Summary
In this episode of the Ecommerce Finance Podcast, Stephen Brown and Mac Wright from Avalara discuss the upcoming changes to sales tax for Shopify Plus users. They delve into the complexities of sales tax calculation, the importance of understanding nexus, and the registration process for compliance.
Mac explains how Avalara’s tax engine simplifies the sales tax process for ecommerce businesses, while also addressing the challenges posed by varying tax laws across states and countries. The conversation highlights the need for businesses to stay informed and compliant in an ever-evolving tax landscape.
Takeaways
- Avalara has been a leader in tax technology for over 20 years.
- The relationship between Shopify and Avalara is changing with new tax solutions.
- Businesses must migrate to new tax engines by April 30, 2025.
- Sales tax is complex and requires understanding of nexus and registration.
- Nexus determines a business’s obligation to collect sales tax.
- Collecting sales tax before registering can lead to complications.
- Sales tax calculation involves where, who, and what.
- Different customers may have different tax obligations.
- VAT is a significant consideration for international sales.
- Staying compliant with sales tax is crucial to avoid penalties.
What We Cover:
00:00 Introduction to Sales Tax Changes in Ecommerce
02:09 Avalara’s Role and Shopify Plus Integration
06:38 Migration Options for Shopify Plus Users
10:19 Understanding Sales Tax Complexity
11:34 Nexus: The Foundation of Sales Tax Obligations
19:05 The Registration Process for Sales Tax
21:30 Calculating Sales Tax: The Key Factors
28:39 The Importance of Product Taxability
31:26 Navigating VAT and International Sales Tax
37:02 The Future of Sales Tax Compliance
Interview Links
Mac Wright on Social Media
Work with LedgerGurus
Stop losing sleep over sales tax! Let LedgerGurus handle the complexities for you. From nexus determination to filing, we’ll simplify compliance so you can focus on growing your business. Reach out today and get back to what you do best!
Transcript
Stephen Brown (00:00)
Welcome to the Ecommerce Finance Podcast. I’m your host, Stephen Brown, COO at LedgerGurus. In this episode, I have Mac Wright with Avalara to discuss some changes to sales tax that are coming to Shopify Plus and insights on what’s involved in calculating sales tax for an online purchase.
Mac, thanks for joining us.
Mac Wright (00:18)
Stephen, thank you for having me.
Stephen Brown (00:20)
Give us a little bit of background about yourself and Avalara for those who might be hiding under a rock and don’t know what Avalara is.
Mac Wright (00:28)
Sure. So, know, Avalara has been around for 20 years. We’re a global, you know, leader in tax technology. Anything to do with indirect tax, both domestically and international. We really just want to be the cheapest, easiest, best solution on the market for anyone looking to address indirect tax, which as you know, Stephen, and probably a lot of the people who are listening to a podcast like this, it’s a complex and annoying world. Nobody gives you prizes for doing things right and there’s a lot of consequences for doing things wrong. Like most people who talk about tax for a living, I didn’t go to school for it. My background pre-Avalara, bartending, raft guiding, service industry especially, but I’ve been here for about six years, both implementing software on our professional services side as well as in our product side developing and testing software. For the last several years I’ve been in the sales space working with Shopify and ecommerce customers, just helping people solve tax problems.
Stephen Brown (01:40)
And for those who are listening not watching, you have an incredible collection of games in the background there. Board games. Yeah, that’s awesome. That’s awesome. You’d fit in with my family. We love board games as well. All right. Well, let’s talk about, there are some changes coming to Shopify Plus in regards to how sales tax is done. Can you summarize what, you know, maybe tell us what, how it has been and where is Avalara in this mix and what are the changes that are happening?
Mac Wright (02:14)
Yeah, absolutely. So, Avalara and Shopify have a very long standing, you know, very successful, commercial agreement where for years, the only solution outside of manually uploading tax tables to your Shopify store was upgrading to Shopify plus and using Avalara. Shopify used Avalara as, kind of a great way to get people to upgrade to their, their premium subscription plan. And Avalara got access to Shopify’s customer base, especially, you know, those premium customers. So for years, that relationship worked well. The landscape has changed. Shopify built their own tax solution called Shopify Tax, which is these third party content, but Shopify built and maintains updates, their solution, Shopify Tax. And then in 2023, Shopify opened up their partner portal, which is, you know, not just anyone can build a solution to calculate tax at checkout, they vetted and they’ve only allowed approved partners, but now there are multiple options at any level of Shopify, you no longer have to be on plus to use a third party integration to calculate tax. So because of these changes to the landscape and to how Shopify operates as a platform, now kind of moving into that platform as a service space with allowing third party vendors to build approved integrations.
