Avalara and the Marketplace Fairness Act
Avalara is a venture-funded, leading provider of sales tax and compliance automation services. A director for the company recently spoke at an event held by proponents of the Marketplace Fairness Act (MFA) and Fortune magazine recently featured them as a big "winner" if the MFA passes. Yet, Avalara has publicly expressed how burdensome and crushing sales tax compliance is for remote sellers. This does not change if the MFA passes, hence the need for their software, or software like it, in order to help alleviate some of this enormous burden. The quotes below (clearly marked with quotation marks and with a gray background) are from their publicly available white papers, with a large portion of the quotes found in their publicly published Sales Tax Survival Guide 2013. Avalara aims to alleviate some of the burdens and risks foisted on small businesses via the Marketplace Fairness Act and they will be compensated handsomely for it. But small businesses have repeatedly pointed out (here, here, here and in a joint letter to congress and even in person to Congressional Reps) that software (even when subsidized by taxpayers) is not sufficient. Not even close. In fact the American Association of Attorney Certified Public Accountants (AAA-CPAs) strongly opposes the Marketplace Fairness Act because software can't protect small businesses from the costs and audits. In an open letter they say "Proponents of the proposed legislation would like you to believe that free or low cost software can so simplify the collection process for remote sellers that the time and effort to comply will be minimal. This misconception could not be farther from the truth."
Now let's look at Avalara's quotes.
Note: Remote sales tax collection and remittance requirements introduce a crushing compliance burden on small businesses.
“Considering the already impenetrable maze of sales tax collection rules, businesses face an uphill battle this year. Sales tax compliance in 2013 requires more resources and expertise than most small to midsized businesses possess.” [i]
“Current state and federal proposals to change sales tax collection requirements on remote sellers such as online retailers add to an already difficult compliance environment for businesses.” [ii]
“On average, sales tax compliance costs small and mid-sized businesses three to 15 cents per sales tax dollar collected. According to the U.S. Census Bureau, failure to account for that expense is one of the principal causes of small and mid-sized business failure in the United States. Why? The components of this compliance expense are difficult to pinpoint and often overlooked. The costs are hidden in staffing, compliance, accounting systems, information technology, and other business infrastructure. In addition, sales tax compliance is a passthrough activity that adds no value to the bottom line. Sales tax collection requires you to act as an agent of each state in which you have nexus and collect and remit sales tax accurately. And if you don’t do it correctly, accurately and on time, your business can face heavy fines and penalties.” [iii]
Note: Remote sales tax compliance requirements also impact catalogers, manufacturers, distributors & other remote sellers. The MFA is a remote seller bill (not an online seller bill) and the provision of "free" software does not help remote sellers that don't transact online; for example, there is no software solution for catalogers and mail order companies because customers fill out paper forms and have the burden of sales tax calculation.
“What many businesses don’t realize, however, is that remote sellers such as distributors, manufacturers, and multi-level marketers might also be impacted” [iv]
“Calling these laws “Amazon laws” is misleading since they apply to all remote sellers—defined as a businesses without significant physical presence in another state and that sells to customers using the Internet, mail order, or telephone. Cities, counties and states regularly change these rules, making sales tax compliance nearly impossible for most businesses” [v]
“For easier accounting, a database or spreadsheet of exemption certificates should be easily accessible. The best solutions tie directly into your point-of-sale system, making it simple to verify that exemption certificates are current, valid and on file.” [vi]
A customer quote from a manufacturer: “Our biggest audit hit was the exemption certificates and the no-tax sales. So we decided to go with AvaTax Certs. We really feel strongly that it is going to be a good tool for us to help with audits, to reduce our liability with states, to reduce the frequency of state and multiple jurisdiction audits.” [vii]
Note: Audit Risks – If MFA passes, remote sellers can be audited by 45 states each year - with personal liability. Avalara points out the risk of audits for sales tax issues.
“Some businesses mistakenly believe that if they don’t make major mistakes they will not be audited. That is incorrect. Audits are often prompted by external causes, such as revenue shortfalls or changing tax rules. States are becoming increasingly aggressive in auditing businesses” [viii]
“To make up this lost revenue, many states are increasing audit activity to recoup lost use tax.” [ix]
“New York Tax Audit: Company President Personally Liable - The New York Tax Appeals Tribunal upheld a decision to hold a company president personally responsible for unpaid sales tax, including interest.” [x]
“If a notice is received and that person is on vacation, no one is available to handle the concern and respond quickly to the request for information or clarification from the state. Delayed responses can place you at risk of being selected for an audit and can expose you to possible penalties and fees for not resolving the notice.
