Sales Tax Realities with Avalara’s Scott Peterson

Meredith: 00:00:35

Welcome to SALTovation.

The SALTovation show is a podcast series featuring the leading voices in SALT where we talk about the issues and strategies to help you make sense of state and local tax. In this episode, we welcome Scott Peterson from Avalara back to the Saltivation Show.

In part one of our conversation, we explore the real world challenges of sales tax compliance. From navigating state policy changes to managing thousands of tax returns.

Scott shares how Avalara partners with governments and businesses to simplify the complex world of tax.

Whether you're a tax professional, a business owner, or just curious about how sales tax really works behind the scenes, this episode offers a compelling look at the intersection of technology policy and compliance. Well, Scott, thank you so much for joining us again on the SALTovation podcast. It's great to have you here.

Scott: 00:01:28

Thank you. Appreciate it. It's, it's nice to be back with you guys. You all run a great firm and it's important to help.

Meredith: 00:01:40

So for those that didn't join us the first time, Scott's background is available on our first episode in the very, very beginning of our archives, he was one of our first guests. So we are just going to jump right into it this time.

So Scott, what are some of the key Polish policy issues that you are currently following and working on over at Avalara?

Scott: 00:02:02

Thank you. First and foremost, we're, you know, trying to keep. It's not really a policy issue.

It's, you know, we've gotten so big that it's critical for us to understand the administrative changes that happen around the country.

Judy: 00:02:17

Right.

Scott: 00:02:17

And so our, my job, first and foremost is to be in contact with these states, getting them, convincing them that a, we are a great test case. You're going to change something, ask us to help you test that because we can throw thousands and thousands of examples at you.

Whatever it is, we can throw thousands at it. Second, don't make a change and not tell us.

Judy: 00:02:43

Right.

Scott: 00:02:44

Don't, for heaven's sakes, change your bank account and not tell us. Don't change the style of your form, your sales tax form or your lodging tax form without telling us.

Don't do like one little town in Colorado did this spring, this late, one monument. Yes. And decide that on the Tuesday you're going to stop collecting your tax. Okay.

But you know how many returns that messes up throughout the rest of the year. So that's my first thing. It's not a policy thing perspective, but it's more of an administrative thing.

Those are the things that create havoc normally, mostly because they're surprises. Rarely do we get a policy thing that comes out of nowhere. Correct.

Judy: 00:03:34

Yep. There's ample ramp.

Scott: 00:03:38

This year. I wouldn't say this came out of nowhere this year, but we kind of all got overwhelmed on January 1st of this year.

I mean, we had Illinois going from whatever funky thing they had for sourcing.

Judy: 00:03:53

Even in the playing field. Yeah, yeah, even in the playing field.

Scott: 00:03:57

You know, we. We had 6,000 customers that had to switch.

Judy: 00:04:01

Oh, I believe it. And then you got to change the account. It's not a matter of just changing the tax.

It's a matter of freaking figure out how to give it to the government.

Scott: 00:04:09

That's right.

Judy: 00:04:11

That's like an hour, hour and a half tasks depending on.

Scott: 00:04:14

So we had. That we had. On top of that, we had all the changes that Chicago did in their tax rates. Those all affect our customers.

Then we had Louisiana raising the state tax rate and starting to tax digital goods and requiring every parish plus parish e file plus remote seller commission, plus the state changing their tax return.

Judy: 00:04:36

Oh my.

Scott: 00:04:37

Yeah. January one.

Judy: 00:04:38

That comprehensive. That's. Yeah.

Scott: 00:04:40

And these were all policy things. So this, this would be something that I would, that I would have follow. And they're, I mean, they're policy things.

Not because, you know, I want people to do things. I don't care what they tax. We don't care what they tax. Exempt, tax.

Judy: 00:04:52

Whatever you want, just tell us. Yeah, we can make it in a matrix.

Scott: 00:04:55

Exactly. Tell us what it is, tell us what it starts, and give us as much notice as you can. So that's, you know, this, this is. I mean, Eloi.

We have an amazing working relationship with the state of Illinois, the Department of Revenue there. They like us. And we have regular check ins with them. And it is so beneficial for them and for us.

They have made changes into their processing system simply because the things that they wanted to do that they never could get up the priority list on their IT calendar until they brought us in and we said to them, well, you know, that's this, this is 9,000 customers we're talking about. And so if this doesn't change, you've got 9,000 things you have to do every month.

And if you make this one change, you just eliminated 9,000 different things that you have to do every month.

