How To Avoid a Sales Tax Audit on Your Farm Business with Matt Hammond, Avalara
In this episode of the Direct Farm Podcast, we're delighted to host Matt Hammond, National Sales Manager at Avalara. Listen and learn as Matt shares how Avalara's tools can simplify and streamline your Farms' business taxes.
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James: 0:24
Hey, welcome everyone to the Direct Farm Podcast. We've got a fantastic conversation for you today. As many of you might be aware of Barn2Door is a big partner. In fact, a certified partner of Avalara, and we're super excited about working with Avalara because they are the best in class solution for managing taxes. And as we try to help farmers grow and manage their direct sales and their farm business, nothing more important than making sure you're paying the tax man correctly. And this summer too, we're really excited because Avalara is going to be one of our official conference partners at the upcoming direct farm conference on August 3rd. You're welcome to join us for this event. It's a completely free virtual conference. So if you're a farmer anywhere in the country, you can. Join us for this event. And there you'll get to hear not only from Avalara, but also from QuickBooks and Mailchimp. And you'll learn a bunch of tools and tactics to help you be able to grow and manage your farm more effectively. So today I'm delighted to welcome Matt Hammond from Avalara. Matt, Thank you so much for joining me today.
Matt: 1:24
Well, thank you for having us. It's awesome. Really great to be here and excited to talk about some sales tax and all your folks over there. And It's a lovely day in sunny, North Carolina. There's definitely definitely some blue skies out here, so it's a good day.
James: 1:35
We call those blue clouds in Seattle. Cause it's not quite blue skies here yet. So, but I share your affinity for North Carolina and throughout the Southeast great place. So tell me a little bit about yourself, Matt, before we start diving into taxes. Right. So, what do you do with yourself down there in North Carolina when you have a little bit of free time?
Matt: 1:51
Yeah. So a lot of times I have three tree walker coonhounds and they get walked and are in the woods, a generous portion of my mornings. And so when we're not out hanging out with the dogs where we're actually on the pontoon boat with my wife and my baby girl, and we spend a bunch of time on the water. It's my daughter's favorite word is to say boat. So she sees the boat parked in the driveway, and then when we go on the water, she just screams it out loud, over and over again. So we spend a lot of time on the water and, really enjoy it.
James: 2:19
That pretty much shares my same enthusiasm for the water as well. I probably would scream like your daughter does too, because I love being on the water. I tried to get out at least two to three days a week in the summertime. I love being on the water, especially on a pontoon boat where you can re kick back, relax and enjoy the company. Well, Hey, for our audience the farmers we're talking with, let's talk about some of the basics anyways. A lot of farms today you know, may not necessarily think about taxes unless they got audited. Right. And certainly in today's environment, especially as you know, local governments are probably thinking about, you know, other sources of revenue, et cetera. Why is it so important for farmers to be thinking about, you know, using a third party solution, like Avalara to manage their tax calculations and filings?
Matt: 2:59
Yeah, I think it all starts with, you know, and I'm a firm believer in the statement, you know, do what you do best and then outsource all the rest. Right? And sales tax is no different. So one of the things we hear a lot are, you know, companies are growing, farmers, you're expanding your sales. You're hiring additional employees. The things you have to think about is sales taxes are extremely complicated in every state. There are different and the rules and regulations have changed drastically over the last couple of years. If you sell enough into a state now, you now have to get registered. And so one of the things I think that's really key is Avalara's bread and butter is to help file sales tax returns. If I'm doing what I'm doing and then I'm, and I'm running and operating a farm, I want to focus on things that are going to generate revenue for me. Filing sales tax return and spending time on it is not something that's going to generate revenue. And so that's one of the things where we really want to walk through how we can automate it and what we can do. And I think it all starts with what states you have to collect tax. Then now, if you have an individual farm and you're in Washington, you may only have to worry about Washington, but you have business and occupancy taxes. Those are all things that we can help with and, help take care of, but if you're shipping products and food items and stuff across the country, you used to not have to worry about having to collect tax in states. And now if you're selling your products all across the country, you're going to be subject to more states. Where you're going to have to get registered for sales tax. And three years ago, the rules changed and they're really catching up to people now. And that's really what we're seeing. A lot of people want to take have the conversation and just walk through how we can help.
