Michelle Valentine Explains how Anrok Helps Tax Compliance

Michelle Valentine of Anrok - Podcast Transcript

Scott:	Welcome to Founders and Friends podcast. Before we get to our guest, special shout-out to Kruze Consulting, we do all your startup accounting, startup taxes, and tons of consulting. We’re kind of whatever comes up, like financial models, budget actuals, maybe some state registrations, sales tax, VC, due diligence support, whatever comes up for your company, we’re there for you. 750 clients strong now, $10 billion in capital raised by our clients, I can’t believe it. 2 billion this year, it’s been a crazy awesome year. So, check us out at kruzeconsulting.com, and now onto our guest.
Singer:	So, when your troubles are mounting in tax or accounting, you go to Kruze and Founders and Friends. It’s Kruze Consulting’s Founders and Friends with your host, Scotty Orn.
Scott:	Welcome to Founder and Friends podcast with Scott Orn at Kruze Consulting. Today, my very special guest is Michelle Valentine of Anrok. Welcome, Michelle.
Michelle:	Great to be here.
Scott:	Awesome to have you. I’ve heard a lot about Anrok in the marketplace and from Kruze’s team, and so I was excited to have you on the podcast.
Michelle:	Likewise.
Scott:	Well, maybe you can start off just by retracing your career and telling us how you had the idea to start Anrok.
Michelle:	Maybe I’ll go backwards chronologically. So, I first came across the pain point of sales tax when I was on a run with a friend who was the head of finance of a company that I was working with at the time. It blew my mind that we had no idea where the customers were and we had this new pain point of sales tax that we had to deal with. The more I dug into it, the more I’ve realized it wasn’t a problem specific to that company, it was something that all software companies were experiencing around the same time. So, ultimately, decided we could go build something better for the internet economy, which led me to Anrok. Prior to that I was investing on the venture capital side, so really love working with fast-growing technology companies, maybe in some ways, the way that you love doing it at Kruze, I think. I get a lot of energy from working with the underdogs that are building something new and bringing something new to the market. And then before that, funnily enough, I started my career at Goldman Sachs working in the group that structured debt around tax revenue. So, no idea that I would be back in this space, but worked with the CFO of Atlanta, of Birmingham, many cities that were using sales tax revenue.
Scott:	Oh, with this [inaudible 00:02:32] kind of thing?
Michelle:	Exactly.
Scott:	Did you work with Neha Patel, by any chance? She was a classmate of mine from Kellogg that she did that at Goldman Sachs.
Michelle:	No way.
Scott:	That’s crazy.
Michelle:	She was not part of my group at the time I was there. It was called PSI.
Scott:	We’re a little older, I think so we might have backdated you a little bit. But that’s really cool, that’s such a small world. I remember listening to her stories about that and it was really fascinating, because all these municipal markets need to raise money and build infrastructure and things like that. That’s super cool. So, you’ve seen the side of sales taxes where the proceeds fund stuff and build things for municipalities and governments, and now you’re on the helping collections and helping be compliant side of it, right?
Michelle:	Yes. So, there’s two ways in which I think I get energy from this problem. I think on the one hand, helping innovative tech companies not have to think about it. If you think of what the sales tax system was created for, it was really the retail world. So, for a software company where they’re selling all over the place, the customer is not in the same place where they have an office, it’s a huge burden, and we can get into exactly of the dynamics why that’s so tricky. For me, my goal is to make sure that every software company doesn’t have to think about it and we can assist them in focusing on their core business. And then on the flip side, as you said, this is real revenue that governments need. A lot of people don’t realize this, but sales tax was introduced in the 1930s after the Great Depression as a way to help local governments meet their budget deficits. So, it comes from a good place, but it does create a huge burden for companies, especially those in the digital world.
Scott:	Well, and you’re right about the retail sales tax. And then maybe spend a second on some of the new regulations that have come in three or four years ago that made it so that a lot of startups had to start worrying about this. Because it used to be if you didn’t have nexus somewhere, people, property, assets, all that kind of stuff, you didn’t really have to worry about it, but nowadays, the game’s changed.
Michelle:	So, traditionally, sales tax is based on where you have an office, a remote employee, a physical presence. That’s what you were alluding to called nexus, which is a relationship with a state such that they can say, “Hey, you have a close enough connection to me that you now, as a business, need to go collect sales tax. If you don’t collect that amount from your customer, you as a business are still on the hook to pay out of pocket.” So, traditionally, let’s say you have a coffee shop and you’re selling coffee, having that coffee shop, that creates physical nexus, same with selling pair of shoes in retail store, that creates nexus. For a lot of companies based in California, having an office in California creates nexus, but the good news is that California doesn’t tax software. So, even though a lot of software companies based in California had nexus in California, they didn’t have to think about sales tax. So, two things thatchanged, one is the rise of remote, which still falls in this physical nexus realm that we just talked about, but the second, that I think you were leading me to, is this economic nexus concept that was introduced in 2018. So, you know this, but for folks that are listening-
Scott:	No, tell the audience. It changed everything. It probably really enabled your business, in a way.
