President, Government Affairs, Fedtax

Gary Centilivre

Was: Chair of the Streamlined Sales Tax Certification Committee from 2006 to 2013.  “The Certification Committee advises the Governing Board on matters pertaining to the evaluation, testing, certification and recertification of service providers and automated systems” – like Fedtax?  Also a state tax official at the Kansas Department of Revenue.

Now: Vice President, Midwest Operations and Outreach, Fedtax

Charles Collins

Was: Streamlined Sales Tax Project Co-Chair

Now: VP of Government Affairs, Taxware

If the Marketplace Fairness Act passes, I wouldn’t be surprised to see more jump ship for the new gold rush.

 

States pay CSPs – We get nothing

If the Marketplace Fairness Act passes, remote retailers will have a variety of integration issues (if support for their platform even exists) and costs.  Personnel costs in time and salary, CSP fees (for most) and even paying for the credit card fees on the newly collected sales tax.   As covered in a previous blog post, remote retailers will pay around $2,000 per year, per million in sales.  So we become unpaid state tax collectors, with all of the compliance burdens and no reimbursements for our costs.  Big-box retailers (like those sponsoring the MFA) can usually get some reimbursements from the states.  But we’re not Wal-mart.

Who does get paid by the SSUTA states?  The Certified Solution Providers (CSPs).  And a lot.

The CSP compensation schedule is per merchant, not total.  So most retailers will be in the top-2 tiers of reimbursement.

  • 8% – up to about $3.5 million in sales on average
  • 7% for the amounts above $3.5 million to $14.5 million.

Sample figures for a hypothetical retailer with 7% sales tax average.

$1 million in sales – $70,000 in collected tax.   CSP gets $5600 per year.    Retailer stuck with $2000 in CC fees alone.

$3 million in sales – $210,000 in collected tax.  CSP gets $16,800 per year.  Retailer stuck with $6000 in CC fees alone.

$5 million in sales – $350,000 in collected tax.  CSP gets $27,000 per year.  Retailer stuck with $10,000 in CC fees alone.

Thanks for nothing.

The Streamlined states group have batted around reimbursing retailers for costs incurred but have done nothing.   There’s room in the SSUTA values to compensate retailers, but we’re not at their meetings and don’t have the cozy relationship CSPs do.

Avalara Government Relations Guy Says Audits Not an Issue – Phew!

This document originally appeared in the October 14, 2013 edition of State Tax Notes and is found here

There’s quite a few whoppers in this article, I had to take a few of them down.

  • If proponents’ estimates are correct that fewer than 1,000 remote sellers would meet the Senate bill’s threshold, most retailers may continue to be audited the same way they’ve always been.

Emainstreet alone has almost that many members.  There will be far more remote sellers that are in the retailer category.  Tens of thousands is more likely.  Less than 1000 is a lie, to help pass MFA.  If I remember correctly that idiotic number came from someone looking at the Internet Retailer Top 1000 list.   FYI, most people don’t want to share their numbers to make that list.  That list doesn’t contain any of my main larger competitors, all of which would clearly make the list.  It’s a very incomplete list at best, worthless for this type of purpose.  And if there were really less than 1000 online retailers that would be over the $1 million threshold, what would be the point?  A large number of them are big chains that already collect the tax.  There’s probably that many Ebay sellers alone.

A University of Maryland paper from 2008 is referenced in Streamlined States discussions and puts the number of Internet retailers with sales between $1 million and $10 million at 28,128 retailers.

More importantly, the number ignores the fact that wholesalers/distributors/manufacturers are ALSO remote sellers under the law, even if they’re a true wholesaler that doesn’t sell at all to the public.  Over $1 million is quite easy to hit and tax exempt sales also count towards that total.

Audits Under Streamlined Auspices

“”I was constantly pushing Streamlined’s Audit Committee to come up with a way of doing one audit,” said Scott Peterson, who last year stepped down from his position as executive director of the governing board.

An early version of the federal Main Street Fairness Act would have allowed a retailer to request a single multistate audit, Peterson said. The Audit Committee spent years trying to figure out how to make it work, he said.”

Well maybe that should be hammered out before passing a burdensome compliance and financial risk on tens of thousands (or more).

  •  Unsubstantiated Fears?  

“Peterson, who previously oversaw sales taxes as director of the South Dakota Department of Revenue’s Business Tax Division, said he is frustrated by assertions that a retailer could become subject to perpetual audit by 45 states and the District of Columbia if federal remote sales tax legislation is enacted.

“That’s such an easy red flag to throw down with very little substance to back it up,” Peterson said.”

South Dakota is the 2nd smallest state (after Maine) for sales tax gross receipts (US Census 2012 figure).  All states are not equal in how they audit and how aggressive they are.  I’m guessing South Dakota has a lot less to audit than the state of New York or California.

  •  Not really unsubstantiated by his own statement

“While every state into which the remote seller makes sales would have the legal right to audit that seller, few states (italics mine) audit more than 2 percent of their retailers in any given year, Peterson said.”