Meredith: 00:05:51

That's fantastic.

Scott: 00:05:53

And it's the same thing when they went to even the playing field, I mean, we had 7,000 customers that had to change.

Judy: 00:05:58

Right. Well, just imagine there's millions of vendors still.

Scott: 00:06:02

Yeah.

Judy: 00:06:03

Millions of companies are out of compliance in Illinois. We Struggle.

Scott: 00:06:07

Oh, it's horrible. And I mean, we f. We still fight him. What we did was we said, okay, here's the deal. You got. How many you going to change?

They said, we're going to change, like 32,000. And we said, well, we're 7,000. Those 32,000. We should talk.

Judy: 00:06:21

Yeah.

Scott: 00:06:22

And so we. We actually. We sat down and we. They told us the parameters. We looked through our system, found the people we thought met those parameters.

We compared notes so that when we changed people on January 1, it was because the state of Illinois told us, that person needs to change. That person needs to change. Don't change that person.

Judy: 00:06:42

Wow.

Scott: 00:06:43

So now. So now the one. And our customers, I think we had. So we gave all. Gave all of our customers notice, and we told them what we were going to do.

And we said, if this isn't what you want, tell us. We had seven out of 7,000.

Judy: 00:06:58

Well, that is amazing because you're exactly right. Like, when we go in, we have to. Depending on what our relationship with our client is, we don't know how they activated their account.

So we have to go into the account, see how they're set up as a vendor, see what jurisdictions are available to them because of the setup. And then we might have to make that manual change in the Illinois system or other state systems and then go back in the software.

And, you know, there's a mismatch sometimes between the Nexus configurations and your guide system that people don't understand. And the reporting. Yeah, that was great.

Scott: 00:07:27

They showed it was.

Judy: 00:07:28

You could do that.

Scott: 00:07:29

Unbelievable.

Judy: 00:07:31

If you had to go into 7,000 accounts. Oh, my gosh. Right. An hour. An account.

Scott: 00:07:35

No, no. Yeah. So thankfully, we were able to automate that process. So we set up a little script that ran on at.

Effectively ran at midnight on December 31st and switched everybody one second after midnight on January 1st.

Judy: 00:07:51

That is power. That's amazing.

Scott: 00:07:53

So that kind of.

Judy: 00:07:54

That's exciting.

Scott: 00:07:55

It is exciting. And, you know, that's.

Honestly, that's why it's fun to come to work, because things are actually starting to go the way they should go, the way they would go. If we were to start. Know what we know now, start over, design it from scratch. We'd have it work this way.

Judy: 00:08:11

Yeah, but you can't know that totally because every client's unique and all the things. So, I mean, you kind of learn through volume and trial and error, and then you develop and grow and then you get synergies.

But you also have a platform where you can use that numbers to make an impact. Because states don't care about the onesie twosies. That's the thing we struggle with the most.

And of course every company cares about themselves a lot. But the states like take a ticket man, you're like one of 32,000. You're just not that important to us.

We only have so much bandwidth so that you can show that kind of volume that gets their attention. Like you should listen to us. We actually might be able to help you here.

Scott: 00:08:44

Yeah, that's powerful. We had an issue in New York a few years ago.

The state CIO decided that every quarter, everybody that had an account with the state of New York, whether it's with the Department of Health, the Department of Revenue, whatever, everybody had update their password every quarter. Perfect.

Meredith: 00:09:02

And it had to be like 16 characters and certain something somethings.

Scott: 00:09:07

And it was perfectly rational thing to request. I mean I'm sure you guys have to update your password every quarter. I have to update my password every quarter. Perfectly rational thing.

The Department of Revenue got no, no more notice than anybody else did. And so all of a sudden we could not, none of us, we couldn't get into any of our customers accounts, right. And the result it had in.

We learned a valuable lesson. You start on the first day of the month and not the first day of the filing period. And so we had to switch. I'll go to a long story.

But the result was we mailed in paper returns. Oh I bet thousands, I bet of paper turns. The lady from New York called me, she said we've got these three boxes. Are you sending more?

Because it freaked him out. Because they all had to be worked manually and they didn't have the staff, they had to call in temporary workers. So they worked.

Judy: 00:10:03

Did they argue? Did they say, well we'll go ahead and give you all that information and you could upload the returns.

Scott: 00:10:08

I mean at this point changed everything.

Judy: 00:10:09

Smartest way to do it.