Michelle:	To me, this was the unlock that blew my mind, which was now, software companies have to track revenue all across the US and measure their revenue, and sometimes number of transactions, against state-specific thresholds. So, this Supreme Court case in 2018 was called South Dakota v. Wayfair and it allowed states, like the State of Washington, to say, “Hey, if you sell over $100,000 worth of software in my state in a year, you now have to pay me a sales tax and collect it from the customer,” and so this creates an ongoing monitoring problem for software companies. Sometimes the threshold is even 100 or 200 transactions.
Scott:	I know, it’s crazy.
Michelle:	You can think of a transaction as a single invoice. So, especially if you’re a subscription business and you bill monthly, one customer, that’s 12 transactions right there. So, even small folks start needing to think about this and that’s a real pain.
Scott:	It’s crazy. So, I didn’t know that sales tax was started in the ’30s out of the Great Depression, but we’ve seen the same thing with Wayfair, where all these states are like, “Wait a second, we can start taxing stuff that maybe doesn’t have nexus in our state but has economic nexus? That’s very, very interesting,” and so we’ve seen this huge jump in the need to be compliant across tons of states where your employees, your offices are never actually been. You’re right, the word unlock is a really good one, because now, sales tax is much more talked about, it’s something we do a lot more at Kruze, because startups who are generating revenue in maybe not the first year or the second year, but the third year, they’re usually tripping some of these sales tax thresholds. Like you said, it can be not even dollar amounts, it can be number of transactions, which is super old-school, but it’s life, it’s reality. So, then, Anrok is born, you see this problem, and how’d you attack it?
Michelle:	Good question. Just one last thing on what you mentioned, it’s essentially governments waking up to the fact that a lot of the future economy is online, and so making sure that they’re part of that story, too. So, in terms of our approach, we do a few different things, and we connect into billing and payment systems, we have an API, and we also have no-code integrations into all of the popular software billing systems, payment systems, so NetSuite, Stripe, QuickBooks, bill.com, Chargebee, you name it. You can integrate without code into these different systems, you can backfill and import your historical transactions, and get a picture of what is your exposure footprint? One of the great things is we often partner with accounting firms like Kruze to walk through what are the results? Sometimes one thingyou have to do in this process is also think about what is your product that you’re selling? Is it pure cloud software, are there services involved? Is it a security product, where there’s an additional state that taxes security software, but not other standard software? So, that’s a first step, connecting and monitoring and showing and quantifying that picture for you. After that, you decide you’ll get registered, our platform can help you do that in the app. And then we help calculate tax on every transaction, we fold those into returns, and actually help remit tax at the tail end, as well. So, our goal is to be the audit system of truth, so whenever you need to track what happened, that’s something you can turn to.
Scott:	I love it. Before we turned on the mics, I was totally complaining and bellyaching about a specific pain point we have with our clients, which is… I actually really like the monitoring aspect of Anrok, that makes tons of sense to me. One of our issues is we have clients who never actually track or document, or whatever you want to call it, the physical location of their clients, and so we’ll have a lot of these conversations where we’ll be like, “We need sales by state,” or, “We’re digging into the sales tax stuff,” and they can’t produce it and it always really bums me out. Can you maybe validate what I’m saying a little bit here and talk about maybe some solutions or maybe some integrations that Anrok can provide?
Michelle:	So, number one takeaway, if you take away one thing from this podcast is if you’re not collecting customer addresses as a software company, you should be. That’s an easy thing to miss, so that’s number one. If you haven’t in the past, there are ways to actually make up for it. Maybe I can spend a minute talking about the hierarchy of what addresses you actually want. So, the best case scenario is you have the ship-to address on the invoice. Even though you’re not actually shipping a physical good in software, this is the best address you can have, it might also be called the invoicing or bill-to address, as well. If you don’t have that, you can look at the zip code, sometimes that’s something we can fetch from past transactions if it was a credit card transaction. So, we can help automate some of that manual work that the team goes and tries to do with our accounting firms to figure out what was missing from that. So, those are the-
Scott:	Can I interject for one second and maybe ask you a follow-up question, which is, I think I know the answer to this, but you’re way better at sales tax than me, why is the ship-to better than maybe the corporate address or where the credit card was processed? What’s behind that?