James: 4:34
Yeah, that's a big deal. I mean, trying to keep up with taxes, I mean, it's super complex. I know when I was in law school, I took a class, a class on taxes. It was super interesting, but also convinced me. I did not want to be a tax attorney because it was so complex and it changes all the time. And I know Avalara because they're based here in Seattle as well. I mean, you guys have what, like 1,500 plus people. I mean, geez, that's a massive company. Clearly all those people are busy doing something, writing code, keeping up with all the changes, sales and use tax. Like you say. How do you guys divvy up the work? I mean, tell me about 1500 employees. What are people doing there all the time?
Matt: 5:09
Yeah, it's a great point. And I think one of the key things is we have done a great job at segmenting, you know, the marketing department, the sales department and a lot of it has to do with brand awareness. Right? We want people to understand that you can. Automate and outsource this component of your business for compliance. Not a lot of folks know that there are companies out there that can do sales tax automation, and historically you've had CPAs and bookkeepers that would do it for you. And that's great, but now that we're seeing companies have to get registered in multiple states, it's becoming too much for CPAs and tax attorneys and whatnot. So they're leaning on folks like us here at Avalara. But we have a great great go to market strategy and we have so many folks dedicated on specific industries. Even the farming industry, selling e-commerce, international, we have dedicated teams and folks to expand the business and expand how we go to market because we've built these integrations into almost every application where we can effectively calculate tax on your behalf and, or file the sales tax return.
James: 6:10
We're super excited about it. I know when we surveyed and we looked at all the different players in the market, you guys clearly stood out as the market leader, head and shoulders above so many other folks. Your coverage alone, you guys had over 4,000 categories of products that you guys covered. And then to your point, you know, it starts to get really complicated, even if you're not selling across state lines. Let's dive into one of the big differences that really delineates the different treatment of the products sold by farmers. Right. You know, that the states kind of fall into one or two categories. Right. And for our listeners, we'll dive into each of these. One ,is the notion of a destination-based state and the other one's an origin based state. So let's start with the origin based state specifically, like first off, what does an origin based state mean? And then use an example of that. So we can illustrate it for our farmers are listening.
Matt: 6:59
Yeah, perfect. So one example would be for like, a state uh Utah. So if you are located in, you have a farm in Provo, and you're shipping a product to Salt Lake City, you're actually going to be charging sales tax based on where your farm is. So the origin, wherever the order is being shipped from that's where sales tax is going to be derived and AvaTax. Our tax engine looks at the Bill To, the Ship To, and makes a determination and it recognizes that okay. In the state of Utah, we're going to be charging sales tax and calculating state, local, and city sales tax, based on the ship from address versus the ship to.
James: 7:38
So it'll do that all automatically. Right? So if someone goes on, they're shopping from a farmer from their Barn2Door powered store, the AvaTax calculator's, just going to calculate that in real time and be able to make that determination. Right. Even. So if that farmer's based in Provo, wherever the buyer is, it's always going to be able to calculate the proper origin based tax from Provo, regardless if they're in Salt Lake or elsewhere.
Matt: 8:01
Correct. The tax engine is made to where you simply check a box that says I need to collect tax in the state of Utah cause that's where my farm is, great. Then I'm going to look at what you're selling determined it's taxable, and I'm going to look at the ship from versus the ship to, and then I'm going to an AvaTax makes that determination real time. So you set up the configuration and a lot of it's as simple as saying, I need to collect tax in this state. And then we maintain the rates, rules, boundaries, regulations, as well as sourcing rules automatically on your behalf.
James: 8:31
That is so cool. And you do that down to the category, like you said. Even like if someone's placing an order, let's use that Farmer again and Provo, they might have a combination that buyer might be buying 10 different things. Seven of them might be taxed. Three of them might not be taxed. And you guys will also even determine what the tax rate is on each of the individual items, those seven items. Is that correct?
