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  • An Interesting and Timely IPO

    Posted by David Foster on June 22nd, 2018 (All posts by )

    I’ve been aware for some time of a company called Avalara, which is in the cloud-based tax-compliance business.  In the US, Avalara keeps track of the vast array of sales tax rates, which are imposed not only at the state level but often also at municipal and county levels.  Avalara integrates with a number of electronic commerce platforms, which can pass destination address info to the system and thereby obtain the appropriate tax rate in real time and include it in the end customer’s charges at checkout.

    The company did its Initial Public Offering on June 13, and AVLR quickly jumped from its IPO price of $24 to about $45 , putting its market capitalization at about $2.9 billion.  Yesterday, the Supreme Court issued a decision that has great implications for Avalara’s business…as well as for the businesses of hundreds of thousands if not millions of on-line retailers and the consumers who buy from them–and as of this moment AVLR is trading at $52.16, with a market cap of $3.32 billion.

    What the Court apparently ruled is that states can impose sales taxes on on-line transactions (and, I would presume, classical mail-order transactions as well) even when the seller does not have a physical “nexus” (such as a warehouse, and office or a factory) in that state. (And you can be sure that most of them will take advantage of this opportunity.)   This is really “just” a cost problem for very large on-line merchants such as Amazon, but the compliance issues for smaller businesses are going to be considerable.  Avalara seems well-positioned to help with this problem, but the ruling is still going to be far more burdensome to the smaller on-line merchants than to the large ones.

    See discussion of the sales tax issue at the Instapundit post.

    Regarding Avlara, I have not analyzed this company as a potential investment and am not giving an opinion on it for that purpose either pro or con, certainly not giving investment advice here.

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    28 Responses to “An Interesting and Timely IPO”

    1. Mrs. Davis Says:

      the ruling is still going to be far more burdensome to the smaller on-line merchants than to the large ones.

      Why? Avalara seems to be a service that could be pretty easily bolted onto Quickbooks, or at least Quickbooks online. The issue would only be cost.

    2. Brian Says:

      I don’t understand this decision at all. If I live in NY and buy something online in TX, isn’t the tax liability on the seller in TX? Why does NY get to take a cut? Does the seller pay TX taxes AND NY taxes?

      I know that some states, such as CA, charge “use taxes” to try to prevent people from buying stuff out of state, but they have no way to enforce that. With this decision it seems states are now highly incentivized to spy on on-line purchases.

    3. Jonathan Says:

      States can enforce use tax rules if they have access to retailers’ sales data as the new ruling seems likely to facilitate.

      Perhaps the ruling won’t be as harmful to small businesses as is being predicted, because it creates a big market for accounting services such as Avalara.

      Nonetheless this seems likely to be a destructive ruling overall and one hopes Congress will pass laws to nullify it.

    4. Dan D Says:

      Sales or use tax is imposed by most states at the point of retail sale. Many states have sales tax rates that vary by county or other municipality, sellers will have to know which municipality their customer resided, this is not always accurate by zip code. Some products are taxable in one state, exempt in another. Small businesses selling nationwide will have to comply, the Avalaras of this world do not have foolproof solutions. Sellers still have to file with these non-nexus states, many of whom require reporting total sales within their state and taxable sales within their state. Once that business registers for sales tax reporting and remittances, the state will then contact them with gross receipts taxes, business privilege taxes, possibly income or franchise taxes. Miss a filing deadline, be prepared to face a long struggle with a distant state’s department of revenue.

      All this time the customer has had the obligation to remit use tax if the seller did not charge sales tax, most did not, either out of ignorance, inconvenience, or tax avoidance. The USSC has just turned every multistate selling business into tax collection agents. That is time and expense these businesses will not be devoting to providing their customers products they need.

      Yeah, this is a pretty big deal, and unless Congress intervenes, which is unlikely, this will depress competition and small businesses will suffer. The big catalog and internet retailers will have the scale and departments of clerks to comply, at minimal marginal expense to their large operations. They won’t have to fear being disrupted by an army of the little guys.

    5. Brian Says:

      It seems completely bonkers to suggest that an internet sale happens at the physical location of the buyer, rather than the seller. How long until lawsuits based on this will have to be adjudicated because of the use of VPNs, other mailing addresses, etc.? And for those saying that tax software can easily handle the issues, what about the fact that you have to be properly licensed, registered, etc., with a state you are operating & paying taxes in? How many small retailers are going to do all the necessary paperwork to operate in all 50 states? Zero.

    6. David Foster Says:

      Mrs D…at a minimum, the business owner is going to be receiving correspondence from 50 state Sales Tax department. He is probably going to have to go through some kind of initial registration/setup process with each. If there are states that don’t accept electronic filing AND electronic payment, then checks will have to be printed out, signed, and put in the mail.

    7. David Foster Says:

      Sales taxes in some states do go into the general fund, which can be used for such things as Police, Fire Department, Schools, and Parks…all services which are used by businesses with a physical nexus, but not used by those which lack a physical presence in the state. So it seems incorrect to say that applying sales taxes to both kinds of merchants equally creates a level playing field.