You know, there was just a mutual decision that the legacy integration doesn’t need to be supported anymore. So we gave a six month notice of deprecation and April 30th, 2025, anyone who uses the integration between Shopify and Avalara on the plus integration, we’ll call it, we’ll call version 1.0 for the sake of this conversation. Anyone who uses version 1.0, that will be deprecated and shut off April 30th, 2025.
Stephen Brown (04:12)
So that’s also the engine that you’re referring to for those that are really sales tax nerdy. That is AvaTax, right? That is the product that is running under the hood of Shopify Plus. Is that correct?
Mac Wright (04:12)
That’s correct. Yeah. So it’s, it’s not so much under the hood as you know, what customers have today, what I’ll call 1.0 is an integration to Avalara built by Shopify owned and maintained by Shopify and kind of in a different business model that you don’t see really anymore. And that we’re moving away from is actually paid for directly to Shopify either you know, you would a customer who used it would have signed an addendum to their Shopify contract to add that additional service, unlimited tax calculations for a flat monthly fee using the Avalara engine. So they were effectively white labeling and reselling our tax engine to their customers.
Stephen Brown (05:07)
Was that tax engine, was that only for US based customers or was that being used outside of the US as well?
Mac Wright (05:17)
So Avalara right now and for years has been a global tax calculation engine. So Shopify, the nature of how it’s structured is you can only have one tax engine active at a time. So Avalara was and is capable of calculating both domestic and international taxes. So that was true on version 1.0 and true on the new integration that we’re here to talk about today as well.
Stephen Brown (05:42)
Gotcha. So April 30th, 2025, that’s coming up here in a few months. Customers will have to make a choice for where they want to go with their sales tax engine. Tell me a little bit about the option. So option one is to go with a Canadian company who’s trying to calculate for, you know, obviously you do global, but talking to a US audience here. you got this option one is their sales tax engine. Side note, I don’t, I don’t love how Shopify, I feel like Shopify needs more accountants. Case in point, go look at their revenue reports and any accountant will tell you why they don’t do it right. Option two, you could migrate to Avalara. So tell us about the option. If you’ve had happiness with Avalara, how you would move forward continuing to use Avalara.
Mac Wright (06:38)
Yeah, absolutely. So, you know, we believe we have the best tax engine on the market.
Stephen Brown (06:46)
Let me pause you there. How long has Avalara been doing sales tax? 20 years.
Mac Wright (06:52)
20 years, a little over 20 years. So 2004, it started in my hometown, Bainbridge Island, out of a garage, as a lot of great tech companies are. And that original tax engine has been upgraded over the years. We’re now fully cloud-based, decentralized, on the web entirely. And we’ve come a long way since then. We just recently had you know, what we call our Super Bowl, which is cyber week where we handle almost billions of tax transactions over the course of a single week. And, both did a hundred percent uptime during that. our engine has certainly grown from, from those humble beginnings, but, you know, we’ve been doing this a very long time. We have years of content, and are always making strides, you know, our big, recent purchase in the content space. bought a TTR or tax research and rebranded to ATR, but it was the largest tax content platform, basically Google for sales tax. And are still, because it’s so much data, still integrating that content into our engine today, but always just making strides and making sure we have the most up-to-date and largest content library available for indirect tax.
Stephen Brown (08:15)
So keep going. I want to come back to the tax calculation and what goes into that. So I kind of pulled you down a tangent. they can talk through the process of continuing to work with Avalara if somebody’s been working with them as part of Shopify Plus before.
