Sona Akmakjian Discusses Avalara and Automating Sales Tax

Sona Akmakjian of Avalara - Podcast Transcript

Scott:	Hey, it’s Scott Orn of Kruze Consulting, and thanks for joining us on Founders and Friends for another awesome podcast. Let’s give a quick shout out to the Kruze Consulting accounting team. We’re very fortunate. We have a ton of people at Kruze who work on the monthly books for our clients, and get them all set up, due diligence ready, rocking every month, answering all the clients’ questions, making all those adjustments. And there’s no better moment for a founder, and for us really, when a founder says, “Hey. I think I’m going to get a term sheet. Are my books ready for diligence?” And we get to say, “Yes, they are. Fire away. Send them over. Give them access.” That is a great feeling. It’s the feeling that lets us know we’ve done a job very well done. And nothing is better than watching that cash hit the bank account. So if you are a venture-backed startup, you’re going out to fundraise, maybe check us out. Check us out at kruzeconsulting.com. We love what we do. At taping here, I think we have 575 clients. Clients raised over $1 billion this year, so we know what we’re doing, and hopefully we can help you be successful in your fundraise. All right, let’s get to the podcast. Thanks. (singing).
Singer:	It’s Kruze Consulting, Founders and Friends, with your host, Scotty Orn.
Scott:	Welcome to Founder and Friends Podcast with Scott Orn of Kruze Consulting. And today, my very special guest is Sona Akmakjian, of Avalara. Welcome, Sona.
Sona:	Thank you for having me, Scott. Great to be here.
Scott:	We’ve been a long-time partner of Avalara. And as we were talking about, I am a shareholder since the IPO. It’s a publicly traded company, and it’s been a good run. So, we’ve been very excited to have you on. And maybe you can just start off by everyone, retrace your career a little bit. How did you have the idea to join Avalara, and then, what does Avalara do?
Sona:	Excellent. Well, it’s always a privilege to have you guys as a partner, and we value the partnership, Scott. So, retracing my career, I’m a California CPA, Scott. And I started my career in sales and use taxes very, very early on. And ironically, when I got out of college, the market was very bad; and the only job I could get at the time was as an auditor with the state of California for sales and use taxes. So, I kind of fell into that area of taxation, but I never left it because I absolutely, I’m one of those people that is very passionate about transactional taxes. So, my whole career, I’ve done a number of things, but it’s all around sales and used taxes. So, I got tired of being an auditor, and I got my CPA license; moved over to Deloitte, where I spent a good number of years. And that’s where I actually got introduced to technology; and the market was very different back then. Then moved into competitors of Avalara, ADP, and then a smaller accounting firm, and DMA, where I spent a good number of years. I actually developed the partnership we had with Avalara; and loved the company, loved the vision. I bleed orange, I think orange, and I moved over. And I’ve been here about a year and a half, and I lead our Accounting Partnership channel. And I have the pleasure of working with a lot of accountants and their clients, and absolutely love it.
Scott:	I love that. And I love the bleed orange. And so, going way back in your career, you used to audit sales tax returns and things like that. It must have been kind of mind blowing when Avalara appeared on the scene, and could actually automate some of this stuff. Was that like a “Oh my gosh” kind of moment, or “My life just got so much better” kind of moment?
Sona:	It was. So, I will say, I’m not going to tell you when I audited; but I will tell you Scott, when I was auditing at the state, we didn’t have laptops or computers.
Scott:	Oh, my god.
Sona:	I had those green ledgers. So that’s how far back we go.
Scott:	Wow.
Sona:	I’m talking-
Scott:	You look way too young to be working… Maybe the state was just behind, and upgraded late.
Sona:	Oh, you’re too kind. But anyway, when I got into technology, there was really two players in the market. And the technology at the time for sales and use tax automation was really geared towards the very large companies; we’re talking about the Fortune 1000, because it was expensive, it was not a SaaS solution. It was a premise solution, difficult to implement, extremely costly, and not scalable.
Scott:	Yeah.
Sona:	I’ll be honest, when Avalara first came, I was with Deloitte, and I said, “What are they thinking? Who is going to want their information on the Cloud?” Right? But our CEO, Scott McFarlane, who still leads the company, is a complete visionary and futuristic thinker. And he was right onto something. I’m embarrassed to say, I wasn’t sold on the idea when they first came in. I thought, “They’re never going to survive.” Fast forward years, here I am. Right? So, they came in with a Cloud solution, and it was affordable for the smaller companies.