Michelle:	Good question. There might be a few different things. I think, at the end of the day, the tax rate should be based where the customer’s consuming the product. There’s been some talk of maybe going down to even the IP address level one day.
Scott:	Oh wow.
Michelle:	But it’s a bit of a privacy issue and if I had to make a bet, I probably don’t think that will happen. So, usually, especially if you’re selling to a company, the corporate headquarter address is good enough. Maybe your team is also remote and also distributed and maybe actually using the software somewhere else, but usually, the corporate HQ is good enough, the one that is actually paying for the service.
Scott:	But the ship-to is ideal, because that’s where it’s being consumed and the ship-to address might be in a different state that has different sales tax rules than maybe the corporate HQ, so that’s why you want to get it down to as a fine of figure as possible, because that’s actually most accurate and it may actually be beneficial to you and the customer, at some point, too.
Michelle:	That’s right. So, we have an onboarding process that aims to make this very easy, where you can actually backfill historical transactions, see what invoicing errors there might be. So, if there are transactions that were not processed because of missing an address, we can actually surface that for you, and we can also help fetch old credit card zip codes, as well.
Scott:	Oh, that’s amazing. There was also something, we were just getting to know each other before we started hitting the record button here, but you had a really cool feature, which I really liked, which made tons of sense to me. Do you want to explain that, it’s the fail versus hey, we need more information feature?
Michelle:	Yes. One feature we initially built for ourselves and we’ve now opened this up to our customers, is a dashboard that allows you to see all the unprocessed transactions that might happen and allow the finance leader the power to debug and solve that. Usually, it only comes up in the reconciliation process, where they look at the billing and payment system, they compare it to their tax engine, and realize, “Hey, we’re a couple thousand dollars short here, what’s going on?” And then they try to email support, support doesn’t respond, you try to get someone on the phone and it’s an awful process. So, what we’ve done is built a dashboard where finance leaders can see this in real-time and be allotted that, “Hey, you have a sales team that made a sale and they didn’t collect the correct address,” or, “There was something wonky about this transaction from this billing system,” and so you can go into that in Anrok, see it, debug the error, and actually retry the webhook, so it’s a bit of a no-code platform, in some ways, specific for the finance leader.
Scott:	It’s really interesting, because we do spend time where we can’t get it down as finely tuned as we want because of this issue and I never… Again, I’m not a sales tax expert, so I just talk to our team, who’s doing it, and my wife’s a tax genius, so I hear these kind of things, but it’s like, “Oh, if we just had a basket of transactions that we could then go dig this information up for, that would make it so much easier, instead of having to exclude them or do a pro-rata basis or something, some type of rationale.” So, it sounds like Anrok can actually go back and dig that stuff up, or you have access to the credit card transactions and you can figure it out through the credit card feed, or something like that?
Michelle:	That’s right. Also, this is something that I cared a lot about when I was building our model, where I want startups, even founders before you even have a finance team, to be able to connect Anrok for free and just let us help you monitor when you’re starting to hire a remote employee in a state that taxes your product to tell you when you’ve actually crossed that transaction or that revenue threshold. So, we are free up until that point.
Scott:	That’s really cool.
Michelle:	When you’re ready and realize, “Hey, I actually need some expert advice,” go call your accounting firm or go reach out to Anrok and say, “Hey, what exactly are the products am I selling? Should I register for sales tax here? What is my strategy?” That’s the goal, to empower everyone to track it so you don’t have to worry and do this backfill and do all this crazy adjustments that we were talking about. I wanted to make it really easy from day one, and that’s why today, we have a free product and it’s only when you decide, “Hey, I actually want to register in this state,” do you start paying for it.
Scott:	That’s really smart. That’s a really smart freemium approach to it. That’s really cool, good for you. It’s a really great idea. Where are you folks as a company? I know you’ve raised some venture capital, are there any milestones you passed that you’re especially proud of or how are you tracking here?
Michelle:	Yes. We’re in growth mode, so we’re super excited. Our products out there in the market, we have unicorn companies on us, so really looking to actually grow the team and grow the business.
Scott:	Hey, it’s Scott Orn at Kruze Consulting taking a quick pit stop to give some of the groups at Kruze a big shout-out. First up is our tax team, amazing. They can do your federal and state income tax returns, R&D tax credits, sales tax help, anything you need for state registrations, they do it all and we’re so grateful for all of their awesome work. Also, our finance team is doing amazing work now. They build financial models, budget actuals, and help your company navigate the VC due diligence process. I guess our tax team does that, too, on the tax side, but the finance team is doing great work. And then I think everyone knows our accounting team is pretty awesome, but want to give them a shout-out, too. Thanks, and back to the guest. This world of sales tax, you are super knowledgeable, by the way, you know way more than me, have there been any weird or wonky or funny things you’ve discovered like, “Oh my gosh, what about this or what about that?” The funny things that a non-tax person in the audience would think was amusing?