Mac Wright (08:32)
Yeah, absolutely. So, you know, our platform that we would have about 6,300 customers using the legacy integration. We have about thousand customers on the new integration. Not all of those have migrated. Like I said, the new integration is available to anyone on any level of Shopify, not just plus. So there’s a lot of, you know, net new customers using it, but we understand that, you know, the businesses who’ve been using it would like to keep using it. And if you take price and difficulty of implementation and things like that out of the window, people use our platform because it works. And so what we’ve done is created a special migration offer to match what Shopify is currently charging their customers, which is $250 a month. So we have a 12 month migration offer. You sign that, you get access to the new app. Most businesses I’ve talked to, you know, I’ve migrated, helped about a hundred customers so far migrate. More about 95 % have been able to self migrate without having to raise their hand, which is a pretty impressive, you know, coming from my background and implementation and technical support. You know, you don’t see stuff like that very often. So it’s a pretty smooth process. And the goal here is to be minimally disruptive to these businesses because tax is just one of those things you just want it to work.
You don’t want to think about it and you would like it to be in the background doing its job. And the goal here is that it’s not taking center stage. It’s not rebuilding how you do your processes. It’s just swapping something that works for something new that should also work and kind of rip and replace.
Stephen Brown (10:19)
Awesome. I want to talk a little bit about what goes into sales tax. We’re not going to nerd out to the degree that maybe a tax accountant would want, but for a seller, you know, I work with and I talk to a lot of brands and I think the feeling and I’ll tell you, I am a part owner of a brand and my feeling around sales tax is just like, make it go away. Just make it as easy as possible. It’s not strategic. It’s just a pain in the butt.
And I don’t think that people fully appreciate how complex sales tax is. So let’s just talk through that. when I go and this is kind of the magic of ecommerce is simplifying some very complex processes. And one of those processes is that calculation and collection of sales tax. Talk to me a little bit about what goes into calculating sales tax on a typical order.
Mac Wright (11:16)
Yeah, absolutely. think calculation is kind of that first piece that drives everything else. know, obviously with ecommerce, especially, you know, what most people are concerned about is just figuring out where they have a tax obligation. And I’m sure as you’re aware, you know, the concept of nexus, I mean, that’s a huge rabbit hole.
Stephen Brown (11:34)
Well, let’s start there. Let’s go down Nexus just a little bit, because I’ve seen some crazy stories over the years. I’ve seen people go in and say they’re selling online everywhere, so they just start collecting online. What is Nexus and why, like, how is that calculated? Maybe let’s start there and then we’ll get into the calculation and collection of sales tax. So what is Nexus and what does it mean?
Mac Wright (11:38)
Yeah. So from, 30,000 feet nexus is basically just your relationship with the state and it’s, you know, so it goes back to when sales tax was introduced after the great depression, you had boots on the ground, you were physically located in a state and you were selling physical goods and that meant you had to collect tax, right? obviously the landscape has changed, you know, first with mail order catalogs, and that, you know, kind of increasing the scope of what physical nexus might be to you know, do you have a warehouse?
Do you have affiliates like those kind of all but it did still for a very long time boil down to do you have physical presence in a state? You know, and there’s a Supreme Court case quill versus North Dakota That you know went for a while and then eventually we get to 2018 and Wayfair versus South Dakota, which kind of blew the whole thing open and created and established rather and held up a concept called economic nexus where South Dakota had put a law into effect that said, yes, you’re not physically located here, but you do enough business that we believe you shouldn’t be circumventing tax. It went all the way to Supreme court was held up and other laws in other states that were either already on the books or were going into effect kind of all happened. And so we had this big boom of sales tax obligations in 2018, 2019.
And you know, kind of that we’re still feeling a little bit of tailwind, although it slowed down a bit to this day where now your nexus, your obligation, your relationship with the state has, um, has grown because now you have, um, either a total number of orders in a calendar year or 12 month period might be 200 unique transactions. And even if they’re only $10 and you did need to collect sales tax.
You now have to collect tax and then other states kind of went the other direction and said, we’re not going after small businesses. We don’t want to make undue burden on interstate commerce. And we’re going to set our level based on the dollar amount. So you have this kind of general concept where it’s a hundred thousand dollars or 200 transactions in a lot of states. And then you have variations on that where that dollar amount scales up, you know, 200, 500,000, you know, in the case of the larger states. But you still have this complex web of laws, right?
Stephen Brown (14:28)
And then there’s still, and yeah, so you have different laws by different states. And then to your earlier point, there’s still, if you have a physical presence in a state, like let’s say you hire a remote team or a remote employee, does that give you physical nexus where you should be collecting sales tax, even if your sales activity doesn’t exceed those thresholds?