Scott: 00:10:11

We, they, they, we spent. It took us, it took us I think three months to get it all set up and running.

But we have completely automated the way returns are filed now in New York. And they're different than, than completely different than it was before.

And now if we send them a paper return, it's because, you know, we, we, we've got a customer that we, that we're pretty sure is attack a New York taxpayer. But we have not clues. We just send them a paper return and say right, well help us sort this out. We don't know who that person is.

We know they collected New York tax. That's all we know.

Judy: 00:10:41

Yep. Here you go. Yeah, that's funny. That's powerful. That's really exciting.

Scott: 00:10:45

It is exciting. And it's. You know, I tell departments of revenue, and not so much that, but their politicians.

I tell them all the time, you build systems for that person who owns one store in one town in one state, and you ignore the fact that that person doesn't want to be a taxpayer, their taxpayer. That's the last thing they wanted to be was a taxpayer.

Judy: 00:11:08

That's right.

Scott: 00:11:09

And if they look for some way of getting out of that, they choose that. And when they do, they choose us or they choose you. And you need to go.

Judy: 00:11:18

We choose you to do the return, and you need.

Scott: 00:11:20

You need to build a system that works for people who don't want to do that work in the first place.

Judy: 00:11:23

Yeah, totally.

Scott: 00:11:24

Nobody volunteers to be a taxpayer.

Judy: 00:11:26

No. So true. Yeah. And it's incredible burden that we put on taxpayers in community.

And then Wayfair is big, fortunately, it's made everybody more aware of compliance, and they're getting compliant, but they don't even think of the old ways. Oh, no ADD duties. So they're like, we're a marketplace or we're this. I'm like, do you understand how your transactions throw through commerce?

Because you may be physically present, you may want to be physically present. You may not just be economically present. I just think that's been a good thing from compliance.

But the understanding of the obligations is where we kind of come in and provide additional clarity. Yeah.

Scott: 00:11:58

I mean, that's why I have a partnership with. With y'. All is. Is so important for us because you're. You. You can do things we can't do.

Judy: 00:12:07

Yeah.

Scott: 00:12:08

And then things that. And you. You can be very specific, and we can't be very specific. We got to be pretty. We have to be very general.

You have to fit our rules, or we, you know, we don't. We'd love to have you, but if you don't fit our rules, we can't have you because we can't do specific things.

Judy: 00:12:25

Yeah. Yeah. You know, it's funny that I was going to mention on the rule thing.

I mean, you know, I mean, this is my 30th year in business, so I'm like, okay. When that retail.

Retail delivery fee came out in Colorado, you know, it was passed as a transportation bill, and then Department of Revenue had to implement. It was out a year and three. Like a quarter. Like a quarter month. What? A year and a half. And I didn't even know about it. And I was like, I'm out.

I can't do this business anymore. I kind of consider myself to be paying attention.

And I didn't know about this because department revenue didn't want anybody to know because they didn't know how to deal with it. So that whipsawed me. Like, how am I going to tell my clients to impose this?

Scott: 00:13:02

Yeah. I had to follow my sword several times here at Avalara because that's my job to know that stuff.

Judy: 00:13:09

Right. But it wasn't something you would have known. I was pretty upset. Like I know Josh Pens. Like we know the department revenue people well.

And they didn't say anything because they didn't want it. They didn't know what they were going to do with it.

Scott: 00:13:20

Well, I, and I've never asked him this, but my, my was. I saw that play out. I just presume that they were hoping the legislature would repeal it the next session and they didn't. Oh.

When the legislature went home, they were stuck.

Judy: 00:13:36

Okay.

Meredith: 00:13:37

One, there were some talks as legislative session to get rid of it, but I think the fiscal note on it's too big.

Scott: 00:13:42

Oh yeah.

Judy: 00:13:42

And at this point we're in a trouble state. We are a little cash short apparently of this billion dollar shortfall in Colorado. So we ain't giving nothing up now.

Scott: 00:13:51

Yep. You know, the, Minnesota is the same. You know, they've got, we all, we all presumed that Minnesota would repeal it and they still might.

They're, they're, their legislature doesn't really act until May.

Judy: 00:14:04

Okay.

Scott: 00:14:04

And then they throw all, they pass one bill in May and it has everything in it.

Judy: 00:14:09

Oh, interesting.

Scott: 00:14:11

And so it could end up there in the last minute and we wouldn't have a clue until we wake up the next morning. But they, it's the same deal. It's just, it's a lot of money.