Scott:	Yeah. Amazing.
Sona:	That was really the first solution. And they had a vision that was very different than the competitors. The vision was, “We’re going to develop integration to many different systems.” And, as a partner, you know those integrations are gold for us. That’s how our clients communicate with our systems. And Avalara is the only vendor out there, and I can say that with great confidence, that has more than 1,000 connectors.
Scott:	Wow. That’s amazing. Well, it also makes the life of an accounting firm like us so much easier. And that’s what gets us to promote Avalara and introduce our clients to it, because we have the same kind of epiphany that you have, where it’s just like, “Oh my gosh. Being able to automate this, have it in the Cloud, let the client access it too; the client can see actually what’s happening, and just makes our work so much more efficient.” That’s why we love it. That’s really why you’re on the podcast; we want people to know about this solution. And so, kudos to the company and kudos to you on the Accounting channel. But it’s amazing how far the company has gone. Avalara is a publicly traded company. What’s the revenue now? It’s like $1 billion a year or more.
Sona:	We’re getting there.
Scott:	It’s got to be pretty big.
Sona:	We’re getting there. It’s very attainable; and we’re growing like crazy, Scott. And there’s a number of components contributing to that. But we were introduced as sales and use tax, but we’re grown naturally, and through acquisitions into so many different areas. We’re a global company. And our goal is to make compliance easy. We want to make what is difficult, easy for our clients, and to do it globally. And we’re expanded into other tax types, cross-border, VAT, recent acquisitions of 1099, and property taxes, invoicing insurance, exemption certificates, research. The list goes on; but we’ve had a lot of acquisitions in a lot of different areas, all to help with compliance.
Scott:	It’s amazing. Maybe you can take a second. We’ll talk about some of the drivers of what in the market has really driven Avalara. But if you can take a second to just explain the nuts and bolts of what is sales tax, what is use tax, for the entrepreneurs who are listening to the podcast.
Sona:	Sales and use taxes are transactional-based taxes. It is a compliance burden for the businesses, and adds really no value. Right? You can go to jail for not complying; but when you comply, it’s a requirement. It adds no value. But it’s a huge risk. If you are not appropriately collecting and remitting these taxes, it’s a pass-through. Right? If you’re not doing it correctly, it becomes a cost to the businesses, and goes straight to the bottom line.
Scott:	Yeah. Yeah.
Sona:	Well, as a small business, it becomes really critical to be in compli,ance.
Scott:	Yeah. Also, in our… To jump in here, with our client base, this is one of the things where when a venture capital fund is investing in a company, like doing their next round of capital, a lot of times people think about the accounting, what does the operational accounting, the income statement, the balance sheet look like? But there’s a whole component of tax compliance and diligence that happens from the VC firm. So they’re asking for the list of states that you’ve been filing sales tax in. And actually, that’s like one of the things on the checklist. And so, this is why we’re more aggressive about bringing Avalara in these days. But you’re right; it doesn’t add a ton of value, but it can be a red flag for an investor or for a state agency that is auditing you.
Sona:	Absolutely. And you asked, “What is it?”
Scott:	Yeah.
Sona:	It’s a transaction-based tax that is very complicated, and very, almost impossible these days, to handle manually. It’s due based both on the sale and the use of it. So, both on the procure-to-pay and the sales-to-order. It’s typically based on who am I selling it to? Where am I shipping it to? What am I shipping? And also, how will they be using it?
Scott:	Yeah.
Sona:	So, you combine that, it becomes really complicated. Then there’s like 13,000 jurisdictions across the US that have different rates and different ways of taxing each of these products. And Scott, when you do the math, you see the complexity. And that’s why I say it’s nearly impossible for a company to handle this manually.
Scott:	It’s crazy. And maybe we can break those components down. So, the different… What is it? So, there’s… We were talking before we turned the mics on, a lot of our eCommerce clients have to file sales tax. A lot of our SaaS clients in specific states, because SaaS isn’t a national thing yet, statewide. They have to file. It all kind of depends on what kind of business you’re in. Right?
Sona:	Yes. What kind of business; and some states tax tangible, personal property, something tangible. Others tax services; they tax them different ways. But it’s even more relevant now than ever, based on the world we live in and some of the regulatory changes.