Mac Wright (14:55)
Yeah, and it can and it does in most states, right? If you’re registered for payroll tax, you know, one of the things that we often find, one of the most common reasons you might get an angry letter or even just a letter in general from the state is you hired a road employee, you registered for payroll tax. Well, sometimes it’s the same Department of Revenue and people talk and they might walk across or be talking in the lunchroom or in the break room and, hey, X company and we’ve seen that time and time again where you might have hired an employee, you’re doing the right thing, you think you’ve gone down your list of things to do and suddenly you get a letter saying you’re delinquent on sales tax or they would like to know more about your company and nobody wants to get that letter.
Stephen Brown (15:25)
Yeah.
So step one is you have to have a Nexus and it’s a lot easier to have Nexus. You know what’s crazy, Mac, is we still run into companies that online sellers that are occasionally, not very often, but we’ll still hear them, they’re come and find me. And we’re like, okay, good luck. And they wanna work with us and we’re like, we don’t really wanna work with you because you’re trying to avoid a legal requirement to collect sales tax, that mentality still exists among some sellers. Do you guys run into that as well or?
Mac Wright (16:45)
Well, all the time. Yeah, absolutely. And I think our stance is we’re a compliance company, but that doesn’t mean we’re enforcing compliance. You our role is to educate and automate. so, you know, my background in new business sales, I I ran into that exact scenario a lot. We have a team of tax advisors. We have partners like yourself who we refer business to to say, hey, if you want to dive deep into this, understand the risks to you, understand everything that can go on so that you can make an informed decision. All of this is available to you in our network. Let’s tap into it.
But yeah, of course, there’s going to be some people who are generally a single owner, young company, fast growth kind of creates a more risky profile that might go, I got this far, come find me. And to those, we’re happy to work with you. We’re going to provide the technology to automate to your level of desired compliance. But unfortunately, if the state comes knocking at your door, they’re not going to come after Avalara. They’re going to come after you. I think kind of our stance in that is make you absolutely aware of the risks so that you’re not going into a situation blind. But if you want to take those risks, I our stance kind of differs from yours in that regard.
Stephen Brown (18:18)
We have a little bit more exposure as a professional services company. So one of the other things we see, so you have Nexus or, know, we see some people that aren’t sure, right? And they’ll start collecting sales tax before they register with the states because they don’t understand that just because you have the legal liability to collect sales tax doesn’t mean that you should until you’ve gone through a registration process.
And this causes all sorts of problems, whether they are legally required or not. Sometimes they’ll get scared. They’ll collect sales tax in all the states. And then they’ll come to us and we’re like, uh, did you register? what? What are you talking about?
So tell me, let’s just, just kind of describe you. You have an obligation. Now what is registration entail?
Mac Wright (19:05)
Yeah, absolutely. So, you know, there’s a couple different methods of registration. The most common is, you know, a future dated or current dated registration where, you know, you’ve determined you cross Nexus, you go to the state or, you know, use a third party. know, Avalara offers registration as a service, which basically means you tell us where you need to register, where you’ve established Nexus.
And as we covered, we can help you figure that part out as well. But once you know that, we can register you. And generally, for most customers, it’s a pretty straightforward process. You fill out a questionnaire. You say, I cross Nexus. This is my sales in the state. Register me. The state sends you notice. As you know, Stephen, and maybe some of the people listening, it’s not always that simple. If you’ve already collected tax, if it’s been a year or two since you crossed Nexus, you know,
Stephen Brown (20:00)
Yeah, they’ll ask you, hey, how long have you been work? How long you’ve been selling in my state? How much have you sold there? We’re seeing, cause we do registration services as well. And we’re seeing when you start going down that path, they’re starting to ask more. We’re starting to pry and see, Hey, is there additional, thanks for being compliant. Were you compliant last year when you were supposed to be? So in some cases, we’re seeing states trying to squeeze out more than, you think you’re going to have to owe.
Mac Wright (20:02)
They’re going to ask you some questions.