Michelle:	So, we have an amazing tax team in-house and we actually have two funny channels in Slack, one is called #IsThisSaaS and then the other one is called #LOL@SalesTax. In the first channel, it’s usually sales drops in inbound or companies that are interested in us, and we’re like, “Hey, by the way, is this SaaS? Can they use Anrok?” And then the second channel is, we had a question where it was a software company and they had a remote employee that was doing a road trip around the US in their RV.
Scott:	Oh God.
Michelle:	They wanted to ask whether do they have physical nexus in all of these states?
Scott:	In all these states, oh god.
Michelle:	So, those are some of the funny questions that come up.
Scott:	On the is this SaaS one, that’s a really interesting point, and you’ve done a great job of this, of being highly focused on software as a service customers and software companies, would you ever go into e-commerce or things like that, or is it just like, “Hey, we’re software people and that’s what we’re going to focus on for a very long time”?
Michelle:	We do SaaS and digital goods and there’s a few reasons for this. I think number one is that software tends to have the most complex subscription model, it’s recurring, you might prorate down to the minute or the second you add a user, it might be volumetric billing, so you need a tax engine that keeps up with these changes. That’s one thing that we saw was missing in the market, was a tax engine that could do this, so that was number one. To me, I care a lot more about building financial tools for this user than to try to do every type of sales tax under the sun.
Scott:	That’s cool.
Michelle:	And then the second thing that I think it helps us is we end up being much more accurate for SaaS given that focus. So, I’ll give you one example. Cloud software is a more controversial product tax. Is it tangible, a non-tangible good? A lot of governments still don’t really quite know how they want to tax software, it’s not like a cup of coffee or a pair of shoes, where it’s not very controversial if you want to tax a pair of shoes. But in some places, it is quite controversial to tax cloud software, and maybe it falls under data processing services in Texas. Where these edge cases come up and why it impacts SaaS accuracy is that taxability of a product is usually defined at the state level. If the state says yes, something’s taxable or not, all the cities and all the special purpose districts that usually get their slice of the sales tax pie can only apply the rate. They can’t determine if it’s taxable or not, but they can add a little rate so everyone gets their 1%, 0.5%, and those little things that add up.
Scott:	I’m only laughing, because I flashed back to, I joined Kruze seven and a half years ago and we were a four-person company. So, I remember sitting next to Vanessa, the founder of Kruze, is my wife, Vanessa Kruze, and she had a spreadsheet with exactly what you’re talking about. I think it was on a county basis, but it was the county basis of California, and it was all these little $12, $50, $75, $200 breakdowns, exactly what you’re talking about, every county was getting the slice of the action.
Michelle:	Sometimes it’s a fraction.
Scott:	Yeah, it was crazy. That was literally maybe the first sales tax thing I saw, but that’s how fine-tuned it is, but it also lends itself to automation really well, so that’s one of the things that’s super cool about what you’re doing.
Michelle:	That’s right.
Scott:	Just changing gears a second, because you were talking about how you used to work in venture capital, did you have any surreal moments as you were pitching the company? You’re sitting on the other side of the table, all of a sudden, what was that like? Were you just like, “I know all your questions, I know all your tricks,” or were you more nervous? What did it feel like to do that?
Michelle:	Definitely more nervous than I initially anticipated. I remember I pitched my old firm that I used to work at and I had no idea, but they had prepared everyone to join the call, or what felt like everyone that jumped on that Zoom call.
Scott:	That’s awesome.
Michelle:	It was a great moment. I think the other thing that I didn’t realize until you’re actually in this seat, is there’s a huge sense of urgency when you’re doing a fundraise. As a founder, it’s really hard to maintain control over the speed. A venture capitalist will try to get you to accept their term sheet right away. Just making sure that, hey, yes, I’m really excited about you but I want to finish the process, just making sure that despite how excited you are and despite the craziness, you’re doing what’s best for you and best for the company. The urgency feeling is really real and there are ways in which really great investors know how to make you feel that.