  • 2% audit in any given year for most states
  • Some might audit a larger percentage
  • 2% is 1/50.
  • 46 possible states have sales tax.
  • That’s almost an average of an audit every year!

Sorry, but this would be an unreasonable burden for a small business.  Just the fact that we’d need to actually answer communications from 45 more states down the road would be a problem.  Does he not understand the math behind his statements?

  • Why would remote states even want to audit?  Really?  Did he say this?

“Peterson said he has always struggled to understand why any state would go beyond its borders to audit someone collecting its sales tax. If some version of the Marketplace Fairness Act were to pass, not only would states benefit from increased collection of their sales taxes, but the amount of use tax that goes uncollected would drop significantly, Peterson said.

“For me it was always a struggle, because I could never figure out why in the world there’d be this need for auditing,” Peterson said.”

States would audit because they can.  Pretty much that simple.  They want to know that they are getting everything they should.  What would the point be of NOT auditing?  Why would anyone comply?  I’m “struggling to understand” his fairly baffling comments above.  The states want their revenue.

Small Sellers and Certified Software Providers

Rachelle Bernstein, vice president and tax counsel at the National Retail Federation wants the exemption level as low as possible.   “We think the technology is there”.

No, it isn’t.  (NRF is a massive proponent of the MFA, by the way.)  She then goes on to tell more whoppers.

“The Marketplace Fairness Act contemplates remote sellers taking advantage of government-funded certified software providers (CSPs) for automated sales and use tax calculations and remittance, Bernstein said. It’s possible that the CSP would also handle most — or even all — of the audits for those small sellers that use them, she said.”

  • MFA does not mandate government funded CSPs – Sorry, but we need to focus on the bill and SSUTA as-written, not a gauzy-idealized version of what someone would like it to be.  States will make available free software – no details are in the bill or SSUTA regarding how.
  • CSPs can’t handle multi-channel retailers
  • CSPs would be an initial contact and access to data – audits need more
  • CSPs only would be for “level 1 sellers” who use a CSP for ALL aspects of sales tax.
  • “Possible”?  An awfully-squishy word.  And unlikely.

“Peterson said this is basically true, putting on a third hat to explain how. (Following his earlier service at the South Dakota DOR and on the governing board, Peterson is director of government affairs for Avalara, one of the governing board’s six authorized CSPs.)”

Basically true?  In other words, not entirely true.

“Peterson said there generally aren’t mistakes, but occasionally a piece of documentation might be missing; if there is a mistake, the state will assess Avalara, which has a contract with its sellers that says the party responsible for the error is liable for the assessment.”

Which means we’re liable.

“A second set of streamlining states treats the CSPs’ customers as the seller, Peterson said. When one of these states conducts an audit, it will choose Avalara’s specific customer that it wishes to audit based on the state’s normal auditing practices, and Avalara will provide the customer’s records to the state. These states will send Avalara all notices that otherwise would go to the retailer; if there was an error in the seller’s tax calculation, Avalara would get the audit assessment, pass it on to the seller, and explain what the notice was about. Here, too, Avalara has a contract with its sellers that says the party responsible for the error is liable for the assessment.”

And again, we’re liable.  And this CSP handling issues, it’s only level-1 sellers who might interact like this and any other requests for data (like tax returns) would go to the retailer.  And the state isn’t required to go through the CSP by the way.

“Under both scenarios, Peterson said, the records Avalara keeps are exactly the same, and the states conducting the audits get the records in exactly the same format. He cautioned that the way the CSP auditing function works now isn’t necessarily the structure that would be reflected in Goodlatte’s bill or what CSPs themselves would advocate.”

Fortunately, the article ends with some more realistic and concerned views about the MFA and the audits.  Maureen Riehl, vice president of government affairs for the Council On State Taxation had a lot to say (underlining mine):

“looking at the Marketplace Fairness Act as it stands now, a business still might be looking at multiple audits from multiple sources asking for multiple, different things.

There are streamlining states that have not only their own audit options but also differing approaches to audits involving CSPs. The legislation then creates an alternate category of non-streamlining states, which could require tax collection if they implement their own simplified audit approaches. The MTC would still be conducting its own joint audits, and it’s possible that smaller groups of states would enter into joint auditing agreements.

The default is to do audits exactly as they’ve been done, Riehl said, adding that this would create a “Wild West” atmosphere in which businesses might face audits from thousands of local tax jurisdictions. She said the federal legislation at least contemplates a single-audit approach on a statewide basis, but even this remains the subject of disagreement between state and local governments. “And that’s precisely why this hot potato has been passed down the line this entire time to deal with later,” she added.

“With the rules of engagement still up in the air, it’s not surprising that the audit framework is still a question,” Riehl said. “It’s a very important feature of the Marketplace Fairness Act, and it’s good to know that congressional staff are looking for input on this. But even if, in the end, the Marketplace Fairness Act punts this to the states, there has to be some addressing of what’s done in the case of multistate audits.”