Stephen Brown (20:31)
So something to be aware of. And one of the things I would say on this point, and I tell people over and over, there’s a couple of mistakes you can make when it comes to sales tax, but one that you want to avoid is collecting before you register. Don’t collect until you’ve registered with the state because that creates all sorts of complications and it’s very expensive for somebody like us, LedgerGurus, to unwind that mess. We can do it, but it’s not pretty. So make sure you do those things in order. So you get registered.
And this is where, let’s take us to where I wanted to go. Now I hook up a sales tax engine, like an AvaTax. And when somebody goes to purchase something that is calculating the sales tax on that order in real time, tell me about what goes into that. Because again, as I’ve talked to my team and the Avalara team about the sales tax laws, it’s crazy. Like how is sales tax calculated?
Mac Wright (21:30)
Yeah, it boils down to kind of three factors on every sale. Where, who, and what. There’s complexity in each of those, of course. But they’re kind of gates. Where unlocks who unlocks what. And what I mean by that is where the sale takes place is the first thing we look at. Because if you don’t collect tax in a jurisdiction, you know, maybe you have to, maybe you have nexus, but if you’re not registered, as we talked about, and you’re not collecting tax, we want to make sure that we don’t.
So the first thing we look at is the, the ship to ship from address. And that is what kind of unlocks the other complexity. Now each individual address might have three, four or five different sales tax rates attached to it because we have state, city, county, multiple special taxing jurisdictions, especially as you get into, you know, LA or Denver area. I those are kind of two of the most I’m in Seattle. We have some of the highest sales tax rates in the country, but the complexity is not quite as high as a place like Denver. You know, there’s a classic example we point to at Avalara when, kind of talking someone through this the first time, you know, we helped Colorado build out their sales tax lookup website because it was, you know, we had better content than the state did. And there is a specific street.
In Denver, you can look out, it’s actually Aurora, just south of Denver, but you click on one side of the street, the tax rate is 4%. You click across the street, the tax rate is 7.5%. Same street, just on different sides because of how those GIS boundaries are drawn, different jurisdiction.
Stephen Brown (23:10)
Holy cow. Same street. Yeah. And the different jurisdictions, right? When we see a sales tax rate, to come back to your earlier point, it’s the city, it’s the school district, it’s the utility. It can be all sorts of people that are getting their piece of the sales tax transaction.
Mac Wright (23:32)
And you need the ability to have it complex and simple at the same time, because your experience as a customer is you should see tax, right? You don’t necessarily need to know how the sausage is made. Most businesses aren’t necessarily displaying a full breakout of the blended tax rate, but you need that as the business. You need that in an internal database saved so that when you file, when you have someone file for you, if you ever get audited, you can reference, you know, the tax rate at that address on that date. And that’s where an Avalara comes in is the breakout. With Shopify specifically, on your order, on your fulfillment, you will see that breakout. Your customer may not necessarily see it on their invoice, but it’s there if you need to provide it to them. And customers in this day and age are savvier than ever, especially as we get to kind of the who or the what of the determination, which kind of rolled me into a
Stephen Brown (24:28)
Yeah, let’s go there next. we got the what or the where, the where sucks. And let me just ask you one more question. How common is that situation where one side of a street might be taxed different than the other side? Is that a common occurrence?
Mac Wright (24:30)
Yeah.
I think the scarcity makes it all the more complex, right? know, most situations are going to behave like you expect them to. City boundaries, et cetera. But, you know, to use another example, I was working with a winery in Napa and Sonoma County and, you know, a lot of these wineries are relatively rural. They might be just outside of the city limits.
So, if you’re looking in Google on the map and it has the city name and you’re seeing a tax rate that you might not expect, well, if you look into the weeds of it, the GIS, which is kind of the official boundary of the city limits, you might find that that winery is outside of city limits and they’ve actually been overcharging by 2 % tax because they had no idea that they were actually outside of where the statute applies. So it’s not super common.
But all the more important to get it right, you know, when it does matter, as well as just even if you’re not in one of those corner case scenarios where, you know, across the street is a different address, you still might be dealing with five or six different tax rates that apply to you. And even if they also apply to your neighbor, just the act of figuring out your own tax rate is complex enough.
Stephen Brown (25:44)
but it exists. It’s gnarly.
So that’s the where. Talk about the who.