Judy: 00:14:19

In that which is really unfair to the people that are providing the revenue.

Scott: 00:14:24

It's like, hello, it's, it goes.

You know, this particular fee is the exact example that I use when I talk to politicians about how the fact that they don't collect taxes, they receive them.

Judy: 00:14:43

Yes.

Scott: 00:14:43

Departments of revenue don't collect taxes.

Judy: 00:14:46

Yeah.

Scott: 00:14:47

I spent 10 years running the South Dakota sales tax. Never collected a penny. My job was to help people.

My job was to help the people outside the Department of Revenue, help the people who are the real tax collectors. And if you think about, in this, I think about this too much, I suppose.

But you know, there's almost no tax that a state or local government collects on its own. No, the property. You know, the closest I can come is to license plates.

Judy: 00:15:21

Yeah, license plates.

Scott: 00:15:22

But even then, yeah. The county relies on the sheriff and the police to enforce it.

Judy: 00:15:30

Oh, I see.

Scott: 00:15:31

So to the extent that, you know, if you have. If you're a very rural county and, you know, your, your police, you. You get your police coverage.

If you get it all from the neighboring county because they're bigger, they may not ever come over. They may not ever see that the guys driving around your county haven't. Haven't renewed their licenses.

Judy: 00:15:48

Yeah. You know, otherwise they have to check it.

Scott: 00:15:51

Otherwise, all the taxes that get collected in the United States and probably throughout the world are either collected from a consumer, collected from the real taxpayer, you and I, the consumers, buy a retailer, or withheld from our income by our employers or paid on our behalf by our mortgage holder.

Judy: 00:16:12

Yeah, yeah, yeah. It's an interesting. I feel like, I feel like a lot of people get the term collect and, you know, incorrect.

Scott: 00:16:20

They do.

Judy: 00:16:20

You know, do I have to pay the tax? Like, no, you have to collect the tax collecting. Yeah, I think people don't.

Scott: 00:16:29

Exactly. Right. Oh, yeah, both, both. Both words are correct. They just. There's a timing issue.

Judy: 00:16:36

Yeah, right.

Meredith: 00:16:36

You're gonna write a check. It depends on whose money that's right. Going to be backing that check.

Scott: 00:16:42

No, don't bring up. Oh, hey, Check. Don't bring up checks.

Judy: 00:16:45

Right.

Meredith: 00:16:46

I was like, I am one of the few people that still write checks.

Judy: 00:16:49

Because, okay, I just, I have to.

Meredith: 00:16:52

Pay my son's, you know, pre K tuition via check.

Judy: 00:16:56

Oh, I just had someone do some and he took a check. I don't even know how to write a check. Like, how do I write 500? And I'm like, I can't. I haven't written a check in so long.

I really couldn't write it. It was like I had to look at other checks in my checkbook to see how it was written.

Scott: 00:17:10

We write thousands of them a month.

Judy: 00:17:13

Right.

Scott: 00:17:13

For all the local lodging taxes around the United States. Really an unbelievable number of local governments in the United States expect. Do you to send them a check?

Judy: 00:17:26

What a waste.

Meredith: 00:17:27

Well, but that's even like, we have tax.

There's a couple of states and Covid was great for this, you know, because, like, in the voluntary disclosure process, you would typically have to like, send your data and send along a check.

Now, a lot of the kind of that process has been, well, okay, give us the data, we'll send you final bill for tax and Interest and then you can go online and pay it.

But there are still a few, you know, North Carolina is one and New Jersey is one where you are right in Pennsylvania, here are your physical checks mailed to the jurisdiction. And you know, some of our non US Taxpayers are like, well, I don't have a checkbook, number one checkbook.

And, or there's just a lot of organizations that don't really have checks. You have to kind of like almost get the equivalent of like a cashier's check in the modern day version.

It's got to be issued from the bank to, then you need to mail it to here.

Scott: 00:18:25

So. Wow.

Judy: 00:18:27

Yeah.

Meredith: 00:18:27

Checks are not, I mean, and it's.

Scott: 00:18:29

So, but they're, they're cumbersome. You have to have a third party. So there's a cost to us to write a check to somebody and it goes along with the paper return.

There's, there's a local government out there somewhere in the United States that mails us their returns on purple paper. And if we don't, if we don't send them back that purple paper, they won't accept it. I mean this is 30 years ago thinking, right?

Judy: 00:19:01

You know, we have these issues, policy.

Scott: 00:19:04

Perspective and slash administrative perspective.

