Greg Chapman - Getting tax right for ecommerce

Jay Myers: Hey, everyone. Welcome to another episode of own your commerce. This week, we have Greg Chapman, the senior vice president of business development at Avalara, which is a company that helps e-Commerce stores all over the world handle tax properly, specifically for e-Commerce stores. So we’re going to dive into a lot of things you need to know and think about when you’re selling online and especially when you’re selling internationally online. So Greg, thank you so much for being on the show and welcome.

Greg Chapman: Well thank you for having me. It’s fun to be here.

Jay: Tax is one of those things that you have to deal with it, and people might want to put their head in the sand and not talk about it, but it’s obviously very important. It touches pretty much every single store. So hopefully we can answer some questions here today for some merchants that are listening. Why don’t we start with, just give us a quick overview on what is Avalara and how does it work?

Greg: Sure, so Avalara is a technology company that was founded 15 plus years ago. I think it’s going on 16 years ago. And really it was founded around the central tenant of solving this complex tax compliance issue problem through an automated SAS solution. And back when it was founded SAS, wasn’t a thing and so interestingly, back in the day, it was more on how do I connect, do I get this rich content set. It was more of a distributed solution back in the day, but Avalara is all about, our former tagline was making tax less taxing sales tax, less taxing, and really it’s about compliance.

Avalara strives to bring automated tax compliance solutions to the mid-market and ultimately to everyone who has it because all of us unfortunately have the same requirements. It doesn’t matter if you’re big or small, and there’s really no reason that you should be doing it manually, whether it’s payroll or some of these others, they’ve all been automated. And we feel the same about taxes. Ultimately tax will be an automated process and Avalara has a SAS solution that we automate the calculation accurate calculation of tax worldwide, as well as in the backend, we help you to remit that tax and do all sorts of other things. We help you to register. We can help manage some of the tax compliance issues around being tax exempt, et cetera. So it’s been a good ride.

Jay: Why is it such an issue I guess is the question that comes up a lot. Why is tax so complicated?

Greg: It’s a great question and it goes back to the tea party back in Boston, et cetera, where here in the United States, we have given the ability for each state to manage their resources and their attacks independently. And as a result here in the United States, especially cause the rest of the world is on that. The rest of the world is an exaggeration, but most other regimes around the world have a backend tax and it’s more of a federal level. And there are exceptions in Brazil and other, but here in the United States, we have 50 States. Those 50 States have the ability to set different tax rules. And so here you can have a fire station that is built and we have a local tax regime that is set up to pay for that fire and it’s generally done through sales tax.

So there somewhere in the neighborhood of 15 to 16,000 different tax jurisdictions in the United States alone, and then we call them shades, but they’re different tax jurisdictions literally think about if you have that fire station, they’ve drawn some shape around that fire station that says people who live within this area pay some sort of a tax, be it sales tax, property tax, other to fund these things, you get into all sorts of different deviations. And then on top of that, then you have all the business rules and the content around that. So here in Washington State where I am, the sales tax has a different set of rules and application than in New York or in Pennsylvania, so the combination of those two things is wicked, and it leads to just immense complexity that we are all federally and locally responsible to adhere to. And the automation of that is really what Avalara is hoping to help with. It takes that complexity and makes it our problem, not yours.

Jay: Wow! Thank you for that first of all. We’re in Canada, but Canada sells typically all over the world. Tax is very different country by country, state, by state. A lot of people think it’s just the zip code level, but it’s even more granular than that, correct?

Greg: That’s right and Canada is more on the GST side of it, but it’s all the same. There are exceptions and so we use all sorts of colorful examples in Colorado, where if you look at a map, literally the governor’s home is exempt from tax. And so someone who delivers something it’s not accurate enough to say it’s in that zip code, you literally have to go onto the street or on one side of the street it’s tax exempt or there’s some different because of again, that fire station and that other; those don’t follow zip code lines, those follow very special jurisdictional boundaries and shapes that they arbitrarily set up. And interestingly, some of the States use Avalara to manage those jurisdictional boundaries because it’s so incredibly complex.

They can’t even do it so they come to us and when they go out and do audits and other things, they’re actually referring to our database and our shapes or our jurisdictional maps to adhere to their own taxes that they set up by themselves, which is crazy to think about. But that’s the sort of complexity that as they get into it, all these States, because it’s not just the state level, it’s County level, it’s municipalities, it’s all this stuff and it rolls all up and they all have the ability for better or worse to make these changes and these different rules. So incredibly complex and that’s just on the calculation. Once you calculate it and you’ve charged someone in collected tax on the backend in North America, Canada here, you have to remit it. You have to remit it quarterly; you have to remit it monthly, annually, depending on your different thresholds. And so if you’ve opted in and you all of a sudden have this responsibility charge, you have to do it accurately, but then you have to remit it and in different places around the world and in Canada versus the United States and it’s all different so it’s fascinating.