Mac Wright (26:09)
So who boils down to, not every customer is going to be taxable. In ecommerce, we see it all the time, especially more and more these days as businesses are moving a lot of their wholesale business online. You might have a separate store for your business to business sales. It’s different from your direct to consumer. You might have them in the same store. So being able to identify different customers by whether or not they’re a wholesale customer, a religious organization, knowing the difference between which states will exempt a university from sales tax and which states will expect the university to pay sales tax. Those are the kinds of things that will get large differences depending on especially specific industries where you might sell entirely to that kind of customer or wholesale makes up 90 % of your business.
You know, in that case, knowing who’s exempt and for what reason and be able to actually manage those documents and keep them in a centralized database that you know they’re up to date and they know who they apply to and being able to seamlessly actually apply those exemptions at checkout. my go-to on this one is always drop shipping.
Drop shipping is just the most complex, but also the most common business model that you see today, especially, you know, new smaller companies just starting up that don’t have the funding to purchase inventory. You know, those drop ship businesses, the suppliers make that so much easier. But what they don’t tell you is how complex that web gets as there’s multiple sales taking place every time your customer clicks buy, you’re buying from your drop shipper, they’re shipping it on your behalf.
You’re making multiple sales. Whose nexus takes a place? Whose exemption certificate actually matters in this case? Who has the obligation to remit tax? These kind of complex factors on what seems to be a very simple transaction, just making sure that you have a strategy for dealing with who your customers are, what’s their tax status.
It’s so necessary in having a functional ecommerce business in today’s day and age.
Stephen Brown (28:34)
So we got the where, we got the who, now let’s talk about the what.
Mac Wright (28:38)
Yeah, the what? Gosh. And again, this is defined by the exceptions, right? Most things, if you look behind me on the shelf, almost everything up there is taxable everywhere at the full rate. know, board games, books, it’s all just physical goods. But my shirt, your shirt, glasses, I know you’re wearing glasses. I took mine off because of the glare, but…
Stephen Brown (29:04)
Yeah, they’re taxed differently.
Mac Wright (29:09)
If it’s prescription, it’s taxed differently than if it’s not. You don’t need to know all of those laws though in today’s day and age. What you need to do is utilize a service like an AvaTax where you just have to know your product. And so instead of knowing, okay, clothing is taxed. It’s not taxable in Pennsylvania unless it’s formal wear. It’s taxable in New York unless it’s under a certain dollar amount.
Stephen Brown (29:10)
Yeah.
Mac Wright (29:36)
It’s not taxable in Massachusetts or Connecticut unless it’s over a thousand dollars and consider a luxury good. You don’t need to know those laws. You need to know that what you’re selling is clothing. The specific type of clothing can matter. So you just need to be an expert on your product and then you let, groceries is a great example. Yeah. You know where I’m from Seattle again, we don’t tax grocery items.
Stephen Brown (29:52)
Groceries is another good example, right? There’s a lot of variability with groceries.
But I’ve seen you guys, you guys have some great articles where you show like this piece of food is taxable, but this one is not, know, just like these weird quirks that happen. I probably should have put a trigger warning at the beginning of the episode because I know when I talk to people, it just frustrates them. They’re just like, this is insane. How, how is it that we have such a complex system here around tax? it’s just like, well, welcome to 50 states with their own set of rules and laws and and You know, if somebody has a good idea, but the you know, think what you know, the end result for ecommerce is it’s a big freaking mess.
Like this is the you see this more than anywhere else is I’m selling to multiple locations potentially multiple products and and Different customers to your point the the where the who the what and it’s just a big complex nightmare in terms of calculating what I owe, which is why you really need to be using an engine like an AvaTax. And so maybe let me ask you, because I know the answer to this, but one more variable is like, and these things are changing all the time, right? Like, it’s not like you build up this database and you’re done. The states are constantly tweaking their laws.
Mac Wright (31:26)
Absolutely. And it’s not just the states. If it was just the states, you know, 50 variables to keep track of, that would be one thing. But, you know, tax is global. And we haven’t talked about VAT or GST. And, know, for a lot of sellers, it’s not super relevant. But, you you’re not dealing with 50 jurisdictions. You’re dealing with 50 states. You’re dealing with sub jurisdictions. If we talk about Alaska, they don’t have state sales tax. They sure do have city and county.
