Live from SAPinsider Studio: Avalara Panel on Tax Calculation Challenges

May 14, 2015

Mike Alpert of Avalara moderates a panel during FIN 2015 with John Sallese of Avalara and Sona Akmakjian of Ducharme, McMillen & Associates. The three weigh in on tax calculation challenges facing organizations today, and what organizations are doing to meet those challenges. Topics of this discussion include:

  • Changing business models as the top pressure that tax calculation engines must account for
  • Increasing state tax regulations that introduce complexity into tax calculation processes
  • The challenges that globalization brings to accounting for a multitude of tax calculation rules
  • The trend toward cloud-based tax calculation solutions

This is an edited version of the transcript:

Mike Alpert, Avalara: Hi my name is Mike Alpert, and we’re here at the SAPinsider Financials show in Las Vegas, and I’m with John Sallese form Avalara and Sona Akmakjian from DMA. Hi John, Hi Sona how are you guys doing today?

John Sallese, Avalara: Hi Mike

Sona Akmakjian, Ducharme, McMillen & Associates: Hi Mike. Good.

Mike: So we’re here at the big SAPinsider Financials show, all the financial professionals are here. There’s been some recent surveys done by a lot of SAP users and financial professionals in particular and they said the No. 1 business challenge for them is changing business models. How does that impact you guys?

John: You know, I’ve been seeing over the years a lot of companies having different areas I guess they’re looking to actually bill in, either quote taxes or bill taxes in, which has kind of led companies to have a lot more different systems they’re looking to actually calculate taxes with. It’s certainly been a challenge for them because it look like they’ve been quoting in some systems and then they actually want to process the invoice in another system. And they’re trying to make sure those two systems stay in synch when they’re actually calculating taxes. And it’s been a big of a challenge because sometimes they have like a cloud provider calculating tax on one side of the coin, but then on the other side on their billing system they’re actually using another tax engine altogether and it’s been hard to get those two systems to sort of synch up on the different methodologies they’re using to calculate taxes. And if they’re not doing that in synch correctly it causes the invoice amounts to be different between the two systems. People like to validate those credit cards ahead of time, and if the amounts aren’t the same it could certainly cause some problems not to mention the customer service concerns around that when the quoted tax amount is different than the total invoice the customer gets after the fact.

Mike: And when I hear changing business models is the No. 1 pressure that people are in, I always think of having to move from a traditional model of maybe invoicing your customers to moving to a subscription model, to using e-commerece or something like that. Sona, you’ve been involved in taxes tied to SAP for a long time. What have you seen happen?

Sona: What we find is that in addition to the complexity that John mentioned, states are becoming more aggressive. They’re looking for different ways to tax situations, create affiliate nexus, so complexity from the states makes this whole situation more complicated for our clients. And they not only have to worry about the government authorities coming after them, they have to worry about the public face; we see a lot of class-action lawsuits, there are attorneys out there looking for ways to make money so it adds more to the complexity.

John: Those states are definitely watching people a lot closer now, those revenue sources are sort of drying up within different states.

Sona: Yes, they’re more aggressive looking for that extra dollar and where it’s going to come from. It’s usually the larger organizations.

Mike: As we talk to customers that are using SAP, we’ve seen lots of customers are encountering a lot of different issues, and one of the trends that we’ve seen too is foreign companies, both European and Asian-based companies coming into the U.S. and getting hit with this reality of what the U.S. has done with our sales tax rules. What have you seen John in working with some of the Avalara customers and how they’re experiencing things?

John: As a lot of our customers are looking to move globally, or they are already global, they’re realizing the complexities associated with doing business in different countries. The ones I get hit with a lot are Brazil, India, and China. We’re going into those different countries, lots of different rules on how to calculate taxes, they started out pretty small so they’re doing the individual research on how to actually produce those invoices there, but they’re realizing they need a method or a methodology to scale up on how they actually invoice. So they’re looking for third-party solutions to actually calculate taxes there. That is something Avalara has actually been strongly focused in; we’ve actually gone out and actually have acquired companies that are specific in those types of industries to calculate taxes effectively for our customers.

Mike: And in particular Brazil.

John: Yes, in particular Brazil has had a lot of the focus lately to make sure that we’re actually calculating taxes correctly there. A lot of people look at Brazil and the complexity there is sort of equated to doing business in two different versions of the United States. There are just a lot of different tax rules there, and they’re not as centralized as far as their rules and taxing is as compared to the United States.

Mike: And Sona, in doing a lot of the tax work that you guys have done with clients, have you seen people make a lot of changes or customizations to core SAP SD (sales and distribution) functionality around how to handle taxes, especially when they’re doing multiple countries?

