Thought Leaders in Financial Technology: Peter Horadan, CTO and EVP of Engineering at Avalara (Part 3)

Sramana Mitra: If you look at the space, what are the emerging trends in e-commerce you see that are creating more pressure on this kind of real-time tax calculation?

Peter Horadan: One example is a customer of ours. They’re an online Amazon seller. They started using Amazon to manage their inventory. It’s a program called Fulfilment by Amazon. The interesting thing about that is, Amazon will then distribute your inventory to multiple states, which gives you an obligation to collect and remit sales tax in those states. They’re a Washington-based business but they quickly had to file taxes in 17 different states. It had previously taken them eight hours to manually prepare just the Washington return. After using our system, they’re spending one hour a month for filing in 17 different states.

Sramana Mitra: How does that work? Is Avalara having to calculate the tax information? It seems like when I buy from Amazon, even from third-party sellers, Amazon tells me what is the tax collection that’s happening for that particular transaction. Doesn’t Amazon already have that built into their system? What is the role that AvaTax plays in that context?

Peter Horadan: We do both. If you’re in a Shopify system and the customer is at the checkout, the estimated tax is a real-time API call to our system. You can send out a system invoice from any ship and to any ship. We then go through a pretty complicated calculation to determine that tax. The first thing we do is we determine what jurisdictions are involved. There could be a lot.

In the United States, there’s the state, county, city, and special taxing jurisdictions. Every jurisdiction has its own set of rates. Then there’s the applicability. Products are all taxed differently. There’s plenty of jurisdictions where clothing may or may not be taxed depending on the character of the clothing. The tax might be halved or eliminated. If it’s over a certain amount of a certain price, then the exemption doesn’t apply. Food also has a lot of different applicability rules. We’re tracking over 800,000 unique codes just in the United States alone.

On top of that, there’s tax holidays. A lot of jurisdictions will have tax holidays. There could be a back-to-school tax holiday. There could be a tax holiday just to incentivize commerce. All of that is calculated by our services, on average, in 60 milliseconds or less. There are also much more complicated examples. We have hundreds of customers who are in the fuel space. When you’re determining tax on fuel, the interesting thing is there’s over 50 parameters that go into a fuel tax calculation, one of my favourites being the specific gravity of the liquid. You’re measuring that by volume. When the fuel is coming out of the ground, they’re measuring the specific gravity. We take over 50 parameters into account just to calculate tax on fuel.

This segment is part 3 in the series : Thought Leaders in Financial Technology: Peter Horadan, CTO and EVP of Engineering at Avalara
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