And they have a special governing board of basically a coalition of cities that work together to build a tax department that’s not actually a state tax department. So do they have a state sales tax? Do they not? It depends who you ask. It depends on the complexity. And then you have other countries. know, VAT is mostly a simpler system, but it is a complexity.
Stephen Brown (32:15)
Let’s go down that path. Yeah, so let’s explain VAT. What is VAT? Because if you’re an American, probably, you may have heard of it, but what is VAT? And where do you run into VAT?
Mac Wright (32:28)
Yeah, so, you know, as an American, if you’re shipping internationally, you know, you may think, I don’t have to worry about tax. Well, you know, VAT – value added tax – is a, you know, a consumer tax on the price of goods, but it’s not just charged to the end consumer. One, you know, customers overseas have different expectations. You know, VAT should be included in the sale price. The difference if you go to the store in America and it’s $9.99 you know you’re paying more than that it’s kind of built in you have that moment when you’re a kid you think I have a $10 bill I can go buy this $10 this $9.99 stuffed animal you get to the counter someone breaks your heart so we expect that as customers because we’ve learned that internationally your customer expectations are different is the price and the VAT the tax is factored in and it might be as high as 20 % but it’s included in the sale price of the good and it’s not just the final sale price, you know, your business to business transactions, you charge the VAT at every step.
It’s value added. You charge VAT and the VAT is paid on, you know, from what you paid to what you sold it for. And that’s the value that you’ve added. That’s the name of the tax itself. You get credits back. It’s a complex web, you know, especially for the distribution and manufacturing, you know, kind of side of things.
Stephen Brown (33:24)
my gosh.
Mac Wright (33:53)
But even as an end consumer and the final sale on that chain, you still have to collect and remit tax. And it can be easier in some places. The European Union’s made a lot of steps to simplify that process over the years with IOSS or Impart One-Stop Shop, which allows you to have kind of one registration and one filing that covers the whole EU. But you still need a tool to calculate that and you still need to meet those customer expectations of including it in the sale price. And you generally want to have a separate storefront or a separate market set up. And that’s not even getting into customs and duties and landed costs, which is there’s extra taxes when you’re crossing borders. And all of that just adds to this complexity of selling internationally for American companies. And similarly for other countries selling into the US, they’re not familiar with our complex system of 13,000 unique jurisdictions, each with their own special tax rate.
Stephen Brown (35:01)
So this is the complexity of calculating sales tax real time, is you’ve got all these things that you’re, all these factors that you’re having to calculate and ideally not become a friction point on that sale, right? You just want to calculate that number and purchase is done. But behind the scenes, all this nonsense is, I call it nonsense because it feels crazy when you kind of pull it apart, it is happening to make that happen.
Mac Wright (35:27)
Right.
Stephen Brown (35:32)
And then sales tax, maybe we’ll take the cycle through. I’ve registered with the state. I’ve used the engine calculates it. I pull that money out. This is one of my beefs with Shopify. If you go look at revenue report, they will say your their revenue reports include sales tax. yeah, it’s insane. So people are like, oh, I made, you know, $500,000 last year. Well, actually you made about 495 for whatever reason.
Shopify has a clue, decided to include the collected sales tax in that number. And that’s not accurate. You know, my team will always be like, Hey, this is, this is not income. It’s not, it is, it’s a liability, you know, to nerd out on accounting. This goes onto the balance sheet is something that you owe to a state. It’s not yours to keep. You’re just the intermediary, unfortunate intermediary to collect. then you have to remit that sales tax. do a filing with this with the state and send them over the money and depending on how much you, you know, there’s different intervals that you have to collect and remit for it. It’s it’s it’s a nightmare, right? This whole process is a nightmare. what, you know, people like us, our companies and the broader ecosystem is trying to do is, Hey, can we simplify this as much as possible so that people can be compliant with the law and, um, but not lose their hair trying to do so.
Mac Wright (37:02)
Yeah, I mean, it’s one of those things that you can become an expert. People like us have made a career out of learning this stuff and becoming an expert. But for the average person who has to interact with sales tax, it’s not a value add. know, could becoming an expert is not a good use of your time. Yes, it’s never going to make you money. Just simply won’t. And so the. You can lose money, right? It can be a cost.
Stephen Brown (37:16)
It’s a necessary evil of business.