    8. Mrs. Davis Says:

      David, Been there, done that. On both sides. This will be just as bad for the states as the businesses. That will force uniform electronic processes on both parties. Just like payroll. I’m sure Avalara talked about ADP in their road show.

    9. Jonathan Says:

      One prediction: Many more small businesses will become affiliates of large retailers that will handle the tax accounting in exchange for a percentage (2-6%?) of the gross. Amazon, for example, will benefit from any such trend in addition to benefiting from the reduction in competition.

      The overall effect of this ruling if it stands will be a transfer of wealth from consumers to state governments and to big retailers such as Amazon.

    10. Christopher B Says:

      Sales taxes in some states do go into the general fund, which can be used for such things as Police, Fire Department, Schools, and Parks…all services which are used by businesses with a physical nexus, but not used by those which lack a physical presence in the state.

      I don’t think this is really a valid way to analyze the impact of this decision. Sales taxes seem to be the least likely of any tax to be ‘paid’, i.e. taken out of profit, by a business. This is so obviously a cost borne by the consumer that most states have laws in place to forbid rebating or otherwise discounting a sale by the amount of sales tax due. Sales taxes are merely collected by businesses from their customers. They do bear a cost for doing this but I doubt that any business owner would look upon sales tax as anything but a nuisance. The preemption of sales tax for internet sales was, I believe, primarily to reduce the burden on fledgling internet businesses of having to comply with the vast number of sales and use tax regulations.

      This is certainly going to increase the burden on small businesses but the existence of Avalara indicates that internet sales have probably matured to a point where it’s reasonable to assume the point of sale software used by most on-line platforms can handle this.

    11. Grurray Says:

      And also to brick and mortar retailers. They’ve been outperforming the broader stock market since last year’s holiday shopping season.

      I think to some extent this can be attributed as part of the Trump Effect. Targeted government interventions giving old industries (and old jobs) a new lease on life.

    12. David Foster Says:

      Re, the preemption of sales tax for internet sales, I believe the differing tax treatment for remote sellers long predated the Internet…I don’t think Sears and Montgomery Ward and other from the glory days of catalog sales were collecting and paying sales taxes for the multiplicity of state and local jurisdictions.

      This article

      https://www.forbes.com/sites/kellyphillipserb/2014/08/18/flipping-through-history-online-retailers-owe-popularity-and-tax-treatment-to-mail-order-catalogs/#4ab864324ad9

      suggests that the catalog retailers were pretty much left alone until a 1986 challenge to Bloomingdale’s, based on the theory that their retail stores in that state did generate a nexus even though organizationally separate from their catalog division. The state’s argument…that the company did conduct business inside Pennsylvania because they advertised in the state and because the items for sale were largely the same items available inside Bloomingdale’s stores…was rejected by the court.

    13. Jonathan Says:

      I don’t think this is a technical issue. Until now you could sell online through a middleman (e.g., Amazon) and be liable to collect tax only for sales to customers in the state where your biz is located. Now that you must collect tax for all sales the middleman will reconfigure his software and solve that problem. The bigger problem is that small retailers will have to raise their prices by several %, perhaps up to 10%, to cover the new tax obligations. Maybe PayPal and credit card processors will take up the tax-collection-middleman slack at a reasonable rate, but you will still have to raise your prices.

    14. Mrs. Davis Says:

      David, I believe this decision is wrong because of the lack of nexus and stare decicis. I believe it would not have been decided this way were it not for computer capabilities and companies like Avalara. The arrival of computers and service providers is also responsible for the creeping complexity of the tax code. It will be interesting to see how soon I can do my taxes with Excel instead of having to buy TurboTax every year.

    15. Brian Says:

      Will this Avalara company register you as a tax collector in every single state?
      https://www.tax.ny.gov/bus/st/register.htm

    16. David Foster Says:

      Brian….looks like they will (for a fee) assist with the registration, but there is still work for the business owner to do

      https://help.avalara.com/000_Avalara_AvaTax/Is_Your_Business_Registered%3F

      Note also the “other considerations and restriction” about Local taxes and Combined Business Tax registration. This is really a very deep swamp.

    17. Brian Says:

      Yeah, I’m just trying to point out (again) that the posters who think that some software plugin will mean this is no big deal for anyone are way off base. I don’t see how any small business owner can do this.

    18. ErisGuy Says:

      I wish I’d shorted Starbucks after its diversity issues.

    19. CapitalistRoader Says:

      I’m guessing Quickbooks Online will offer a service to collect, file, and pay state sales taxes for their customers within six months. It probably won’t be cheap; maybe 1% of the sale, but their customers will gladly pay vs. getting in trouble with 50 different state agencies. I know I will.