Jay: Avalara does both sides. It helps merchants charge proper tax, and then also helps them remit that tax as well.

Greg: That’s right, that’s right so in the world of tax, the terms we now use are we help automate compliance. And when you think about compliance, you have to register, you have to then accurately account for and charge for the right tax and you have to remit it. In Avalara our goal is to be on the frontline of all of those different processes around the world, help folks register then calculate and remit in a compliant manner.

Jay: So what exactly is a merchant responsible for when it comes to tax. This is a question that comes up a lot in various communities. There’s a concept of while at a certain threshold and they don’t have to charge tax until they hit a certain amount. There’s physical nexus versus economic nexus selling outside the company. So if I’m a merchant and I’m starting a store other than just installing Avalara and letting it just calculate it for me, just as a general understanding, what are merchants responsible for collecting and remitting as far as tax goes?

Greg: It’s a great question. And it really goes down two years ago, there was some legislation that was established and it got into this whole nexus. And it’s interesting as well as just good to know, there was a Supreme Court decision in the state of North Dakota that basically was back from the cataloging days and in essence, what it did is it said, hey, listen. At the end of the day, as a cataloguer should not be charged for the tax to maintain sidewalks and street lamps and all this other so if I’m not physically present in that state, I shouldn’t have to pay tax. And it went up to the springboard. It was passed and it was the rule of law for 30, 40 years. That is the legislation that Amazon, interestingly built such an empire on is they were tax exempt in most States. And so when you think of physical nexus, there are all sorts of things that, again, on a state, by state basis, they treat the physical nature.

Whether you have an office, whether you have an employee, whether you attend a conference in Denver or in some other place, all of a sudden that triggers and when I was at Amazon, we had to be really careful about where we even flew. And interestingly, like on a personal, if I went out of state, I had to actually be very careful to say, hey, this is personal travel because Amazon, God forbid I was the person that triggered tax for New York State as an example, when that had huge ramifications for Amazon globally. So this physical thing was one thing recently, there was a Supreme court decision that overturned that, and it’s the Wayfair it’s South Dakota versus Wayfair, which was done a year and a half ago, or so basically that said, hey times have changed this crazy thing called the internet is around all of a sudden.

And so now this idea of tax exempt because of nexus or physical is no longer valid; and so while there are still limitations on the physical side of it, it’s now an, a statement instead of and or right. So you have physical nexus and you no longer are exempt as a result of it. You can also have economic and basically economic. And again, it’s different state by state, unfortunately, but that just gets into your economic activity in the world of e-commerce. If I have a shipment in generally its destination-based versus origination so if I’m based here in the state of Washington and I’m sending something to New York City, I now have economic nexus in the state of New York and all the different States are different, but they look at it from a transactional standpoint, right? So they’ll say, hey, listen, if you have one transaction, but that transaction is for a million dollars, you’ve triggered your economic nexus. Or if I have a thousand transactions or a hundred transactions, I’m actually not sure what it is off the top of my head for New York. But if you do that, even though the transactions are worth 2 cents, you’ve triggered because of the volume of transactions, you’ve triggered that economic nexus as well.

Jay: So is that state by state?

Greg: It’s state by state yes.

Jay: So what triggers it, the economic nexus is not the same.

Greg: That’s right and again, the big change that Wayfair did is that was just kind of get out of jail free for most small businesses. Because even if they have a large volume like Amazon, because they weren’t physically there, the Supreme court basically said, Hey, because the economic stuff doesn’t matter. And that’s what Amazon rode for years, as well as a bunch of small retailers around the country here in the United States, outside of the United States; by the way, it hasn’t changed much. There are different laws associated with how those countries are treating marketplaces, which is a whole different topic.

But as it relates to your, to answer your question, there’s a physical requirement that still applies. It’s just much less and much different and then most of the time, small businesses need to look at their economic, transactional activity in those States, which is different on a state by state basis to see whether you’ve triggered an obligation to register and remit taxes, pay, charge, and remit. So there are still thresholds so you can be under the thresholds and be fine, and you still are tax exempt. You just have to be really careful to make sure that you monitor those and make sure you’re adhering to the laws of those States.

Jay: And so does Avalara then keep track of volume. It syncs with whatever platform you’re using with orders, volume size transaction value in certain States. And then it calculates it. Like it’ll trigger it at the right time, depending on when you reach that point?

Greg: That’s right. We have tools. There are other tools out there, but that’s exactly right so what we then do is we go to a small business and we say, Hey, listen, help us understand your activity. And generally what that is give me all of your shipments, your transactions and show me where they’ve come from and where they go to. We then have the business logic on our side to understand that, Hey, listen, Illinois is an origination versus a destination where it’s coming from versus where it’s going to 90% of some high percentage of the activity is destination basis, like New York example.