Scott:	Yeah. Maybe talk about that. There’s there was a huge Supreme Court decision three years ago, four years ago, that really kind of paved the way for sales tax to go mainstream.
Sona:	Absolutely. It was called the Wayfair. And it’s not the furniture company either. Right? Wayfair changed commerce. Right? Retail commerce. And then I think the pandemic on top of it accelerated things so much more. So what Wayfair did really, was introduce economic nexus. Before, where a company needed to collect and remit taxes was based on where they had operations, sales people, warehouses. But what Wayfair did, was introduce economic nexus, which is, “Where am I shipping to? I no longer have to have physical presence.” And what it they did, is even complicated more, because every state has a different threshold. So now you need to track those thresholds, and say, “Okay. Have I hit that threshold? Do I need to register?” So, it’s an administrative nightmare, and you guys are seeing it as well.
Scott:	Totally. So, to break it down for folks, was South Dakota or North Dakota? I apologize, versus Wayfair?
Sona:	I think it’s South. Yeah.
Scott:	South. I get this wrong half the time.
Sona:	I do as well.
Scott:	And my college roommate was from South Dakota.
Sona:	I’m embarrassed to say.
Scott:	Yeah. But my college roommate is from South Dakota, and he would not get mad at me for this. So, one of the states sued, and took it to the Supreme Court, and said, “Hey. This out-of-state commerce company is selling a lot of stuff to our people that live in our state. And we’re not getting taxes on that. And we want to be able to tax that. And because they don’t have people in the state or assets or property, we’re not able to tax that right now.” A lot of people remember Amazon stayed out of certain states for a long time, because they didn’t want to pay sales tax. And so, the Supreme Court said, “Hey. If you’re selling a certain dollar amount to people within a state, yes, you can start taxing.” And so, some states are $50,000, some states are $100,000, some states are higher. Like you said, it varies everywhere; but that opened Pandora’s box for the states to start charging sales tax. And I think you probably saw this, too. The states are like a new revenue stream. That’s amazing. I want a new revenue stream. I want to be able to do sales tax. But for us poor accountants out there, and the clients selling to people in the South Dakotas and North Dakotas and all these states that maybe they didn’t have sales tax before, all of a sudden, the burden of compliance was very, very heavy.
Sona:	Yep. And then you had the pandemic, where everybody shut their doors, Scott, and they started shipping.
Scott:	Yeah.
Sona:	They turned to e-commerce. Right?
Scott:	Yeah.
Sona:	Everybody started buying on e-commerce. My mom, who’s not even technology savvy, next thing you know, she’s buying things on e-commerce. Right? So, everybody went to e-commerce, started selling things on websites. They said, “Wow, this is great. I can sell everywhere.” And some even sold internationally. Right? So they started hitting those thresholds a lot quicker, created cross-border issues. So, it became… That’s why I said, pandemic accelerated, all of this.
Scott:	It really did. And we saw that, too. You must have… And I know Shopify had a huge explosion in the number of clients they were hosting e-commerce shops for. But at Kruze, I think we signed 30 e-commerce clients just this year; that’s a huge… 30 isn’t a huge number, but for us, that’s like 5% of our client base, which is boom, boom, boom. Right? And so, in a lot of those companies, they get going, and three months later they’re selling pretty large numbers of dollars. And all of a sudden, they have a sales tax problem they need to comply with.
Sona:	Absolutely. So, technology is really the only way to comply with that. And that’s why our business has been growing, and your business is growing, because… I think a lot of companies are turning to their trusted advisor. They’re trying to say, “How do I adopt technology? I can’t do it. I need to be in compliance.”
Scott:	And you talked about the connections that Avalara has, early on in the podcast. Are some of the connections with some of the big eCommerce platforms like Shopify, how do you work with the big kind of folks… When people are going to choose their e-commerce vendor. Right? How do you… Do you plug into Shopify and some of the other ones?
Sona:	Absolutely. Actually, with Shopify Plus, we’re already part of it.
Scott:	Oh, amazing.
Sona:	When a client has Shopify Plus, Avalara Solution is already embedded in. But that’s not necessarily the case with every system. With 1,000+ connector, if somebody’s using an eCommerce or a financial system or a POS system, chances are we’re there.
Scott:	Yeah.
Sona:	Right?