Director of Tax Research & Compliance at Avalara – Malthus Again?

Stumbled onto a 12/2009 report written by Phil Schlesinger that’s on CCH’s website (another Certified Solutions Provider) that is absolutely Malthusian.  For those who aren’t Econ geeks or didn’t major in Economics, Thomas Malthus wrote a paper on population growth and did straight-line extrapolations, showing doom and gloom based on these assumptions.  From wikipedia: “Malthusian terms can carry a pejorative connotation indicating excessive pessimism and inhumanity.”

As everyone knows, we entered a recession.  So it’s not surprising that sales tax revenue declined, as did personal income tax and corporate income taxes.  This December 2009 white paper in mainly about the gloom and doom projections going forward.

“The goal of this whitepaper is to present credible and timely data

that helps to articulate, both in quantitative and practical terms,
the depth of the situation that most states find themselves in,
both presently, and for the foreseeable future. Additionally, we will
examine how states will likely deal with their financial woes, and
some of the measures that states have already taken to generate
additional revenue. Our analysis is limited to revenue shortfalls
related to transactional taxes such as sales and use tax.”

At the end: “The goal of this whitepaper

was to create for the reader
a fairly realistic view of the
landscape as seen from the
eyes of the struggling states.
For many states, the picture is
very grim and could take years
to rebound from the current
economic downturn. Whether
popular or not, states will
have cut costs and generate
additional revenue.”

Quoting from Scott Pattison, executive director of the National
Association of State Budget Officers, her article includes the
following statement: “This is an awful time for states fiscally, but
they’re even more worried about 2011, 2012, 2013, 2014.”

Sales tax revenues of course, stabilized according to US Census figures at governing.com.  2010 sales tax receipts were roughly flat or slightly lower than 2009.  Since then:  Rising every year, with 2012 revenue higher than 2008 and significantly higher than the 2009/2010 lower points.  And as mentioned in our previous Myth of Declining Sales Tax Revenues posts, virtually all states project sales tax revenue increase for 2013 vs. 2012.

Economic recovery will do far more for states’ budget health than implementing new taxes, especially those based on wildly optimistic projections of sales tax revenue it would bring in.

 

Link to CCH’s whitepaper from 12/2009 (PDF)

 

Avalara – Huffington Post Articles

http://www.huffingtonpost.com/rory-rawlings/

 

Rory Rawlings is the Founder and Chief Tax Automation Officer of Avalara.  He’s been given a platform on Huffington Post to write advertorials for his company.

His two articles boil down to this:

June 5th: Collecting Sales tax is hard.  Get ready now!

vs.

June 26th: Everything will be OK, software will make everything all right.

And how is it that Mr. Rawlings has published 2 articles here. This one says how easy it will be. The June 5th article’s last section hints at the exact opposite to drum up business:

“The Marketplace Fairness Act could dramatically change sales tax compliance requirements for small businesses that are not preparing today. Whether selling bikinis to starlets or skateboards to CEOs, the smart money is on businesses that prepare now, not later.”

If it’s so simple, why do I do I need to scramble now to get ready? Earlier in the same June 5th article, you mention it would take a minimum of 6 months warning from the states to even try and collect the taxes.
“Even if this bill becomes law tomorrow, some states will have to implement significant tax code simplifications in order to enforce it. Even then, states would not be allowed to implement the law earlier than 180 days following enactment.”

So is it easy? Or a complete bear, that you need to get started on now? My money (and venture money) is on bear.

 

Avalara didn’t care for my quotes – A letter from their lawyer/lobbyist

I’m surprised that the Emainstreet.org blog received a letter from a lawyer representing Avalara regarding this article (original still on my site).  How there could be any issue with a series of perfectly footnoted quotes from their own publicly available documents was amusing to me.  Heaven forbid I gave the (correct) impression that Avalara wants the MFA to pass.

It’s obvious Avalara supports the MFA and will rake in the money if it passes.  Whether it’s being a basis for the “free” states limited offering or by supplying fee-based services direct to retailers, it’s a huge bonanza for the company.  Avalara is currently only 1 of 6 “certified service providers” in the country at the time of this writing.

Fortune magazine writes about the windfall in “The biggest winners of an Internet sales tax”

The founder wrote this ridiculous puff piece advertorial about how software takes care of everything and makes everything A-OK with the MFA.

Avalara has actively contributed to and lobbied regarding this bill (publicly available records) available on the U.S. Senate website for lobbying reports.  Here’s one for $20,000.   And another this year for $40,000.   So far this year, they’ve spend $50,000 lobbying for this bill.

But here’s the best part!  The lawyer who contacted Emainstreet is also a lobbyist for Avalara in the above reports.

Since Avalara is such a cheerleader for Marketplace Fairness Act, I will of course continue to fact check their speaking out of both sides of their mouth.   Is it easy and not a burden on retailers? (when talking to Congress or cheerleading for passage?)  Or hard, like it actually is, when communicating with prospective customers in white papers, webinars and other communications?  Only one is true.  Pick one.