And so that we analyse all that transactional activity and say, Hey, listen, you’ve triggered your responsibility for these reasons in New York, Minnesota, and the state of Washington, you’re getting close in Illinois in South Dakota and in whatever, right? So we give you a map and we physically show you where you’ve triggered nexus and you should register and start to charge and remit tax to the States versus where you otherwise haven’t. And that’s really the new part of it since South Dakota and the Supreme court, the Wayfair that responsibility is now unfortunately much more of an obligation than it was before with the legacy legislation,

Jay: Just to kind of touch on a little bit on then where Avalara plugs in to stores. I know the answer to this, but I think for the benefit of people listening, obviously Avalara is not an e-Commerce platform.

Greg: That’s right.

Jay: But you somehow integrate work with, maybe you can kind of highlight if someone isn’t using Avalara right now and is doing what probably a lot of merchants are doing and charging flat tax rates by state, or maybe they’re one step better than they’re doing zip codes and they’re thinking, okay, I should maybe think about this. Where does Avalara come into this?

Greg: So 15 years ago, Avalara went out there and they saw the fact that this was kind of a big company problem that was being solved and Avalara said, Hey, listen. At the end of the day, what we really need to do is we need to be where the transactional activity happens, right? So in the world would be commerce that’s in the Shopify as the world in the big commerce is in the Magnetos, the delusions, the witches, the Square spaces, all of those platforms, Avalara needs to make sure that we have an easy integration that’s out of the box for all of these small, medium and large sellers to leverage. And so what Avalara has done is we’ve gone out and invested very heavily in pre vetted integrations.

We internally call them connectors, but are integrations that enable these on a back end point of view, that when you’re transacting via Shopify, Magneto, or any of these, we then have the hook that allows those to, instead of going to a local tax table that you fill in with any of those applications, with annual data, you can just call our API and we take all that complexity out of there and you no longer have to do this. We’re certainly not the only solution that does that. I would say what makes Avalara a little bit unique is that we’ve done this across hundreds and hundreds of applications because well, most of them have the big ones in place. You generally don’t just do business across one application. You have an order management solution that you might use. You have a quoting solution, you have a CMS, you have all these different applications that ultimately touch tax in different ways. And so Avalara has really tried to surround our customers and our merchants to say, hey, listen, we’ve got a connector for that. And we really try and exist where all these transactions are being calculated.

Jay: Interesting so why don’t platforms handle it themselves? Greg: That’s starting to be the trend, right? So that’s one of the things that I would say is trending, especially in some of these is taxes becoming more of a, of course you have some sort of a tax calculation solution. Why would you force me to put that in manually? - Because it is becoming a bigger and bigger burden for these small businesses. So in the past, the way that I would say it is for small businesses, it wasn’t as big a need and it wasn’t all that auditable so to speak, right? The States weren’t able to go after these small businesses because you had this overarching legislation that kind of prevented them and by the way, they’re going after some of the big ones. With this Wayfair and other, it really has brought the burden of proof down and small businesses unfortunately are at a higher risk.

It’s not supreme, but it’s at a higher risk. And the value of getting it right is more pronounced because if you’re selling just across the e-Commerce channel, that’s great, but most folks are multichannel. Most folks will have a website that they’re doing some level of activity that might be selling through a marketplace. They might have their own retail store where charging at the different locations, be it one or many. And so all of these channels now have different levels of tax if you’re not consistent. And if you’re not charging them appropriately, unfortunately you’re responsible for that and you have audits and penalties and others. And if you can automate it and do it centrally through technology like Avalara, why wouldn’t you right.

Jay: Well, on that note, maybe not to scare anyone too much, but do you have any stories of, I mean, what’s the worst case scenario? Like if someone charges, I have a feeling someone might be listening right now and you might say something or tell a story and there’s going to be a lot of people that it will resonate with them because maybe that’s the way they’re doing it or you’re right. People do kind of brush this under a rug and say, well, they’re going after the big guys. I’m not, but like, what are some of the stories that you’ve heard that have happened to merchants who are just charging blanket rates or state by state?

Greg: For small businesses, there are scenarios and stories are just use cases that tend to pop up. The first use case that I would suggest is more and more common is through the marketplace activity. You still are the merchant broker. You’re responsible for the tax and it’s changing over time, but you’re responsible. So one of the stories that is pretty consistently known, or at least that we see a lot is a merchant will be selling through Amazon. And Amazon is not responsible for accurately charging and remitting the tax. Now that’s again, changing a little bit in the United States, but one of the things that happens is you go about your business and you sell on Amazon for a long period of time or any other marketplace. I don’t mean to point out just Amazon and you are unaware of the tax responsibility that you have, you get audited, unfortunately. And the auditor will come in and say, Hey, listen, in the state of California, you’ve been selling a lot to the state of California, especially if it’s high dollar items like computers or electronics or those sorts of things.

