Show Notes
Carl Lewis: Welcome to the Connected Enterprise podcast. I’m Carl Lewis, your host from Vision 33, and my guest is Maria Tringali from Avalara. Maria, welcome. Please tell us about yourself, Avalara, and what you do there.
Maria Tringali: Carl, thanks so much for having me. I’m always delighted to talk about sales tax compliance. Avalara has been in business for 14 years. We're a global company that helps automate sales tax compliance across every type and size of business, including folks who don’t charge a lot of sales tax – because everyone has sales tax compliance. We do it through a delivery of pre-built integrations.
We have integrations specifically for SAP Business One clients and integrations with multiple invoicing platforms. That's our specialty. I've been at Avalara for seven years. I'm a Senior Solutions Consultant, which is a fancy way to say, “I work with our customers, salespeople, and partners to educate them on the importance of tax compliance, how to stay compliant in their industry, how to stay out of audit scenarios, how to not waste time with employees, and how to provide great customer service even to exempt buyers.”
Carl Lewis: I'm interested in what Avalara has seen happen in the last 18 months because of the pandemic. What happened to the manufacturing and distribution companies you serve?
Maria Tringali: It's been interesting. To back up a little, before that, we had the changes in economic nexus requirements across the country. That compounded during the pandemic. In our manufacturing and distribution world, we're very person to person. We have a lot of relationships, but we couldn't go out and see our customers, which changed how we did business. And there was a time before the pandemic when manufacturers and distributors were trying to move business online to be more efficient, which COVID-19 accelerated. Now, a lot of our prospects and customers are moving what used to be their in-person, B2B business more online by enabling their customers to buy in an online mode – beefing up their online purchasing, whether wholesale or not, to an online portal and being super creative and getting into new businesses, industries, markets, and adding B2C.
Everyone’s going this way, Carl. For example, a plastics manufacturer client of ours. Early in COVID, they created dividers using their plastics for their break room. Then, they contacted their top customers and asked, "Would you like to buy these? Our employees really like them.” That turned into a business, and now they’re B2C because the business is consuming that, even though it's still manufacturing. People are going in all directions and changing their business models. We can't get out to see our customers in person, so we owe them a good online experience.
Carl Lewis: I’d say the number one thing that's occurred in the last 18 months is the number of eCommerce sites either initiated or integrated for the first time or enhanced dramatically.
I wanted to talk to Avalara because suddenly, people are doing business globally where they weren’t before. They were regionalized or localized, and now they're selling across North America.
Maria Tringali: Correct.
Carl Lewis: And suddenly, they have tax compliance issues. People don't think about it. They just put up an eCommerce site and start selling. Then, tax time comes around, and they have a mess because they don't know if they’re compliant. What can Avalara do with a customer like this? They're asking, "What kind of nexus do I have? Where is it? How do I do the reporting? What's available?"
Maria Tringali: You're right; most of these businesses don't know what they don't know. They’ve never charged retail tax before. How do they know the tax rates? How do they know how their products are taxed? That's where Avalara comes in.
Carl, to many people, a trip to the doctor is really advice. And that’s understanding your nexus footprint. For those who don't know, nexus is the requirement of the responsibility to collect and remit sales tax or collect those exemption certificates in a state based on your business activities. It can be a physical presence or based on how many sales you make into that state.
You must understand where you have the requirement to collect and remit today based on the new laws and your business changes, and you must constantly monitor it. Avalara can help you do that. We can help you understand where you might have responsibilities today, then create solutions to help you get it right – calculate the right amount of tax, collect and manage certificates, etc. And if you have to register outside your region or in more states, you not only have to know the tax rates there, you have to collect more exemption certificates. And those forms are unfamiliar.
Say someone's been buying from you from Texas. You didn't have nexus there, never provided a certificate, and were always tax-free. Now, suddenly, you must collect a certificate for charging them tax. Avalara has systems, platforms, and services that will make that transition smoother. We help you collect those certificates, get the tax rates right, and file the sales tax returns. Even if there's $0, you still have to report. That's where people get confused.
Carl Lewis: You're talking about manufacturers, resellers, and distributors that are suddenly B2B online or B2C instead of B2B. Are there other things about eCommerce – if they could go back to before they started – they should have thought about?
Maria Tringali: One thing is that products and services can be taxed differently in different states. Many people assume that if they sell services, they’re taxed the same outside of their home state/region. But they aren’t always. So, understanding taxability is critical if you do installation and warranties. If you're selling tangible property, you go with the state rate. But most people have other products – if only freight – that can have varying taxability in states. It's not just getting a bunch of rates into your eCommerce platform. It’s understanding what you sell and how it's taxed before you apply tax to it.
Another thing is in an online scenario. As we move more business online, we must give our customers the opportunity to submit an exemption certificate, either in the shopping cart, in their account, or some other digital way. We need to exit the paper business. We call it paper-to-pixels, and we need to ditch paper and PDFs and join the digital world. That's where people are struggling.
But I don’t want tax compliance to keep anyone from going online. There are solutions like Avalara and people like me. We can walk you through it. How do you see your business and how are we going to keep you compliant? Don't be afraid! I talked to a company that said, "We aren’t sure we want to go online because of the tax ramifications." I said, "You'll be out of business."