That's one of the things I, that I do is I'm, you know, I'm constantly compiling a list of things that we do or that we have to do that seem antiquated or are cumbersome or that you can't automate.

We have, we have a, we don't really have this much at the state level, but local government level, we have this a lot where they have, where they're, they're very up to date. They've got a wonderful little system that they run their lodging tax on, their meals and beverage tax on.

They've outsourced it to a third party who, you know, built a software and runs it. And these third parties aren't accustomed to volume.

They're not, they're, they're accustomed to one person of one vacation rental owner sending in their money. So the whole system is, it's all electronic, it's all automated, but it's all built around one person doing one thing.

So we come in and we say, well we're, you know, we represent, you know, the world's largest marketplace of lodging and we're going to file 3,000 lodging tax returns with you a month.

And, and we're not going to use your paper, we're not going to write you a check and, but we want to use an API that we, that, that hits your system and the first thing they do is they say, nope, that API looks like it's coming from India or it's coming from Australia. We're not gonna, we, we, we automatically block all APIs that look like they come from the out outside the United States.

So that, which, that means that the only people that can actually file that return are the people we have in the United States.

Which means we have to look at all the returns that we're going to file in a month and say, okay, you are going to do only logic tax returns in this state because. Or that right for the local governments to use this vendor because this vendor won't accept the, the API calls from outside the United States.

Judy: 00:20:57

It's, that's crazy.

Scott: 00:20:59

And so this is, this, this is the new initiative for this year where we're going to really do a full court press on local governments to get them to get on board to have an appreciation for, you know, volume.

Judy: 00:21:13

There is a lack of it. I'm just saying, like that's the suds thing we finally got in Colorado.

I mean, I remember when I got involved in that task force force 10 years ago, I think you spoke, it's still going on, by the way. I mean these local mayors would come in.

Yeah, we don't have a, we're not having session because that costs like $10,000 for us to go sit in a room that the, that the state owns. I don't understand why it's that expensive, but whatever. Yeah, but these mayors would come in, they're like, don't touch my taxes.

And I'm like, we're gonna give you more taxes. Do you not understand this? Because you've not simplified it so people don't comply. Exactly right. They just don't understand. They don't understand.

I mean, I have a hearing on Monday with the city, that the company built something in the city, built it in the city. Never got a license, didn't know they had to. So we have a hearing because there's no statue. So it's not bueno.

So that's very common unfortunately in a lot of things that are not really very regulated, if you know what I mean. Like, okay, you have gas, you're gassing, you know, you gotta get a license. You have a convenience store, you get it.

But if you're a service provider, like even law firms, I had a ton of clients that were law firms that did not self cess sales tax on any of their technology. They didn't know they had to do that.

Fixed assets, big law firms, they have tons of stuff they buy on the collective and nobody thought use tax because they don't charge sales tax. They don't know what that other reciprocal duty is.

Scott: 00:22:40

Oh. So I need to get our API product sales team to go out there and start calling on law firms.

Judy: 00:22:47

Well. And see, you know, CPA firms have to charge tax in like three states. I think it's South Dakota, Connecticut. Not sure about West Virginia.

Scott: 00:22:55

No.

Judy: 00:22:56

Hawaii. Is it Hawaii? New Mexico and Hawaii in New Mexico and Hawaii. So it's four states. We have to charge sales tax.

And I learned that when I was at a regional firm I Bailey and we had North Dakota offices and I got caught in the trails wins at the that where we didn't charge tax properly. And it's like oops.

And then obviously our clients didn't understand that either when they would have different intercompany and different things they were selling. They didn't realize those are taxable. Because South Dakota taxes so much that are in the service. I got a massage there and I got a tax. Right.

Scott: 00:23:24

I'm like, you know, you know, if you think though about a what a legitimate tax on consumers would look like, you wouldn't tax accountants.

Judy: 00:23:38

Right.

Scott: 00:23:38

But you detect you tax that massage therapist.

Judy: 00:23:41

Why?

Scott: 00:23:42

Because that there is. There is. That is a personal consumption. No, no business. No business is buying massage services.

Judy: 00:23:51

Interesting. So that's what you think would be.

Scott: 00:23:53

Oh, absolutely. Haircuts. All those things that you and I as consumers buy that are strictly and completely personal.

There's no possibility that there could ever be a business use that would be on the list. And that's why South Dakota's tax is the way it is.

Judy: 00:24:09

That's the thinking behind it. Yeah.