It’s not common, but we hear a lot about sellers who are unaware of their responsibilities and they are audited. And they owe the state of California a lot of money and in those cases, it’s not like the state just kind of says, Oh, don’t worry about it. Just make sure on a go forward basis you’re good. You are responsible for that. And that can, and extreme cases put businesses, especially small businesses out of business. It’s just; it’s a very, very unfortunate situation that they find it. And it’s not that the small business has done anything that is untoward or they just weren’t aware of their responsibilities. The other one I point out is kind of a one size fits all. So they go in and they do the best they can, but they mistakenly put the wrong tax rate. In a similar way they get audited, right? So you’re in your home state, you here in the state of Washington, you say, Hey, listen, and say percent.

I do a little bit of research and maybe they researched it and it was 8%, five years ago, but it’s now 9.7% and you’ve got the volume of transactional activity. The auditor will come in and say, Hey, listen. Unfortunately you’ve been, if you’re too high, happy days, the state accepts it. And as long as you’re not doing anything fraudulent, and you’re remitting it properly, they let you know that it’s been too high. And there are situations where you think, well, maybe you should pay that back to the customer, but that’s a different issue. You get out of jail on that one without any severe penalties from a state auditor standpoint. But on the other extreme, if you’re too low, you get into situations where you have penalties and interest for the back tax that you owe, plus all sorts of other colorful examples of how this is.

So again, it becomes unfortunately a big financial burden and we work with those sorts of businesses all the time. There’s something called a VDA. It’s a voluntary disclosure and basically the way it works is a small business will come to us and say, hey, listen, we’re in a bit of a pickle. We either have that marketplace scenario I described, or we have this tax scenario like we need help. And we go in and we actually access and we determined, unfortunately, that there is a problem. We will independently go to the state anonymously and say, hey, listen, I’ve got a client and this client unfortunately has been misrepresenting or has been applying the wrong tax rates or whatever the scenario is. We’d like to offer a deal. I get out of jail free one time offer and we voluntarily disclosed. We say, hey, they owe $10,000.

We’d like to cut the difference in half and do this for $5,000. Oftentimes it’s just around the penalties and interest. It’s around some, if it’s extreme, maybe the worst, but at the end of the day, we go to them, we get the agreement from the state upfront. And then we disclose who that merchant is versus disclosing what that merchant is. It’s just a way to soften the blow and make sure that you’re walking in with a known don’t deal. But that’s the way it works in real life. Is unfortunately, if you find out you have a problem, you discover it through doing some research or other, you do have a way to get out, but it can be costly.

Jay: Yeah so if a store charges too much tax, so say the tax is 7% and they’re charging eight for years. The state looks at that as that’s not fraud, if it’s across the board and they’re clearly padding tax, I imagine there must be cases where this is considered fraudulent activity.

Greg: Yeah so the trick there is, it gets into fraudulent activity. If you’re charging 8%, you’re remitting 7%, and then there’s a little bit of an issue, right? But 99.9% of the time, it’s a honest mistake. It’s a less severe; it’s not a full percentage point. It’s a fraction of a percentage point and it’s, Hey, get that updated and go forward. The other thing that I think is common practice. If it is severe, there is the discussion around, Hey, do you remit that back to the customer because you’ve overcharged the customer from a tax standpoint. And so not that the state is saying, Hey, listen, I’m only going to accept anything. You can get into the nuance of saying, Hey, listen, I’m going to remit back to the customer the amount. Again, the company, unfortunately is the one who bears the burden on both sides, but that’s really the scenario you get into an over situation.

Jay: Well, years ago I got a check from toys R us for, I was like $4.89 cents because of something similar to this, they had accidentally overcharged. I imagine they had to do this with all their customers. And I think something that a lot of people don’t realize is like, I assume this is a cross platform, but I mean, even in Shopify’s terms of service. They have a built-in tax calculator. I know it only goes to the zip code level though. It does not go anymore granular than that. But they say in their terms of service that even though they calculate the merchant is a hundred percent responsible for charging proper tax.

Greg: That’s right.

Jay: So you can’t rely on that at all. Does Avalara have any type of Insurance or coverage? If you completely rely on Avalara and you’re doing everything right. And then something wrong happens in these merchant thousands of dollars for some reason. Is there any coverage then or….

Greg: So we do take that risk. We take on that risk and we do our best to protect ourselves in that, so there are two scenarios. The one scenario which happens, unfortunately, no, one’s perfect given the complexity of this Avalara makes a mistake. We charge 8% when it’s supposed to be 7% or the other way we will work with the merchant and the States just to make sure that we get it right. But in those cases, yes, we stand behind their product and our content and our rules and we fund and we own that.

The other issue that at times happens is unfortunately, the merchant will make a mistake and they ascribed the wrong they’re called assistant tax codes, but the wrong tax category to a product or a catalog in some way, shape or form. In those cases, unfortunately, we certainly work with the merchant, but those are our tax codes and our rates aren’t necessarily at fault. It’s more of just a misalignment of the tax categories because you have a different tax rate on apparel versus furniture versus whatever. So in those cases, it’s a little trickier, but yes, if the merchant got it right, and they ascribed the right tax category, et cetera, we stand behind our product a hundred percent.