Matt: 8:53
Part of leveraging Avalara is you tell us what you sell. We are going to look at the each individual item on that order or invoice per se and say, okay, is it taxable or not? Is it a hundred percent taxable? Is it 50% taxable? And we make those determinations in real time. So what you're outsourcing with a company like Avalara is we can monitor if you have to get registered in new states, we are taking into consideration the tax ability of your products at the line item level. And then we're also looking into city, state county, any special taxes that are applicable based on the addresses on the order. It's amazing. We call it rooftop level calculations versus zip codes because zip codes, aren't the right tool for the job. They're not accurate and they're not going to determine taxability. So that's one of the key things why we suggest and focus on rooftop versus code calculations.
James: 9:44
That's a great point to make, especially let's shift over to the other calculation or the other type of state that destination-based state. Right. Because that rooftop example, like you said, can be very, very different if you're like in a state, like the state of Colorado. Right? So let's say you're a farmer in Colorado and you're, and you're selling, you know, from Boulder down into Denver, right? Walk us through an example where, you know, this kind of rooftop calculation's so important.
Matt: 10:08
Yeah, Colorado is one of the most difficult states for sales tax. They have their own rules. They have local taxes, local remittances, local everything. So you're located in one part of the state and you're shipping across the other to the other side of the state to Denver sales tax is typically derived from where you're shipping a product. So it's changing ownership. So if you're selling that in a destination-based space, you have to charge tax based on where the product being shipped to. Now in Denver, there could be a city, a county, a special tax, a local tax specific to the city of Denver that you will need to calculate. File as well as remit and our tax engine does that automatically knowing that you need to collect tax in the state of Colorado and you're shipping into Colorado. So we make that tax calculation in real time. It's one of those things where you don't have to research your rate. You don't have to try and find out if what you're selling is taxable. All of that is automated through Avalara, very seamless.
James: 11:07
That's incredible. So you guys are not only automating the tax calculations, but you guys are also keeping up with the tax changes. Right? So if you're shipping again, let's say you're that farmer in Colorado Springs and you're making a delivery into downtown Denver. You know, you're going to know precisely like to the block, right? The tax rate could be on one side of the street versus the other. I think I've heard some crazy examples from some of our farms who do use you guys today, who're like it's amazing. Like the tax rate could literally almost be double on one side of the street versus the other.
Matt: 11:38
Commerce city, Colorado there's addresses that I, that I used to use where in a residential neighborhood, it's nine and a half percent on one side of this. And then 450 feet to the left. It's four and a half percent. So that's where we stress the rooftop calculation, because you don't want to be off by 5%. You also want your customers to buy from you again, and they want a seamless process. They don't want you reaching back out to them saying, Hey, I should have charge you more. So it's all about customer experience as well.
James: 12:08
Wow. This is a really big deal. So for farmers who are listing here, and this isn't just limited to Colorado, I mean, there's many states that have very complex tax structures, Washington, California, Texas, Georgia, et cetera, where this could be a high value add on for your existing Barn2Door subscription. The other cool part about it too, is that I know that we have inside the Barn2Door product the ability for somebody to actually be able to go click and get a free consult from an Avalara AvaTax specialist. Right? Tell me a little bit about that, that consult, like in how, how you guys kind of engage, can help farmers make better decisions for their business.
Matt: 12:45
Yeah. And that's really one of the things that's, that's extremely beneficial because we will have an initial 30 minute conversation. We're going to talk about what states they should be collecting tax and talk about your typical footprint. Where do you have land, where do you have employees, where do you have inventory? We're going to walk through on that initial conversation on where you should be collecting tax and why. And also we discuss where the farm is going. Right. How, how much are you going to grow? Right. Are you shipping out? If a lot of your state sales are in state, if you're going to be opening up the sales and shipping outside of the state, when may you need to collect tax outside of the state that you're located in? So we walked through, what I like to call is your sales tax profile. What are you selling? How do you classify it? Are you sure it's taxable? And then we walked through how we can really assist with that integration. And then also, knowledge of sales tax, the base sales tax 101, 201, 301 and then how we can help. It is a very consultative approach because not every company needs to use Avalara. But it's good to have a base, a good knowledge on just what sales tax means and when you need to charge it and why.