To stay relevant, you need an online presence – and it must be easy for your customers and employees. You don't want anyone to jump through extra hoops because you've added new marketplaces. Automation helps both: it’s easier for customers to buy from you and easier for your employees to sell your stuff.
Carl Lewis: You mentioned exempt certificates, and there are businesses exempt for various reasons. Can you explain why that’s gotten more complicated with doing business in multiple states?
Maria Tringali: The more states you’re present in as a seller, the more certificates you must collect, and the harder it gets. Customers don't necessarily know what to submit. Employees don't know what to collect. Is it a business license? Is this the right form for Missouri? For Texas? Etc. Some clients went from managing 50-75 certificates for their home states to being present in 23 states and managing literally thousands of documents. It’s much more complex. It's not something you collect and stick in a drawer.
Also, if you're selling in more states, you need to be able to verify that you have an accurate certificate at the time of sale because now you're open to audit in more states. When you do business in a state, it wants to get everything it thinks it rightfully deserves from you. And you must manage those certificates more efficiently than ever.
The average SAP Business One distributor doesn't have a tax person. And even if they do, they're not exemption certificate specialists. That job doesn't exist. You can’t hire someone who doesn’t exist.
We’re also not treating it seriously enough. Exemption certificates are valuable. If you have a $10,000 order you didn't charge tax on, and you can't prove you have the right document on file, you could owe $800,000. You can owe a lot of money out of your pocket from tax not charged because you can't prove why you didn't. So, it's riskier, too.
Carl Lewis: I know some states have a requirement about gross sales for qualifying for nexus. Are exempt sales included in that gross sales figure?
Maria Tringali: It depends. In the United States, we let each state make its own laws. Some states count all sales, some count all but resale, some count all but exempt. Everything is determined state by state, which is why a nexus study (aka a sales tax risk assessment) is critical. Understanding how you go to market and how each state would require you to register and collect and remit or not based on your business practices is critical. There are 46 taxing jurisdictions in the US, and they're all different. They run the gamut.
Carl Lewis: I can imagine some small businessmen I've worked with hearing this conversation and saying, "I haven't been paying attention to this stuff for the last 25 years. I'm just going to keep going and not pay attention for the next 25 years." Until somebody calls to make an appointment for an audit, anyway. What are the implications of ignoring this? And then getting audited?
Maria Tringali: Audits can be expensive, and people underestimate the pain until they're in one. But some people take that risk. And we get a phone call: "We’re under an audit, and we didn't have things in as good a shape as we thought." Interestingly, highly exempt businesses that don't charge much retail tax, like many SAP Business One customers, believe they don't owe a lot to the state. And they fail to consider the unforeseen costs of an audit – money, yes, but also time, report running, endless details. And don't get me started on use tax.
Many manufacturers have use tax, and they just estimate because it's hard to calculate because it's different between states. Sometimes, auditors will focus on that. And even if you only owed a few thousand dollars and it didn't break the bank – although that’s rarely the case – you failed to account for all the time, energy, and effort of handling that audit. All the people you took away from their day jobs. But if you're proactive with automation and tax compliance and an auditor comes calling, you can pull this stuff up in minutes and say, "Here, I have my debts. Here's how we manage it. Here are my reports. Here are my exemption certificates."
And the auditors are in and out. So, there are a lot of hidden costs. It frustrates me that businesses are willing to take that. I've heard horror stories where people have been audited for hundreds of thousands of dollars because if you can't prove why you didn't charge tax, don't have the right paperwork, and can’t prove you had it on file the day of the sale, the state wants their money.
Then you're on the hook. Imagine going back to a customer and saying, "Sorry, we didn't charge your tax. Can you pay us now?" What do you think they’ll say? And talk about a terrible customer experience!
Carl Lewis: I've worked with several ERP systems in my career, and none have ever had a menu section called, "In case you get audited." They rarely do a good job when the auditor comes in and wants a type of report that doesn't exist.
Maria Tringali: Right.
Carl Lewis: Everything is a longer process when that happens. I've had customers be very frustrated after going through an audit because the ERP system didn't help them as much as they thought it would. ERPs just don't think like that.
Maria Tringali: I agree. I talk with people that think Avalara can calculate the tax, but they'll still use their ERP reporting to file returns. The ERP does have a GL, but it has room for only one tax rate – it can’t give you the breakdown most states want for filing and audits. But with Avalara’s integrations, you're passing your sales data to us; then, we break it down into the reporting needed for filing your sales tax returns and audit. It has so much more detail because it's specifically a tax compliance system.
It breaks down your sales, some jurisdiction, to rooftop level, to exempt sales, to whatever you need to slice and dice it for, for either that return or that audit. All that reporting is at your fingertips. And you see totals in your ERP’s GL because that's what you need to balance, but you don't have to see all that breakdown. You're pulling information out of your invoicing systems, then using Excel or Access to do the slicing and dicing so you can report. That's extra work that doesn't need to happen anymore. You can take your returns filing from days, a week, a month, to a couple of hours using automation.