Jay: Well, that alone is a huge selling feature for me just to de-risk that.

Greg: Yeah and again, this is all about just taking this complexity. There’s really no upside to getting it right, but there’s downside to getting it wrong. And in this world of it’s no longer just sending things from Washington state to New York, I’m sending stuff to Toronto, as a retailer, I’m selling into London and I’m selling all around the world. While the complexity of getting New York State’s tax regime, correct, is daunting. I mean, the world is even worse, right? So now all of a sudden, I have to understand how that works in London and what are the thresholds. I mean, all that stuff in this world economy, in this cross border economy, let alone the duties associated with it, how to remit, like all that stuff is just more reason that as you get in and these tools enable you to do it, just be careful that you’re thinking about some of the implications from a compliance a tax standpoint.

Jay: I only have a few more questions, but one of the big ones I did have was global commerce. What are merchants responsible for when it comes to selling outside their country and assuming they have no nexus in anywhere else in the world does shipping overseas? Because that is probably the most common question we’re getting lately as internationalization, whether it’s we happen to have multicurrency tools. So we hear about it a lot, but they’re multilingual. They want multicurrency and obviously tax is something to consider with all of that. What are the considerations, but are they responsible for.

Greg: It’s a fantastic question. The first thing to understand is if you kind of understand the concept in the United States with a state by state changing tax regime and thresholds, right? That same concept applies as you move across a border. And so the difference between doing commerce in the United States versus international global commerce is you are crossing borders. You’re moving goods from one to the other, so at a base level, you need to and are responsible for understanding what are the thresholds associated with selling into the UK or selling into France, Germany, et cetera so it’s no different than that. Generally they’re De Minimis thresholds that are different, but as long as you’re not doing a huge amount of activity, generally speaking, small businesses fly under the radar, just like they would selling into different States in the United States.

You have to understand those thresholds. Certainly if you see a lot of activity going into one country, you’d want to take a closer look at it and consult either your accountant or get someone like Avalara to help you out. But that’s the first part is you just have that threshold, the same exact scenario as you do, selling state to state from a nexus or a tax category, point of view, the difference between selling within a country and cross border into another country is you get into duties associated with moving goods from one country to another. And it’s just this fascinating world that Avalara has gotten into about six or seven years ago. And it literally makes the story that I told you on the tax burden and the calculation and the different regions, it makes that look like child’s play.

And so here in the United States and around the world, you have generally speaking, you have tax associated to categories of goods, right? So women’s apparel, computer electronics, whatever it is, when you start going into the cross border, you have that same scenario. Only now you’re looking at duties associated with items, and it’s a many to many situation, right? So I send things from the United States out to X number of countries. And if it’s a good, that has a thread count with silk of X, Y, and Z, it’s going to be a different, what’s known as harmonized system code, but it’s going to be a different classification associated with that item, going to the UK versus potentially going into Germany versus going.

So, one of the big things with Brexit, as an example, as the UK leaves the European union, all of the HS code classifications all of the categories, if you will, and an item by item level, those are going to have to be rewritten. And so you get into this world and all of a sudden, if I’m selling from many countries into the world, it becomes a many to many solution, and you’re doing it at an item level. It’s no longer a category. So if you have a thousand skews that you sell across four categories of goods in the tax world, that’s four categories across all the different places. Now you have a thousand times the number of countries you’re selling into and the complexity is just out of this world. And then there’s different levels of theirs four digits so it’s something that Avalara is attempting to do the same thing from a tax standpoint is we’re trying to automate that and take the complexity off.

For sure platforms like Shopify, big commerce, Magneto, all those platforms are now looking at that in the same way as they’re looking at tax, they’re saying, Hey, listen, why wouldn’t we help our users both to differentiate our platform, but also take some of the burden off. And so they’re working with us as well as others to automate that problem, which is just a fascinatingly complex issue. So for what it’s worth, that’s the big distinction, a very long winded answer. But the distinction is it’s the same problem with the added burden of duties and the duties may not apply. It may be zero, or it may be something. And in real world, when you bought something and you go in and pick it up from the post office and you have to pay a $20 duty that wasn’t set up, it’s just not a great experience. Unfortunately, either for the buyer, for the seller or other and I can get into all sorts of colorful stories about stranding goods or having upset customers and other countries,

Jay: Surprisingly, it doesn’t come up as much as it should, but I’ve spoken personally on a few panels about internationalization. And you have the people talking about how you’re marketing internationally, how you’re supporting internationally, how you’re branding, how you’re feeling, local, your currency, your language, everything else. But the tax is always like an afterthought. I imagine a lot of stories, get their whole, go to market plan and then kind of go, Oh, shoot. We kind of have to figure out how we’re going to handle this site too.