James: 13:54
Yeah. So maybe even if you're a smaller farmer and you're not yet, you know, shipping or you're not yet you know, delivering our offering pickups in areas that do require a tax collection, you at least want the knowledge to know when you should reach out and get started with Avalara. Right? So that way you can have that peace of mind as your business grows. Clearly, if you're a larger farmer and you've got a pretty complex operation and you've got multiple delivery drops and pick up points and you're in these again, pretty complex tax states. You should probably take advantage of those consult today. go sign up as a big deal.
Matt: 14:25
And here's one, one of the reasons I'd also say to, to have the conversation is not a lot of people know this sales tax is the second highest source of revenue for states.
James: 14:35
Wow.
Matt: 14:36
It's the second highest source of revenue for states. Period. That just tells you how much of a focus there is on it and why they need it, because that's how they hit their revenue numbers. And if 2020 taught us nothing, the states are hungrier for revenues, right. Their business has had to close last year. And, that's a focal point for revenue, which is sales tax. So it's very important.
James: 14:58
Well, I know our engineering team literally spent almost six months working with your guys as the engineering team and getting guidance and feedback. And we're really delighted to have met your guys' standard's to actually become a fully certified integration with Avalara AvaTax. What does that mean to the farmers who are listening? What kind of confidence should that give them in terms of working with integration? If they choose to work with Avalara.
Matt: 15:19
Yeah, it is the great thing about it is there's already the code, the software, the connections. Barn2Door and AvaTax, it's already written. So it's more so just downloading a plugin and enabling it. The word software scares people because it's complicated, and we already have the prebuilt integration built. So it's more just downloading it and then setting up your company profile to tell our tax engine. Where you want us to collect tax and what you're selling. And from there you put a start date and say, AvaTax, I want you to start collecting tax on, July 1st. And then from that point on you put an effective date and after you've downloaded the integration, it's extremely seamless. Right. A rate changes, a rule changes, a boundary, changes, anything like that in a state collect tax, we have all of that maintained on the backend. So from an integration standpoint, it's very seamless. We have already done the hard work, we built the integration. And now it's just as simple as you know, walking through your risk and your profile. Which states you collect tax in to see how we can help.
James: 16:20
Awesome. Well, tell us a little bit about the tax filing. How does that work with Avalara? Because it seems to me like I know, you know, I've been a small business owner before Barn2Door is a growing business. Now where I wouldn't call a small with 100 employees now, but we've gotten a lot more complicated, but for a lot of small business owners the onus and the difficulty of filing taxes can be complex, it can be confusing. And it can cause especially in this era right now where, you know, might cause some uncertainty about whether or not they're complying with their obligations. Right. So how does tax finally work with Avalara?
Matt: 16:50
Yeah. Filing sales tax returns is one of the number one things that, when it goes wrong, it's due to a manual component, right? a human couldn't show up for work. And somebody got hit by a bus. What have you couldn't file the sales tax returns. It's one of the number one things people want to automate. So the states are going to tell you how often you should file and what form, so you filed a monthly ST102 in New York. You will just as simply log into Avalara, you signed a power of attorney, so we can pull funds from an account that you designate and then you schedule the returns to be filed. So you're telling us what form you file and how often. And then what we do is we populate a worksheet in inside of your account. From the first of the sixth, then you see how much money you or sales tax owe. You can make any adjustments from the sixth of the 10th, and then we lock it. And for that 10th to the 20th so effect turns would be on the 20th. We have, I think 150 people, in our compliance division alone. That's all they do is file sales tax. We must pay them well, because when I used to see them in the office, they looked so happy and that job is not fun. But they're really good at it. And that's really our bread and butter automation is filing the sales tax returns. We remit the payments to the states and local jurisdictions on your behalf. There are a handful of states that give you timely filing discounts. If you just file your return on time, they give you a discount. When you file the next time we take all those into consideration and the big piece. A lot of companies and a lot of states that are very critical for sales tax, they will send you tax notices. Hey, we have a question on this. If you get a notice, you just forward that directly to our compliance team and they will reach out to the state on your behalf to answer that notice and to reconcile it with them. So it's one of the number one things people want to automate, and it is a very, hands-off approach. Once you schedule the returns.