But you can definitely lose money if you don’t do it right. We’ve seen audits where they’ll come in and they’re like, boom, you owe us this money plus interest, plus penalties on sales tax that you never collected. That’s the worst part is when you’re getting asked to pay for something that you didn’t collect money for.
Mac Wright (37:49)
Yeah, so we want to be boring, right? Stephen, we want to be a boring part of your business. We want to work. We want to minimize your risk and we want to give you time back to focus on things that will make you money that interest you that were why you got into whatever the career it is that you were doing instead of focusing on sales tax. The people I talked to, it’s not their first or second job at the company. It’s often the third or fourth hat that they’re asked to wear.
Stephen Brown (37:51)
Yeah.
Mac Wright (38:19)
And you know, like we talked about the beginning, there’s no prizes for doing it right. There’s a lot of penalties for doing it wrong. And you don’t get a lot of good jobs or attaboys or, you know, pats on the head for filing your sales tax return on time without any penalties. It’s just what’s expected of you. So.
Stephen Brown (38:34)
No. It’s a down, it’s, it’s, there’s really no upside, but there’s a lot of downside to sales tax. It’s just like, you got to do it. It’s not exciting, but if you don’t do it, it’s, it’s, it’s penalizing. One of the things, maybe kind of a wrapping up thought, there’s always been that conversation simplifying things. I don’t see sales tax and, and I’ve never, you know, I like the term you use indirect tax. doesn’t seem to be getting simpler. It just seems to be getting ever more complex every year.
Mac Wright (38:43)
tons.
Stephen Brown (39:09)
Is that a fair assessment or do you see simplifications happening out there?
Mac Wright (39:16)
I would say it’s getting more complex, maybe in fits and spurts. know one thing Avalara is doing to kind of look around at the landscape, what other countries around the world are doing. We’re very focused on e-invoicing, which is the kind of process of the government being involved at the transactional level and tax being calculated and remitted at the point of sale, which is going to add a whole nother layer of complexity and governmental oversight, you know, designed to minimize corruption and promote doing things correctly, but with additional technological demands and just a changing of way, you know.
I went over to Brazil over the new year because my wife is from there and I’d always wanted to go to Brazil for New Year’s and had a fantastic time. But, you know, part of their system is that the vendors on the beach all have credit card readers. Your phone is a credit card reader. Every invoice can be electronic because historically there was a corruption problem and a tax evasion problem and their solution was to move everything electronic and digital and make sure that the government is involved on every sale. And that does appear to be the way the world is trending.
So I do only see the system getting more complex. Now the tools to make it simpler are also getting better and our goal at Avalara is to make sure the tools move faster than the regulations. But it is one of those things that, you know, it’s just laws built on top of other laws. And like most situations, I don’t see anyone who’s gonna sweep through a magic wand and simplify the whole thing.
Rather, it’s just gonna be built layer on top of layer. And that’s how we got to where we’re at today. And I don’t see any reason why that would change going forward.
Stephen Brown (41:26)
All right, well thank you for enlightening us, Mac. If somebody wanted to connect with you, what’s the best way to do so?
Mac Wright (41:33)
Yeah, just, that’s a fantastic question. So we, on our website, we have a contact us. If you’re a Shopify customer, especially one who’s on the legacy plus integration, if you go to your settings page in Shopify, go to taxes and duties next to the avatax app that you use today, there’s a bright red box that says upgrade. If you click on that, and you will hopefully in the near future see an online buy page that says you could upgrade and buy right there in the meantime It’ll send get you a contact form.
You can call a number Excuse me. You can call a number or you can Reach out to us via email or fill out a contact form and we’ll reach out to you. So that’s taking a talk contact with me And with avalara avalara.com contact us we have chat we have you know forms, have a number, there’s a lot of ways to get in contact with us, but specifically if you’re a Shopify customer, it’s right there in Shopify and it’ll tell you exactly what you need to do. You just got to go find it under settings, taxes and duties.
Stephen Brown (42:45)
Awesome. And if you need help with somebody who’s expert working with Avalara, LedgerGurus, we are partners, long time partners with Avalara. We do all the sales tax things so that you don’t have to. Alright, thanks for joining us, Mac. We’ll call this a wrap.
Mac Wright (42:59)
Awesome, thanks Stephen, it’s great talking with you.