Greg: I agree with you generally again, it’s not a calculation problem outside of North America. Canada is in the same, but once you get outside of North America, there’s a regime that’s known as VAT, value on tax for the most part. And it’s a backend, it’s a returns process, so when you buy something in the UK, it’s 20 pounds, right? Well, 20 pounds has the VAT included in the price it’s called tax included or tax inclusive so what happens? So I lived in Luxembourg when I was working for Amazon and my wife bought a blouse of some sort from the United States and it was some amount of money, $50.

When I went in to get the blouse because it was delivered and it was held at the post office. I went in and they said, well, you owe me another 30 year old at the time and I said, for what? And they said, well, this item that was shipped from the United States into Luxembourg, it’s made of this fabric and this fabric had a duty associated with it. So the cost of that, so here I am, I’ve already paid for the item. There was no expectation set that it was additional so I’m upset that I have to pay additional 30 Euro. I could have stranded that good in which case now the retailer in the United States would have had to try to figure out how to contact the postal office in Luxembourg who speaks French. It’s a nightmare, right and worst case of all is I’m now a customer.

And I’ve got a little bit of a sour taste in my mouth about this retailer because they didn’t set expectations around it and so it’s a real problem. Generally, it’s surfaces when you get that scenario and when you dive in and oftentimes when you tell that story, you’ll hear literally folks in the audience. Yeah that happened to me and it was a huge pain in the butt. But so I think as we open up the borders and as commerce continues to go more global, it’s going to become an increasingly bigger problem and bigger retailers. This is something they’re planning for. And they’re doing across their whole catalog,

Jay: I guess bigger problem and bigger opportunity for Avalara.

Greg: Yeah I mean, it’s a lesser known, but it is a huge area for automation. And again, it’s just an area where we think that it’s something ripe for disruption.

Jay: We got one last question before we jump into a couple of quick lightning questions and this one actually came in from our community. And so a lot of merchants use drop shippers or fulfilment centers. Is that considered nexus when you’re located in Chicago, but you’re using a fulfilment network in LA and Florida or wherever, or if you’re using multiple drop shippers, is that considered nexus in those States? So you have to follow those guidelines or how does that work?

Greg: So you’re going to hate the answer. Unfortunately, it is the answer. It depends. It’s a state by state. Generally speaking, I will tell you that if you are using a third party logistics, whether it’s a freight forwarder or any sort of a warehousing solution, generally speaking, and again, I’m not a tax agent do not offer up all those colorful explanations, but generally speaking, those situations are considered triggering physical nexus and it is a situation. So when now that you get into the physical, so all of a sudden now it’s that first part of the story I told, you have now triggered physical nexus. So even though I may have a small amount of commerce going into Texas, and I haven’t hit any the transactional or the economic thresholds, I all of a sudden now I have nexus. I do have the obligation to charge tax because my warehouse is located in that state.

And that has triggered a responsibility to charge and remit tax in the state of Texas as an example and so it’s one of the lesser known items. Interestingly, as FBA for Amazon has grown up. It’s one of the big things that if you just start to look at it online, it’s an area that is pretty controversial because Amazon says, Hey, it’s your responsibility to do this. But as you opt into FBA, that is technically a third party logistics solution. And Amazon has, I mean, they’ve got warehouses all throughout the United States and you don’t know where your goods go. And so there is this black box of, Hey, I don’t really know. I certainly sent it to my logistics, the FBA center here in Washington state, but they then have the ability to move your goods around and do co-located goods and all sorts of fun stuff that get the goods closer to the buyer, which makes it cheaper for Amazon to do.

But unfortunately, when they do that, they move your goods from the state of Washington, into California. All of a sudden they’ve triggered nexus in California for you. The good news and all this is there is marketplace facilitation that’s happening, where the States are sick and tired of trying to follow the bouncing ball to a lot of very small merchants. So what they’ve done is they’ve gone and said to the States, Hey, listen, even though you’re not technically the merchant of record, all the transactional activity, whether you’re acting as a retailer direct in the case of Amazon, or if you’re facilitating third party merchant sales, we’re going to treat those all as direct sales from Amazon. And Amazon is now your responsibility to charge and remit tax on behalf of both your direct retail, as well as your third party sales so great news.

Most sellers are off the hook. Here’s the catch and here’s the challenge is those transactions in some States actually count for the transactional activity against your thresholds, right? So now all of a sudden, I don’t have to remit in Texas because Amazon’s taking care of it or Etsy or Walmart or these others happy days. But my core business has inadvertently been triggered into tax and those, so again, that’s where either an accountant can help you, or we have tools that look at your activity across all the different channels, and then we can take some of that complexity out of it and just suggest to you, hey, listen, based on your activity for your direct retail, as well as your marketplace activity here is your likely nexus situation. Nexus is a fancy word for tax. Here are the States where you’re likely in a position where you should be registering and remitting tax.

Jay: So even though Amazon is the merchant of record for those sales from the Texas warehouse, that still also counts towards economic activity for that merchant as well.

Greg: So it depends, some of the States have enacted legislation.