Carl Lewis: That's awesome. We said it's been a big 18 months for eCommerce. It grew six-fold this year. What does Avalara see as the future of eCommerce?
Maria Tringali: More people in the B2C eCommerce business because we're still sitting at home ordering stuff. If you sell B2C and you're not online, you're in trouble.
Carl Lewis: Yes.
Maria Tringali: But the bigger thing I see is B2B. People moving more B2B online, whether that's taxable or not taxable. But we're allowing our big-volume customers to go online and purchase more stuff instead of calling/faxing us or waiting for a rep to visit. If you look at the research, Carl, and you ask an average B2B buyer, you see they're begging for an easier way to buy.
Do I really have to fax this order sheet? Do I really have to call you? Why can’t I just go online and click, click, click to place an order? They want that. People resisted moving the B2B buyer to an online platform for a long time, but COVID moved us faster in that direction. We'll still have our salespeople, personal connections, and trade shows, but B2B online purchasing is here to stay.
And that change means you must be compliant across all your channels. That's another thing, Carl: People are really in omnichannel. Once you go online or get a quoting system or have multiple websites, one for B2C, one for B2B, one for distributors, etc., you must be compliant across all your platforms. That's a struggle that's here to stay – being compliant, accurate, and consistent everywhere you make sales. And we won’t go back to a one-platform sale. But automation will help.
Carl Lewis: I agree. People are comfortable with online sales at every business level – B2B more than ever. Like you, I think it'll continue to grow.
You referenced use tax and cringed when you said it. Can you give us a two- or three-minute lesson on what it is and why we should know it?
Maria Tringali: Let’s start with sales tax. We all think sales tax is on our receipt. I purchase something from you, and you charge me tax based on where I’m buying or where I live.
Use tax is different. Say I'm a business. When I buy something, I rarely pay tax, or I pay some tax, but I give my vendor my exemption certificate because I don't want to pay tax on most of that order for several reasons. I might be reselling it all, reselling a lot of it but using some in my shop, or I might want to apply the use tax where I go and use that.
It's a very subjective tax where the way I just described it to you is more of a reactive tax. I buy from you. You charge me tax where it's going. It's an exchange. Use tax is I buy it, and then I don't remit the tax on it until I use it. It happens after the purchase, which is harder to automate and manage across states. Say you're a big construction company with jobs in multiple states. If you use product on those sites, you have to know the use tax laws and the rates of the products and services used on that site, and how to tax them after purchase. It's hard. Ask any of your customers who manage use tax!
It's not fun. And the rules aren't the same anywhere. So, automation is just as important with use tax, but harder because it requires human intervention where that repetitive invoice thing and once you know what you're selling, you can just tax.
Carl Lewis: Yes.
Maria Tringali: A human must get involved and say, “We used three hammers on that site and installed fourteen cabinets.” We must know what we did to calculate or recalculate use tax based on how something was used. It's a much harder thing to do – that’s why I always cringe. But it's a necessity, and it must be reported. Auditors love to look for businesses with a lot of use tax and a lot of exemption certificates because it's unfortunately way too easy to get both of those things wrong. And they're worth way more money than getting a tax rate, but getting use tax for big projects wrong or not having exemption certificates for $10,000 or $50,000 orders and you didn't charge tax. They know that's a lot more money.
Carl Lewis: Right.
Wrapping up, Maria, what are the three big takeaways you want folks to remember about tax?
Maria Tringali: The biggest thing is to do a nexus study/risk assessment with Avalara, a CPA, a state and local tax practice, but not your regional firm because they can’t cover all the states. Understand where your business has a responsibility to collect and remit. Next, consider automating part or all of your processes and move into the digital age for tax compliance. Manufacturers and distributors shouldn’t be making Betty do it by hand in the back room anymore. It's too risk-prone, and there's too much compliance.
Think about tax and finance across your organization. We think there's no cost to it as a business, but the truth is it touches many people. Think about it this way: You've got your credit manager collecting your exemption certificate, your IT guy putting rates in your ERP, your web guy putting rates in your shopping cart and on your eCommerce. Your eCommerce team is managing the products. Your controller is putting together your returns. You have an accountant you call. You're spreading the cost of compliance across your business, so it's a cost you don't see. And when people think of the cost of automation, they think, "I’ll just hire someone for that.” Please don't think that. It’s spread thinly across many people in your organization, and the cost of automation will save you the risks. It will take a piece of what all those people do and automate it and give all those people more time in their day. You can't see it on paper, but it’s there.
Nobody adds up the little bits everybody does, so it doesn’t look like a lot – but it is. So don't be afraid of putting automation into it and exploring it for your business because it's not as expensive as you think. And that’s even if you don’t charge tax! We know businesses that say, “We don't charge any tax, so why would we pay? This is more than we pay the government.” But it's the risks. Get a nexus study and evaluate your business. Is it sustainable? Explore automation with everybody across your company.
Carl Lewis: Maria, thank you so much. This has been great information for our listeners.
Maria Tringali: Thank you for having me, Carl.
Carl Lewis: Everyone else, we’ll see you next time on the Connected Enterprise. Until then, stay connected.