Scott: 00:24:11

What they, what they've never figured out is how to write a real good exception for business consumption.

Judy: 00:24:18

Yeah.

Scott: 00:24:19

And it's.

You know, I don't know if you follow the MTC's work on digital goods, but a lot of that that they've been working on the last couple of years is how do you write that?

A language that gives states a good definition the ability to tax digital goods and digital services and exclude those that are being purchased by a business.

Judy: 00:24:41

Correct. Well, there's a huge issue with sourcing on that. We have clients that are software company that buy a bunch of software to add to their software.

So those purchases should be for resale and then the ultimate consumer. And then they don't invoice it. Right. The invoice shared service center that you Know, gives it to all the, all the locations.

So they're paying tax incorrectly if they're in a state that taxes digital goods or software. So there's a lot of arbitration and sourcing. That's a huge issue in the software space. So. Yeah. And I, I kind of got my start.

I read all the sales tax laws because I did a taxability analysis for an on prem. Digital. Not even digital. Downloaded or added on your disk. That's what they did. And then they pivoted to SaaS. I'm like, what SaaS? Right.

And I had to learn how the technology worked and how they're going to deploy. But it has affected invoicing. Yeah.

Scott: 00:25:31

Interesting. Unfortunately, there's still a lot of misunderstanding of what SAS is. And actually, I think. I don't. I'm not sure it's a great description.

I mean, software as a service, what's that mean? Does it mean. Does it really only mean that you pay monthly? And I think a lot of people think that's all it is. You pay monthly.

The fact that it gets delivered to you monthly, give it delivered to you electronically or remotely. Or remotely accessed. You know, those aren't inherent in the phrase software as a service.

Judy: 00:26:10

No, it's really interesting area as it's pivoted and it's a recurring revenue. It's like toilet paper. It gets used up and then you need to keep using it. I mean, it is a great business model.

Scott: 00:26:21

Yes, it is.

Judy: 00:26:22

Really? Yeah. Because that's your best business model as a consumer. Consumer Crocs is my client, and I'm like, how are they going to make more money?

I'm going to only bear so many. Buy so many pairs of Croc shoes. Right.

But then they sold the little things that you put on your shoes, and then they kind of had to come up with different styles. So you could go with the same customer and sell them five pairs of shoes and a bunch of little things on your kit. But. Right.

I mean, I'm not going to buy three pairs of green shoes.

Scott: 00:26:45

No. But if I find a pair of shoes that I like, I buy two pair.

Judy: 00:26:50

Would you like in two different colors?

Scott: 00:26:52

Yep.

Judy: 00:26:52

Yeah. Yeah. But I mean, I just thought that's not your best market. Right. You want toilet paper.

Scott: 00:26:57

Yes.

Judy: 00:26:58

You get up constantly. You have to replace it. That's an annuity contract. Just like software.

Scott: 00:27:02

Yeah.

Judy: 00:27:02

Anyway. All right. We've only gotten to, like, one question. I don't know. There's more.

Meredith: 00:27:07

Well, in: 2020

Scott: 00:27:14

No, it'll happen again.

Judy: 00:27:16

We're all gonna get measles now.

Scott: 00:27:19

We're all gonna get.

Meredith: 00:27:23

And so, sky, you had kind of discuss a little bit of this when you were talking through kind of the Illinois component and the amount of returns that you all file and tax and, you know, taxpayers, you represent. What types of metrics does Avalara track from taxpayers across America? And like, do you have any other examples beyond the Illinois?

And then what do you all do kind of with that information to build insights and to. To shift and pivot? And it sounds like you. You have the ability to take that to State. States. You know, a lot of.

I would say, you know, a lot of people are really worried about what people do with data.

And it's not as if you're collect, you know, hoarding information, but you have an idea of how many Illinois taxpayers you have to support a greater good. So what does Avalara kind of do with the information that it does get, and what kind of information do you get?

Scott: 00:28:20

So we get nothing, really more than what you would get in a normal retail sale. So we get a product code that presumably comes with a description. We have a description once in a while, not always, but we have product code.

We have, you know, the retail selling price, the things that go on the invoice. We basically get the invoice. And with the product codes, we don't get the, you know, brown shoes.

We get a product code that somebody has said that's brown shoes fits within this product code. And then we get the delivery address.

Judy: 00:28:57

Okay.

Scott: 00:28:58

And we. But we honestly, we don't really do much with them. I mean, we get this data. We're. We're.