Jay: Get Avalara, is what you need. That’s what we’re saying.

Greg: And I don’t mean to scare people. It’s just; it’s good to educate yourself, just to understand this stuff. Our CEO, he says, tax is boring, but the business of tax is fascinating. And it really is because all these nuances live and it’s not evident. It’s not self-evident and so to answer your question in some States, yes, Amazon facilitates the transaction. And even though they don’t necessarily take over responsibility for the goods as truly the merchant of record in the state’s eyes, they take on that responsibility. Now it brings up all sorts of funky scenarios that they’re dealing with on what if it’s returned while Amazon doesn’t own the goods and they didn’t resell it, they facilitated the transaction.

So there are all sorts of funkiness that happens in the background, but it is absolutely the case that in some States they are treating Amazon as the merchant record, in which case it actually takes that obligation from a transactional point of view, away from the small business. Unfortunately, there are other States that are treated in a different way, and they look at that activity, even though it’s facilitated by Amazon and paid that transactional activity counts towards your thresholds. And therefore you have to account for it. As you get into assessing whether or not you have a responsibility to charge and remit tax.

Jay: This is all going to be very relevant for Shopify as well too, as they roll out their Shopify fulfilment network. And the whole value pitch of that is they using AI can move packages between fulfilments to be able to fill faster and cheaper, like same way Amazon does. So it’s going to be more and more relevant for other people

Greg: It was really interesting as they got into it. I read something that said, well, Shopify is in fact a marketplace. They’re not like they are an e-Commerce provider that does exactly- everyone is trying to, in my opinion, and this is Greg Chapman’s opinion, but everyone’s trying to basically copy Amazon and give a similar experience because it’s a great experience. In doing so from a tax standpoint, he does trigger different tax responsibilities and so as Shopify goes out there and e-commerce provider with a fulfilment network, they are not a marketplace selling on the URL. So it’s your URL generally speaking, you’re the merchant of record. Shopify is not under that same marketplace, facilitation law and so just be careful as you look at that, because I think it’s a really interesting use case in Shopify offering a fantastic capability, but just understand that some of the downstream implications of that are important to grok

Jay: Years ago, Shopify launched basically a unified search across all their stores. I think it was marketplace.shopify.com; where you could search every single store, find the products they actually quickly got rid of it. It only lasted about six months. The problem was that it kind of got rid of the individual branding that stores were trying to build. It’ll be interesting to see what happens with launching shop, pay fulfilment by Shopify. They could back into a marketplace and be very competitive. They bring over a million. Now, if they did layer on a unified search, because that really is one of the main advantages that Amazon has over a platform like Shopify is I just need a new Bluetooth speaker.

And I know on Amazon, I can search and I can see hundreds of different ones and pick the one I want, where on Shopify, it’s kind of tough. Like I got to go to Google and search find stores. There isn’t a way to quickly find it so there could be potential big wins. I know merchants would complain. So it would be interesting to see how Shopify plays that in the next little bit, because they are in some ways kind of falling into what might be the perfect storm to create, to what could be, not take out Amazon, but be a competitor to it.

Greg: Yeah, it’s the best of Amazon potentially without the obligations to give them all of your content. I was a part of the group that started that whole marketplace business ton of upsides for small business around exposing your brand, exposing off the charts, they do the marketing; they’ve got the customers, et cetera. Downside is, is you are buying into doing this for Amazon. They get all your data, so there are some very scary things associated with it. And hopefully the pros, generally the pros far outweigh the cons associated with that. But if you kind of think about that with Shopify and they’re able to actually mimic the experience, but not have that sort of either expensive fee structure or other, it’s the best of both worlds, so they’ll be interesting.

Jay: Well, this has been fascinating. I see why first couple of times you use the word. Well, it’s a fascinating problem. I didn’t quite understand that, but I can see why yes, maybe tax is not exciting, but the framework behind it and the infrastructure and solving these problems, I can definitely see why people are passionate about it. I just want to end on a couple of quick questions here and we kind of do this every time. It’s just a little fun way to end off. You can say pass if you don’t have an answer

Greg: I’ll do my best.

Jay: First thing is what would you say? You’re in the e-Commerce world. What’s one of the biggest e-commerce mistakes either you’ve made or you see others making

Greg: For me the early days of Amazon. I was part of Amazon when they entered into and then got out of the toys R us relationship and to me, that’s really where this marketplace scenario is born. And while it was a very public exiting and divorce between Amazon and toys R us, to me, that’s one of the most fascinating and I would argue it was a huge mistake on toys, R us point of view, but it really is the deal that launched this fascinating new business that now is seemingly obvious to everyone. But back in the day, no one was sharing their URL. And toys R us was the first instance of that. And for me, unfortunately, a huge mistake for toys R us, but it also led to all sorts of innovation and disruption, which Amazon is excellent at

Jay: Interesting! What’s your favorite thing about your job?