Scott:	That’s amazing. Now, there’s another class of companies that we have, which are SaaS companies, software as a service, which is like… Avalara is a software as a service company. You deliver your service over the internet, in the Cloud. And can you talk through some of the basics of sales tax for those kinds of companies? What do they need to worry about? When should they be registering to pay sales tax? And I know a little bit about this too, so I can jump in there, too. But what are the basics for a SaaS company?
Sona:	So, as a SaaS company, their products may have different taxability across actually the globe. Right?
Scott:	Yeah.
Sona:	So, you look at the product, and we look at the taxability; they’re oftentimes subject to a lot of the same things. If you’re selling a solution into a state, and they’re reselling, you need a resell exemption. You still need to report. You still need to file. So, a lot of the same issues, even though it’s not tangible, personal property.
Scott:	Hey, it’s Scott Orn, and we’re going to take a quick break from the podcast to give a shout out to the Kruze tax team. Gosh, it’s so nice to have an in-house tax team. I can’t even tell you. We have some really amazing professionals on team, I think it’s 13 people now; and we do everything from your federal state income tax return, state franchise tax filings, R&D tax credits, those are pretty popular these days. And guess what? They’re there for you when you go through diligence. A lot of people don’t know this, but you actually go through tax diligence, not just operational kind of financial diligence, but you do go through tax diligence. So, it’s nice to have Vanessa Kruze on the phone with your VCs and with the accounting firm they hire to diligence all your stuff; and the law firm, they hire her to diligence stuff. Vanessa knows what she’s doing. She’s done this a million times. And it’s not just Vanessa. We have a really great team of passionate professionals that will do those calls, too. It’s kind of sometimes the difference between getting around close, or having to take another two weeks because something was disorganized, and the tax compliance wasn’t done correctly. We hear those horror stories from clients that come to us. So, hey, if you want Kruze’s tax team on your side, we’re here for you. Check us out at kruzeconsulting.com. Thanks. What’s interesting about the SaaS stuff too, that I’ve seen is not every state is taxing SaaS the way they are e-commerce or retail or things like that. There’s a couple, I think last time I counted, maybe it was like 25 states that were doing this. It was 19 for a couple years, but they were like the early adopters of SaaS sales tax. I always think New York, I think Arizona, some of these were just… Again, the states need to fund their operations. And so, this was another revenue stream. And so, it’s not like… I think, and again, I could be wrong on this, but California doesn’t have a SaaS sales tax right now. I’m sure it’s coming down the pipe. Maybe there’s some heavy lobbying from Silicon Valley trying to keep that from coming into California. But I know New York does; and so, Avalara is actually a great tool for calculating your SaaS sales tax, too, and doing those filings.
Sona:	It really is. And the other area that’s really evolving right now, is telecom as well. Right?
Scott:	Oh yeah.
Sona:	Everybody wants it. Telecommunication taxes is not just the different tax type we see on our cell phone bills anymore. Right? E-commerce, they’re trying to identify things as telecommunications and get a piece of it, whether it is the device you have in your car that streams and gets you information, or so many different things that now they’re trying to label as telecommunication taxes.
Scott:	Really? I didn’t know that. Wait. Is this the government’s doing this? Or is this the telecom companies?
Sona:	The states.
Scott:	The states. Oh my gosh.
Sona:	It’s easily the states. And to your point, Scott, they want a little piece of everything. Right?
Scott:	Yeah. Yeah.
Sona:	It’s really hard to keep raising the tax rate.
Scott:	Yeah. Yeah. You’ve got to find new, yeah.
Sona:	It’s about switching something that is exempt, and identifying it as taxable.
Scott:	Yeah. That’s such a great insight.
Sona:	And so, it’s a different mindset.
Scott:	There’s one other piece… Totally. There’s one other piece of Avalara. So, we talked about the calculations of the sales tax, and kind of what you owe. But I think a lot of people may not know this, but you will actually do some of the filings. Can you talk about the nuts and bolts of actually filing the returns with the states?
Sona:	So, you’re absolutely right. When we look at compliance, it’s end-to-end. Right? It’s calculating the taxes, documenting; if you have exemptions, you need to have valid certificates. Right? A state auditor will come in and say everything is taxable unless proven otherwise, so those certificates are really important. It’s also not only the filing, but the remittance. So, we look at the end-to-end compliance, and we say, “Okay. We can handle the entire piece.” So, what happens is, AvaTax does the calculation, and has a document management in it as well. Then the calculated taxes end up on physical returns, which are remitted to the government authorities. Sometimes accountants will do that; we can enable accountants to do that. Some choose to do it in-house; but it’s become so complicated that we’re seeing a big trend about companies want to outsource it, whether it’s to us or to their accountant. And we talked about Wayfair, Scott. A company that was selling something, anything, out of their garage in California only, had to worry about one return. But with Wayfair, if they’re shipping all over the nation, think about the volume of returns they need to file. It’s too much.