Because we're, you know, a worldwide company, the privacy laws outside the United States are much, much more strict.

Judy: 00:29:13

I was just. So I just did a sleep story with that on. On calm. It was the whole Privacy Act.

Scott: 00:29:19

Yep. Yeah. So we.

Judy: 00:29:20

I fall back asleep.

Scott: 00:29:21

So we're exceptionally careful about what we keep, what we collect and what we keep, and we honestly do very little with. We store it, and we only store it as long as it's necessary, as long as we think a reasonable state would expect someone to keep it.

Judy: 00:29:41

Okay. But then you compile it and you say, I know we have 7,000 taxpayers.

Scott: 00:29:45

Well, so that you can use that to advocate. That's a different kind of data. I mean, so the stuff we get from our customers, we're very careful about. And we don't. We don't keep.

We don't use it for anything. And we don't keep it any longer than, you know, what a state would require us to keep it.

Judy: 00:29:59

Okay.

Scott: 00:30:00

What we know about our customers is a little bit different. I mean, we know obviously we know where they collect sales tax. Yeah. Actually, no, that's even more. We know where they make sales.

Judy: 00:30:11

Yeah, that's true. Because they may not choose to collect. They may not collect or they might have nexus.

Scott: 00:30:15

That's right.

Judy: 00:30:16

Yeah.

Scott: 00:30:16

And so we know where, we know where their one address is. We know where one address is for them.

Judy: 00:30:23

Yeah.

Scott: 00:30:24

We know what kind of shopping cart or accounting system that they use.

Judy: 00:30:28

Yep.

Scott: 00:30:28

Because we have to build a connector to that.

Judy: 00:30:31

Yep.

Scott: 00:30:32

We have a, over a period of time, we have a really good feel for what they sell because we get the product codes that they ship to run through the system and we know where they're making, we know what's jurisdictions are making sales into. You know, we don't care, we don't care about a.

Well, we have no reason to save an address once we've determined that that address is tied to Denver, Colorado.

Judy: 00:31:01

Okay.

Scott: 00:31:01

Because all we, all, we need that, we need that for that one simple moment in time where it gives us the, the, the, the Denver, Colorado sales tax rate. Because at that point in time, we know we're going to build a Denver, Colorado sales tax return.

Judy: 00:31:16

Okay.

Scott: 00:31:16

In the state of Colorado sales tax return. Otherwise we don't need the address at all. It just takes up space. But we know, we know where they make, we know jurisdictions they make sales in.

We know whether it collect tax or they don't collect tax.

Sometimes we, we presume that they know what they're doing and that when they're not collecting, when they, when they're selling something we know is clearly taxable and they're not collecting tax.

We know, we, we presume they know what they're doing, that they, they have made a conscious decision because that's one of the things we won't change on our customers behalf. We won't go in there and tell them, you got to turn your tax on right now because you're, you're in, you're in trouble. We won't do that. That's.

We, we count on you, Judy, to do that.

Judy: 00:32:00

This also be the job of. Yeah, that's the job of the taxpayer. 100%.

Scott: 00:32:04

That's where the partnership comes in. We know how many returns we will file in the state.

Judy: 00:32:12

That's super important. That's a big advocacy thing. I mean, that's a wonderful thing. You're using.

Scott: 00:32:16

And we know what tax? Well, obviously we. We have lodging tax customers and they collect sales tax. In some states. Some states it's lodging tax. So we know. We know where.

Where a state or local government has a lodging tax versus the sales tax. Because there's a number of states that tax hotel rooms. But they don't. They don't. It's not a lodging tax.

Whereas, you know, the local government that the state capital is in has logic tax. So we know that we have to be able to distinguish that. But that's not really nothing about our customers. That's more about the tax structure.

Correct, Right.

Judy: 00:32:50

I am just surprised. When you said Illinois, they only had 30,000 taxpayers that swished on that or impacted.

Scott: 00:32:56

Yes, that.

Judy: 00:32:57

So that. What does that mean? The rest of them were in state taxpayers. That's what I want to know. So there's not very many.

Scott: 00:33:03

No, they had three types. There's three types of cat. There's the. In state. Yeah. Everything occurs inside the state. Those people all origin sourcing. They have the.

Out of state completely. No in state at all. Those were all okay. And that was a big group of people. So those people didn't change.

They had that group of people that were located outside the state but had some sort of physical presence in the state. And that was the group that was collecting the state use tax. And that was the group that they wanted to change.