Greg: I love working with smart people and solving hard problems. I was talking to my wife a bit back and I said, I think I would have enjoyed being a doctor because that’s really about interacting with people, but also solving problems. And so for me, what I enjoy is all the years I was at Amazon I learned every day I went in there. Amazon is just excellent at thinking about things differently and I find the same thing for me. I get a chance to work with third party platforms like Shopify and big commerce, as well as all the different ERP and others. In general, I’d still find that I am learning. In fact, just today, leading up to this, I have a much better understanding now of headless commerce than I had going into it. So I love learning and working with good people

Jay: What’s your favorite online store or last place you bought something online?

Greg: It’s cliché’ because Amazon is the last place I bought something. I’m personally fascinated by these marketplaces that are getting up like go or stock X or tennis shoes or some of the different. So for me, I do think Amazon continues to be the gold standard, but I’ve been fascinated just watching some of these niche marketplaces and just the incredible volume that they’re getting into. It just taps into a fascinating new business process.

Jay: Yeah that’s one thing that I think it’s going to be interesting in the next five to 10 years is does Amazon keep growing or do chunks of their like different verticals within Amazon get absorbed into niche? Like if it’s photography, marketplaces or outdoor travel marketplaces, as people become used to buying this way, does it still make sense to all be in one domain or in a handful of ones in digital?

Greg: I mean, you find these folks, there are one called teachers’ pay teachers where teachers sell their coursework and so what you find is it’s the community that it builds. So the community around tennis shoes, around coursework, et cetera. That’s what I think to your point might be the thing that Amazon is going to have a tough time replicating.

Jay: If you could give everyone listening one tip, what would it be?

Greg: I learned a tremendous amount. I would just say innovate, innovate, innovate. I always liked Jeff Bezos is, and I refer to it all the time is fail fast and the concept of a two pizza team where if you’re going to do something, keep your team no bigger than can consume two pizzas. And I just think those two things fail quickly, have big ideas. Don’t overanalyse get out there, fail quickly, set a timeline, and then keep your teams manageable. Don’t have it be so big that it becomes unmanageable to just to get something going.

Jay: Yeah and if you ever think failing is bad, go to a website called killedbygoogle.com. Someone started these years ago. It’s every project that Google has ever launched that they’ve killed. And there is multiples more that they’ve failed at than they’ve succeeded. And we would look at Google as a huge success of our time.

Greg: That’s right. Amazon’s the same way. I mean, Amazon has two X the number of failed projects than they do successful ones. The difference is they’re willing to walk away. I mean, they’re willing to walk away from failures after a set period of time. And they’ve said, Hey, here’s what success is and here’s what it’s not. And if it doesn’t meet those success criteria, they cut it and they cut it in a harsh way. And it is a fantastic business process to emulate if you can.

Jay: Yeah if you can, it’s tough; we’ve had to do it. It’s hard and it’s not easy for the people on the team, like the employees who work on something for a year, and there’s nothing more exciting than that launch day. And you crack the champagne and you launch a product, but when you, as a leadership team have to say, we’re cutting this project, really creating a strong culture where staff can be okay with that, even though it hurts, it’s not easy, but it’s important.

Greg: Absolutely!

Jay: Okay, my last question for you is most of our listeners are business owners, they’re entrepreneurs. Some of them have small shops; some of them are quite large. Do you have any favorite quotes advice or I like quotes, but anything that you kind of, as a leader, you are a senior vice president, so I have a team you lead.

Greg: Yeah I may have foreshadowed. I love the idea of fail fast. Some of the different things that Amazon has attributed to, but this idea of don’t be afraid of failure. I’m not sure I’ve got a quote necessarily around it, but that’s what I challenged myself with for sure is just putting myself out there and not focusing on the failure, but focused on the benefits of what you learn from the failure and then go out and get after it again. So there are all sorts of quotes around. If you focus on the wrong things, I’m not sure I’m going to be able to get one, but that’s something that I certainly focus my teams on and I try and hold myself to that same standard.

Jay: I love it. I heard someone say the other day, no matter what happens in every situation you don’t think of it or don’t look at it as a setback. Look at it as a set up. I think right now, with everything going on with the economy, it’s hard to not look at this as a setup, but I think this might potentially be one of the greatest set ups our economy has gone through in decades. And it’s hard to see that when you’re in it, but JJ Abrams had never missed a good crisis or a good recession, like never miss it, that opportunity and so, yeah, I don’t know. There’s a quote in here somewhere, Greg, but I get the idea. Yeah, I love it. Well, it’s been great chatting with you. Thank you so much for the time. If anyone has like questions, where do they go to learn more about Avalara?

Greg: I think avalara.com is an absolutely great place to go and again, we’re not the be all end all, but we certainly aspire to follow through with the idea of just taking that burden of compliance off your plate and allowing you to focus on your business. So avalara.com is where folks do is

Jay: Well on behalf of the entire emergency, you don’t have to now worry about the headaches of tax compliance and for people like you, who find it interesting, thank you.