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Thought Leaders in Financial Technology: Peter Horadan, CTO and EVP of Engineering at Avalara (Part 5)

Posted on Friday, Sep 30th 2016

Sramana Mitra: The customer has everything happening in an auto mode. They don’t really have to worry about it as long as they authorize you and you have ways of figuring out which authority accepts what kind of filing. Accordingly, you handle them digitally or manually. That’s opaque to the customer.

Peter Horadan: Exactly. We have some customers who file one return in one jurisdiction every month. We have some customers who file, literally, thousands of returns for a single merchant per month. When you think about the burden on that customer in doing that manually, it’s really just a space that cries out for automation. There’s a third part to it, which is the exemption certificate issue. If you’re a seller, you will find that some of your buyers say that they are exempt from paying sales taxes for a variety of reasons.

They might be a reseller and so, they’re exempt because they’ll charge the ultimate sales tax. There’s government entities. There’s non-profits. Depending on the jurisdictions, there are lots of reasons you might be exempt. If you’re going to make a sale and not charge sales tax, the jurisdiction will require you to collect a sales tax exemption certificate from your customer for that sale. You have to keep this exemption certificate. If you get audited, the auditor will ask for your list of exempt sales. They will ask for a certificate for every exempt sale. If you don’t have it or if it’s expired or it’s for the wrong jurisdiction, you will owe the sales tax. This could be devastating to a business if they don’t manage this properly.

These certificates expire and are unique to a jurisdiction. You need to not only keep track of the customer certificate, but you also need to make sure that it’s the right one for the right jurisdiction and that they’ve not expired. We have a service that manages all of this and takes this complexity away. We actually did an interesting rollout with a large home improvement retailer. You can imagine they have a lot of interior designers and contractors showing up with retail certificates because they’re doing a construction project. That project will charge sales tax, so they’re exempt.

The point of sale at the register has a mobile app that we’ve provided. If the contractor shows up and says they’re exempt and show their physical certificate, the clerk snaps a picture with a mobile app. That gets associated with the sale in the register. All of it is kept so that if that jurisdiction does an audit, they have all the paperwork at the ready.

This is another one where you can see some trends. If you just want to manage your business, you don’t want to think about having all these pieces of paper and getting audited. There’s a recent study where 50% of businesses said that if they audited, they suspect the auditor would find something. We handled over 16 million certificates on behalf of our customers last year.

Sramana Mitra: Interesting. Let’s go to the last and slightly different question. As you look at the space of automated taxation, where do you see open problems? What is not being done that needs to be done?

Peter Horadan: This is just a hard space for new entrants to succeed. There are a bunch of obstacles. First is simply the amount of information needed to be able to understand and comply the laws. It takes a lot of time and a lot of investment to collect all that information. Then to make it fully automatic, you really need the integration we talked about. There’s over 500 different integrations we built. I’m having trouble answering your question because it seems, to me, a particularly hard space for new entrants to come into.

Sramana Mitra: You don’t see any point problem that is outside the scope of existing vendors where a different kind of approach or technology would be warranted.

Peter Horadan: We’re working on a lot of exciting new things. We’re expanding into new tax types around alcohol. We’re expanding into different geographies. We’re certainly on top of new regulations. India just passed the massive GST law. There’s a lot that we’re doing to try to make sure that we handle the complexity of this space. It’s hard for me to directly answer your question, because the bar to get started is pretty high because of the complexity of the space.

Sramana Mitra: Very good. Thank you for your time.

This segment is part 5 in the series : Thought Leaders in Financial Technology: Peter Horadan, CTO and EVP of Engineering at Avalara
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