Scott:	Totally. I have some great stories of, they might be an investor in your company, too, Sequoia not letting a founder team that I know leave Sequoia, keeping them there for eight hours just to get them… It was like a college football recruiting trip or something like that kind of thing. But the other thing that people don’t always realize is it’s a sales process, from their perspective. Once they decide they want to invest in you, they see you and Anrok, all of a sudden, they’re putting on their sales process and really trying to convince you to take their money. That must have been pretty interesting to be on the other side of that.
Michelle:	We’ve been really lucky, both our seed and Series A rounds were co-led by both Sequoia and Index. So, what was great was we’ve been walking with the same people since the beginning, they have huge skin in the game. We haven’t had to go shop around and meet a lot of people and that’s been really, really lucky to have them on the Anrok journey.
Scott:	That’s amazing. That’s great. I was thinking how it would make me more nervous, because I would be like, “What crazy question have they been keeping up their sleeve for all those years I was working with them and I never heard them ask, and now it’s going to surprise me?” That’s great. Well, you’ve built a really cool company here, I’m really excited for you. Timing’s everything in life sometimes, and you’re hitting this market when sales tax is becoming so much more important and people are thinking about it. I hope people listen to this podcast, but also develop some of the good financial hygiene of tracking where your customers are, using a CRM system, all these things that will make life so much easier, and hopefully, they’ll be working with Anrok, too.
Michelle:	I think the one thing that I want to remind folks, it’s solvable. It might feel scary when you first realize, “Oh my gosh, 5% of my revenue should have been collecting sales tax, and now I have to pay out of pocket,” and that can feel very overwhelming and very scary. But the sooner you deal with it, the sooner you’re making sure that the next $10, $20 million of revenue that you’re going to make, you’re not going to take that 5% haircut. So, it’s definitely solvable and in the long-term, it’ll pay dividends.
Scott:	That’s amazing. For us, we’re constantly telling people to, like you’re saying, the earlier you deal with it, it just makes scalability and growing so much easier and you’re not playing catch-up. There’s nothing more exhausting than playing catch-up or spending time on something that could have been solved the year before if you just would’ve taken a little bit of time, so I’m totally with you. We’re super aligned on that.
Michelle:	I think there’s a world in which when you go buy that cup of coffee, you would always expect to pay sales tax as a consumer. If you saw it wasn’t there, it usually feels quite strange. I think we’ll get into a world where that’ll be the case in software. Just like as an employer, as a founder, I would make sure that I withhold federal income tax from day one, and the same thing with sales tax. From day one when I make revenue, I’m going to be sales tax complaint.
Scott:	You’re totally right. It becomes normalized because all the big SaaS vendors send out the notifications saying, “We’re collecting sales tax now, you’re going to see a different number on your invoice,” and all that kind of stuff, so it’s totally getting normalized.
Michelle:	It’s funny, one last comment on that, I sometimes talk to finance leaders that actually instead of getting an audit that makes them want to become sales tax compliant, it’s when they sell to a mature customer. When they have really big customers that are used to paying sales tax because they’re based in Boston-
Scott:	Because they asked.
Michelle:	… and they’re like, “Hey, how come there’s no sales tax on my invoice?” It’s a sign to more mature companies that, “Hey, I’ve sold to a mature company before. You’re not my first $1 million contract.”
Scott:	The other one is when you’re raising a big round of venture capital and the accounting firm that the VC hired to do diligence on you is asking you that question, “What states have you registered in and are you collecting sales tax and remitting it?” That’s a wake-up call for a lot of founders, too. It’s really great to meet you, and like I said, I heard really good things about the product. Just to wrap up here, maybe you could tell everyone where they can reach out and how to get in touch with you about Anrok.
Michelle:	So, number one, if you’re a founder or a finance leader that has learned something from this and you’re like, “Hey, I want to explore, see if there’s…” Maybe even just want to quantify your exposure, reach out to us at anrok.com. It’s easy to book a demo, it’s easy to also learn more about us on there, we also have great blog posts, as well, or you can talk to your accountant. Often, we work with accounting firms who use us, as well. Number two, I’d say we’re hiring, so if you’re an engineer, a salesperson, a designer, we are hiring across the board in many different roles, so that’s also on our website, too. And then the last thing I would say, I just wanted to give a little shout-out to my team. It’s been an amazing few years and I’m excited for the next stage of growth with them.
Scott:	That’s really cool. The team is everything in startups and I feel the same way about the Kruze team. Well, good for you. Great meeting you. I think everyone should check out Anrok. Thanks for your time, Michelle, I really appreciate it.
Michelle:	Thanks, Scott.
Scott:	Bye-bye.
Singer:	So when your troubles are mounting in tax or accounting, you go to Kruze and Founders and Friends. It’s Kruze Consulting’s Founders and Friends, with your host, Scotty Orn.

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