Judy: 00:33:31

Because even in Colorado, when I heard how many registrants they had, I'm like, that's not very many.

Scott: 00:33:36

Yeah, no, it's.

Judy: 00:33:38

I mean, I just don't think there's a lot of compliance in America. I get called, I get little calls from different investors when you guys are public.

And they now they call me about Vertex because I think they're the only other one that's public in the space. They're like, so do you think that the business is done? There's no more growth? I'm like, no, we haven't even tapped 10% of the market.

There's so many businesses that are just flying under the radar, hoping they don't get caught, don't know if they'll succeed, so they don't want to go ahead and comply. Like, it's a constant push, pull. Or you've got some older businesses that are very manual. You know, they're not ready to automate.

You have a lot of shifting happening. There's still a lot of ramp time to go with as far as. And then there's new businesses is coming up every day.

Scott: 00:34:17

All the Time. Yeah, it's. I'm surprised how many, how many of our customers go out of business. It's really. It's a lot and it's.

But you know, you think about it, you. You. You drive around town and you, you'll turn a cor. You'll turn left and you'll think, well, where did that store go that was right there?

You know, now it's all boarded up or it's. It's dark. And you know, retailing's hard bit. Retailing is really hard work.

You've got to have deep pockets in remarkable timing or no sense whatsoever to go into retailing.

Judy: 00:34:51

Well, because even Amazon, like, they. I think they make all their money on aws. The actual Amazon doesn't like super profitable and it's just super manual the returns, all that stuff.

Just so much organizational management. And then you have low margins. Yeah, but I. My client was Blockbuster at Deloitte. Oh. And then my client was Netflix.

Scott: 00:35:11

All right.

Judy: 00:35:14

So I was like one of the first subscribers with Netflix when they had discs. And then Meredith. Well, she taxed. What did you tax? She researched the taxability. Was it streaming? Mirror.

Meredith: 00:35:24

Downloaded movies?

Judy: 00:35:25

Downloaded movies. Peace. Streaming dish networks 100 years ago.

Meredith: 00:35:31

A different. No, a different. A different.

Judy: 00:35:34

But.

Meredith: 00:35:34

Yeah, that was. But there was nothing akin to that. So we had to kind of come out.

We were looking at like the downloaded software's rules and making, you know, kind of parallels between what a downloaded movie is versus downloaded software.

Scott: 00:35:49

Oh, yeah.

Meredith: 00:35:49

And there wasn't a lot out there.

Judy: 00:35:51

Because Digital guy, there was no statue.

Meredith: 00:35:55

You know what you were doing?

Scott: 00:35:56

No statues.

Judy: 00:35:57

Digital.

Scott: 00:35:57

No guidance.

Judy: 00:35:58

No.

Scott: 00:35:58

Yeah, that's right.

Judy: 00:35:59

thing. I mean, sales tax from: 1922

Scott: 00:36:07

I had Kevin Milligan, who's a senior person in the Pennsylvania Department of Revenue.

Judy: 00:36:15

Okay.

Scott: 00:36:15

Gave me a sales tax token from Pennsylvania. I gotta find that.

Judy: 00:36:20

Oh, my God, I would love that somewhere.

Scott: 00:36:22

I need to find it because it's. It's too important. Too important to lose. And I.

Judy: 00:36:27

Right.

Scott: 00:36:28

I could easily lose it. But yes, you're right. In the early times, you got a token.

Judy: 00:36:34

Yeah. It's such old law. And now we have this new technology impacting. I just got a lead from client out of a foreign country.

They doing some kind of clothing. They did a million. And last year they did 15 million.

Scott: 00:36:47

Oh, my God.

Judy: 00:36:48

One million to 15. That's insane.

Scott: 00:36:50

That's great. That's a great product. What are they selling? We want to.

Judy: 00:36:54

I don't know. I actually went online to look at that today. Yeah, I think they're using you, actually.

So they already kind of knew, and they're in a foreign country. So I thought my issue was, take a step back. What are your entities? I need to understand that to make sure.

Because, you know, if there's no treaty, I mean, there's other issues that everybody's like, there's no barriers to entry. We'll just sell to you. I'm like, you can't do that without some tax consequences.

Scott: 00:37:15

There's one. One barrier of entrance, but it's an easy one. You know, we can help you with that one.

Judy: 00:37:20

That's right. Yeah. Get your license. Get figured out.

Scott: 00:37:24

Yes. Yes.

Meredith: 00:37:27

This podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax, accounting, or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.