    20. newrouter Says:

      Question: What if an internet small business, as a condition of the sale, starts selling his products FOB(his/her/they location). Would the business still be liable for 50+ sales tax authorities or just his own state/local jurisdiction? I know shipping terms such as FOB are typically reserved for international trade. But, this SCOTUS ruling makes establishing when “possession” or trade takes place relevant. Or, perhaps I’m just daft thinking in this way.

    21. David Foster Says:

      Newrouter…very interesting Thinking out loud here:

      If you travel from a high-tax state to a low-tax state, and walk into a physical store and buy something, then one would think that the applicable sales tax is that of the state you are temporarily in.

      If you go back home and take your purchase with you, nothing changes from a tax standpoint.

      If you walk into Fedex or the Post Office and ship it home, still, nothing changes from a tax standpoint.

      So, arguably, if you buy the item FOB and then arrange yourself to have it shipped home, the same tax principle should apply.

      It should be easy to arrange for title to transfer when the item leaves the seller’s facility…you’ve normally already paid for it, this seems like a simple thing to be defined in terms & conditions. The main issue seems like: who needs to arrange with the shipping carrier?…I suspect they would have to be your agent rather than the seller’s agent. If a large seller’s volume discounts did not flow through, then what you’d lose on the shipping would probably be more than what you’d save on the sales tax.

      OTOH, there may be state laws that require in some cases that you pay their sales tax even if you physically buy something elsewhere and move it home yourself…I believe some states do this with cars and airplanes.

      Other thoughts?

    22. newrouter Says:

      “Other thoughts?”

      What happens with the following: I “purchase” an item from Amazon. The item is the wrong item. (This case: CR 2 batteries rather then CR 123a batteries. I want to return the “wrong” item but Amazon tells me that they have “comped” me the charge. A transaction took place but I did not “pay” anything. What is being taxed?). In a retail establishment, the “transaction” is obvious. On the internet, the affair is complicated.

    23. newrouter Says:

      This is of interest but they are attacking from the south:

      Mexico’s Next President Tells Country: They “must leave their towns and find a life in the United States”…

      https://theconservativetreehouse.com/2018/06/22/mexicos-next-president-tells-country-they-must-leave-their-towns-and-find-a-life-in-the-united-states/

      Donald J. Trump
      ‏Verified account @realDonaldTrump

      We have to maintain strong borders or we will no longer have a country that we can be proud of – and if we show any weakness, millions of people will journey into our country.

      https://twitter.com/realDonaldTrump/status/1009928980475138048

    24. Anonymous Says:

      I know that some states, such as CA, charge “use taxes” to try to prevent people from buying stuff out of state, but they have no way to enforce that.

      I bought a rug in Turkey and paid import duty on it when it arrived at Customs. A year later, I got a bill from CA Franchise Tax Board,

      I pretested that states were not allowed to impose import duties.

      I even talked to the head of the FTB who agreed with me but said they would still dun me for the unpaid tax.

      I suppose I could have appealed to the USSC but I paid as being cheaper.

    25. ColoComment Says:

      Warren Meyer runs a multi-state small business and has a comprehensive post on how this new tax law would affect his company:

      http://www.coyoteblog.com/coyote_blog/2018/06/the-sales-tax-problem-for-small-businesses.html

      You can read who Warren is, here: http://www.climate-skeptic.com/about-warren-meyer

    26. David Foster Says:

      Colo…thanks. Good post.

    27. newrouter Says:

      Warren Myers:

      “I would propose a national sales tax system on interstate retail sales that preempts any state sales taxes.”

      Oh good a VAT. How about we push back and make exactly when a “sale” occurs the issue. FOB takes the sales tax off the business and puts it on the buyer to pay the sales tax. This is where we are now! The attitude should be: “‘eff the gov’t” at all levels.

    28. Mrs. Davis Says:

      David,

      If you travel from a high-tax state to a low-tax state, and walk into a physical store and buy something, then one would think that the applicable sales tax is that of the state you are temporarily in.

      If you go back home and take your purchase with you, nothing changes from a tax standpoint.

      Depending on the state, technically not true. The problem is enforcement. The Caliphornia Highway Patrol has a full-time trooper assigned to cruise hi-tech parking lots in Silicon Valley. If a high value vehicle is found with out of state temporary or permanent registration found frequently, the trooper will find out who owns the vehicle and they will have to pay Caliphornia sales and registration taxes if they are a Caliphornia resident.

      If you are caught in an income tax audit in Pennsylvania they will go through your credit cards and make sure you paid use tax on out of state purchases. There are also liquor stores across the PA border that the PSP monitors. If you put a case of liquor in the trunk with PA plates, you could be pulled over after you cross the border.

      Other thoughts:

      This will be as big a hassle for the states as for the small businesses. Wait to see how it sorts out. I suspect there will be thresholds for businesses to pay in a state on either gross revenue or in-state revenue. The other problem the states will have is enforcement. If there’s no real nexus, what can they do? Make a federal case out of it? Somehow I don’t see Oregon extraditing its business men to help Caliphornia collect sales tax from them.

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