Sona: I think for years the trend was you can use a bolt-on system like Avalara for the U.S. and Canadian transactions, but SAP’s internal functionality was good enough for the rest of the world. But even outside of the U.S. things are getting complicated; the authorities are taxing things differently especially in certain verticals. Clients are beginning to realize that they do want as one central location to do tax calculation, whether in the U.S., or Canada, or the rest of the world. And John, you bring up an excellent point; Brazil, Canada, and India are the most complex out there. So it’s really hard to do business in those countries and not have a bolt-on system and I think that’s what our clients are beginning to see.

Mike: And so with SAP moving so heavily into cloud with HANA and everything else that’s going on, how have you guys seen customers or prospects ask you questions relative to this whole issue of on-premise vs. cloud and what’s the difference and why should we do the cloud?

John: From a lot of mobile technologies coming into play right now in the market for border entry, hand-held POS devices if everyone knows what I mean – they can all equate that to the cellphone they’re holding to take those orders. A lot of demand for available, cloud-based solutions to actually calculate taxes. They want the on-demand quick response time for a hand-held unit to calculate taxes. And they want that tax to be correct the first time, because again they don’t want it being recalculated in SAP incorrectly. So I’ve definitely seen a demand on that.

Sona: I remember maybe 15 years ago when cloud was just evolving, tax directors would say “Oh, no, we have to have an on-premise solution. Everything is here, we don’t want tax information on the cloud, it’s not going to happen.” Things have changed, I think the trend is definitely the cloud and everyone is open to it. So I don’t see that pushback anymore.

John: That’s a very good point. Having done tax consulting for many years, a lot of your on-premise based models need to be updated. Taxes change and they change a lot. They need a method to actually keep those systems up-to-date, and those updates can be monthly, sometimes they’re weekly, sometimes they’re last minute. They usually have to have a process sort of built around how to get those systems up-to-date, so a lot of customers are looking to off-load that, they want someone else to be held accountable or responsible for keeping those systems up-to-date. And they definitely look toward Avalara to actually do that for them. The only other area I typically hear about too is performance. They’re looking for a system that maybe can calculate, I don’t know, 100 transactions a day now, but they might need something calculating, I don’t know, 200/300 transactions an hour – they need something that can scale up as their business scales up, and they don’t want to think about swapping out another tax engine, they don’t want to think about buying hardware in order to make that system performing as fast as they need to have it perform. So again they’re looking to offload those types of responsibilities to a service provider that can handle it.

Mike: Sona, what have you seen in terms of agility? We talked about this idea of changing business models, and we know the world of financial folks within companies things need to be predictable, they need to --- have you seen people just have crazy timelines of having to pivot and be able to change business models and be able to have tax adjust to that?

Sona: Yes, I’ll take retail for an example. Historically all these companies were separating their brick and mortar, their e-commerce, and their catalogs. There were separate legal entities, they were separate organizations, separate operations – that’s a perfect industry where things are changing drastically. Now everybody is in the trend of centralizing and with that you want a single tax engine. You want the same tax calculation whether I’m buying through the catalog or on-site, on-line, or at the store. So definitely there is a big trend for example in that industry about centralizing. And with that comes tax projectsa dn usually there’s ample time to do it, sometimes there’s aggressive timelines and we try to accommodate our clients, DMA has a huge resource pool around SAP and we’re able to meet our client needs generally.

Mike: What would be your one piece of advice for all the financial professionals that are here relative to how to be able to handle sales tax and other transactional taxes as we head into 2015 and 2016 and beyond?

Sona: One advice we’d give clients is around exemption certificate management. When auditors come through the door, everything is taxable unless proven otherwise. So if you can’t find that hard copy certificate to show that it’s exempt, guess what, you’re paying the taxes. So I would say that professionals need to think about how they centralize the exemption certificate management into a single utility and maybe scanning devices to makes sure that it’s there when that auditor walks through the door.

John: That’s a very good point, and it’s one of the areas Avalara has really focused on the past couple of years, we’ve actually spent a lot of time developing systems and processes to actually manage that piece of paper. Everyone thinks that piece of paper they get is very simple, they just get it and put it in a filing cabinet. But if you can’t reference that when you need it during an audit, that’s when the problems occur, and you either have to go back and call all your customers – if you know who the customers are.

Sona: And if they’re still in business.

John: Exactly, if they’re still in business. And find them, track that, get that certificate down. Or, you’re digging through boxes trying to find where all those certificates are and getting them altogether just so the auditor can take a look at it and see if it’s actually viable or not.

Mike: Yeah, it’s one of those areas of compliance that everybody forgets about until it counts, and then it can be really painful. Well John, Sona, thank you so much for joining us today and thank you for your time.

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