Scott:	It’s huge. It’s huge. And you’re right. We do a lot of those returns, but there’s some, I think there’s some states, or even some of our clients just decide to have Avalara do the filings. You also talked about… You did a great job of breaking down the chain. The final chain is the remittance, which is basically sending the money to the states. Can you talk about how that works, and how Avalara enables that?
Sona:	So, we’ve been doing this for years. We have a team that’s dedicated to filing this. Just to kind of put things in perspective, we file more than 3 million returns every year.
Scott:	Wow. Wow.
Sona:	And so, we are constantly looking to improve our processes through artificial intelligence, some really good technology; because we’re growing really fast, and looking to leverage some technology to make ourselves more efficient. So definitely a big focus area for us; we’re continuing to grow, we’re continuing to invest in it. But it’s definitely a big piece of our business. And it’s not just US. It’s Canada. It’s VAT.
Scott:	It’s amazing. And so, you actually can, and forgive me for not knowing this exactly, but you can actually trigger the cash payment to the state automatically.
Sona:	We do. We’re also a streamlined sales tax vendor. So, what we do is, we draw the funds out of the company’s account, one withdrawal every month, and we disperse that to the different authorities.
Scott:	Oh. I love that.
Sona:	We have automated ways of doing it, but if it needs… Some of these local jurisdictions, you’d be surprised. They’re very manual. We’ll also print-
Scott:	Oh, I’m not surprised. I know.
Sona:	We’ll print and ship and mail, and do that stuff manually, cut checks.
Scott:	Yeah.
Sona:	So, we provide that service as well.
Scott:	Yeah.
Sona:	So, we really, it comes down to simplify the complicated. We ensure compliance.
Scott:	I love that; simplifying the complicated. And again, it’s not just for the clients, but us; you enable us to serve our clients well, which we really appreciate. And everyone can kind of sleep easy at night.
Sona:	Yeah.
Scott:	You talked about that. Are you… Now, please, and I apologize, I don’t know the definition of that. I know conceptually what is, but could you explain that a little bit, and how Avalara helps jump in there on that, too?
Sona:	So, VAT is value added taxes; and it’s really the equivalent of US sales and use taxes, but outside of the US. Conceptually, the same thing, typically much higher rates. And you’re familiar with sales and use taxes, and you understand the concept of exemption certificates. Right? So, it goes through three different channels; there’s certificates issued. So, taxes are only paid by the consumer at the end. With VAT, it’s paid at every level, but then there’s a credit taken at every level. So, it’s a little bit different. Some will say it’s simpler than US. Others who are used to the US system say US is simpler. But end of the day, it’s a compliance burden. Right?
Scott:	Yeah.
Sona:	And rates, sometimes it’s 25%, 27%. They’re pretty high, and requires the same level of compliance. There’s the calculation component; there’s an input, which is a credit component. But there’s the filing as well. But there’s movement, a lot more movement outside of the US, around e-invoicing. So, the government enters into the process. So, we’re electronically either authorizing or electronically getting what’s paid to them; getting closer to the transaction, and ensuring they get the right amount earlier.
Scott:	Yeah. And some of that seems to be because things are going cross-border in Europe a lot more often than they are in the United States or things like that; so that’s why that is so much more popular. Well, this is great. You’re a wealth of knowledge. And we really love working with Avalara. Can you tell everyone how to reach out, how to find you if they’d like to work with Avalara?
Sona:	Absolutely. I think alvara.com is a great resource to go to; and depending on the needs and what you need to do. And if anyone needs to contact me personally, my LinkedIn is available.
Scott:	Sona, thank you so much. Thank the rest of the Avalara team for Kruze, and we look forward to working with you on many more companies in the coming year.
Sona:	Thanks for the opportunity. This was fun.
Scott:	All right. Thanks, Sona.
Singer:	(singing). It’s Kruze Consulting. Founders and Friends, with your host, Scotty Orn.

Sona Akmakjian of Avalara discusses how Avalara helps companies manage and automate state sales taxes

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