The state can restrict your business activities and even halt business until the notice is resolved. One company didn’t realize they had received a notice at their Texas location. The notice languished on someone’s desk unheeded. The company found out when the state notified them that their ability to do business had been shut down in that state. It was a scramble of extra time and cost in penalties to bring the business back into active status in the state.” [xi]
No system is absolutely foolproof, but with a detailed process in place, an auditor is more likely to give your company a clean bill of health.
Note: Without outside help or other resources, sales tax compliance is especially costly and time-consuming.
“To effectively comply with sales tax regulations, you will need cooperation from several areas within your business:
- Accounting must track and apply sales tax law changes across every jurisdiction where your company does business, as well as create and maintain detailed records of sales tax compliance activities.
- Sales must help the company determine whether new locations or accounts will bring with them additional sales tax compliance issues.
- IT must make changes to accounting systems and e-commerce systems, plus allocate adequate electronic storage for compliance records” [xii]
“Sales tax compliance tasks do not generate revenue and drain scarce resources” [xiii]
“At a time when businesses are trying to do more with less, utilizing staff time to stay compliant with multijurisdictional sales tax collection requirements is a poor use of resources.” [xiv]
Note: Avalara representative warns that if MFA passes the states are not going to provide a "reliable, accurate rooftop calculation on an automated basis." From a recent Avalara webinar questions and answer section:
“Speaker 1: “A couple of folks have also asked about what they've read in the Market Place Fairness Act and that the technology will be provided to them, and I think that actually is pulled directly from SST in that this volunteer versus non-volunteer concept. Using a CSP in Avalara is only one of a handful of CSPs. Can we talk to that at all? I mean the technology itself, is it provided? Do they get it for free? How does that look?”
Speaker 2: “But it's easy to say the state is going to provide the information that you need to calculate it, but when the rubber hits the road and you really figure out what you're being given in terms of what is currently available from SST states it's fairly primitive. So, that's where I'm going to just end it. Listen, if anyone thinks that the states are going to be in a position to provide a reliable, accurate rooftop calculation on an automated basis that's not what the states are going to do.” [xv]
I believe that many of Avalara's own quotes undermine the notion that the MFA will be free or easy for small businesses. Even with sales tax software, there are still enormous costs and risks for small businesses. These costs and risks are explained in more detail in our joint letter to congress, AAA-CPAs open letter, and on numerous articles and blogs across the web (including this one that pulls no punches).
UPDATE: Avalara's lawyer (who is also a lobbyists for Avalara) sent eMainStreet a letter accusing us or misrepresenting their position. You can read an update about Avalara's tactics here.
EDITORIAL UPDATE: Several members of eMainStreet have gotten marketing emails from Avalara during the past few months talking about how MFA could harm their businesses. This one was passed on to us recently and we thought it would be appropriate to include.
Hi (Name Redacted),
I'm writing again to ask you to please forward the email below to the executive (s) most concerned with sales tax management, compliance and audit mitigation. The Marketplace Fairness Act or similar laws will introduce a new world of tax compliance that could lead to the constant THREAT of AUDITS, FINES and PENALTIES from multiple states. Are you prepared? Watch this video to discover just how much risk it could entail: http://blog.avalara.com/2013/05/15/wills-whiteboard-is-sales-tax-putting-your-business-at-risk/ I would appreciate it if you would copy me on your email forward. Thank you in advance,
(Avalara Employee Name Redacted) (Title Redacted) Avalara
We think it's clear that Avalara is taking both sides of the issue so they can profit. On the one hand they (accurately) point out that the MFA is onerous and dangerous for small businesses and on the other hand they claim that integration is easy, simple and even "free" when making appearances in DC. This is quite duplicitous. They can't have it both ways.
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[i] Sales Tax Survival Guide 2013, Avalara. Page 1. [ii] Ibid. Page 2. [iii] Ibid. Page 4. [iv] Ibid. Page 3. [v] Ibid. Page 3. [vi] Ibid. Page 6. [vii] Ibid. Page 10. [viii] Ibid. Page 7 [ix] The Challenges of Use Tax Compliance, Avalara. Page 4. [x] http://www.taxrates.com/blog/2012/09/05/new-york-tax-audit-company-president-personally-liable/ Will Frei covers sales tax news including best practices, legislation and sales tax technology. He is the Social Media Manager at Avalara. [xi] The Hidden Costs of Your Manual Sales and Use Tax System, Avalara 2011, page 3. [xii] Sales Tax Survival Guide 2013, Avalara. Page 8. [xiii] Ibid. Page 9. [xiv] Ibid. Page 9. [xv] http://www.youtube.com/watch?feature=player_detailpage&v=0OUChFkv_C8#t=3300s Avalara Webinar “Sales Tax Showdown” May 2, 2013