James: 18:43
This just makes so much sense to me because honestly I hate paperwork. So the opportunity to simply outsource something like this and have that kind of peace of mind now does Avalera you know, stand behind this, you know, I'm kind of curious, is there some sort of guarantee, like what if, what if I'm a, you know, a farmer and all of a sudden, you know, let's say, I let's say I am a farm and I do half a million dollars a year and I have to. Let's say $45,000 in taxes every year. And all of a sudden I get an audit, like, you know, how does Avalara participate in that? You know, what's the guarantee behind the taxes that have been filed.
Matt: 19:13
Yeah. So, the software is only as smart as how you set it up. So it does have to be set up properly initially. Once it's set up properly and it's automated our guarantees for filing the returns, are we guaranteed to fill the forms out. Send them in on time. Answer the tax notices. A handful of states I mentioned, they give you those timely filing discounts. If you file it on time. We are on the hook for remitting, the taxes and actually getting and submitting the returns and the actual remittances on time. We have full documentation for all of the returns that we have filed. Heaven forbid you go through a sales tax audit and you mentioned earlier, I mean, Avalara is one of the larger companies we're the industry leader in sales tax automation, and we have, multiple different teams that can step in and assist heaven forbid you're going through a sales tax audit. We provide all the documentation needed. A lot of things I've heard from folks are when they know that you're an Avalara customer, and this is a direct quote. I can't say what company said this, but our audit was really quick when they knew that we were using Avalara and a lot of those companies will log into their Avalara accounts. They have at it.
James: 20:17
Yep. That's fantastic.
Matt: 20:19
We have, I mean, probably 40 to 50 former CPAs, tax attorneys, state auditors that work at Avalara now. So they know what their former friends or still friends are looking for in a tax audit. And what they're usually looking for are when you have a invoice that has zero tax and it was in a state you're registered in, they want to know why and they want to be able to document it. So if you sell through exempt customers or people that are reselling your products. You have to have documentation for that. That's one of the number one things. And I'll leave it there. I can go on and on and on and on about that for hours and hours. But we do have some assistance in and can help from an audit perspective.
James: 20:54
That's just super, right. Just knowing that all the documentation there is already set up and available. And like you said, have at it, right? Like it's just going to make the process go easier again. Heaven forbid . You actually do get a sales tax audit. Well, finally, before we wrap up, let's talk a little bit about the pricing model. I'm sure many of these farmers are going to be very curious, like, you know, some farms only sell a few dozen items per month, other sell thousands of items every week. Right. It really depends on the size of the farm. How does Avalara work? Is it based on transaction? Is it based on volume based on number of categories? How do you guys price the product?
Matt: 21:28
Yeah. So we have a couple of different are our core suite. And let me try and paint the picture for this, AvaTax is our integration to Barn2Door our platform can plug in to calculate sales tax in order to calculate the tax you purchase a transaction tier. So we do a thousand invoices a year. Great. $150 on an annual basis. It's typically gonna cost anywhere from $50 to a couple hundred to calculate the tax. Every time we file a sales tax return, it's roughly in that 48 to $54 range. So let's say hypothetically, you had to file a monthly return in that state. That would be $600 for the year. I typically tell folks it's going to cost from a couple hundred, to maybe a couple thousand on the high end. In my opinion, we have the most cost effective solution on the market. And, for the time it takes to file sales tax returns in the calculations. It's a no brainer.
James: 22:18
I agree with you. My God. Time is money. I certainly know having turned 50 this year, how much I value every hour of my day, the last thing I want to I be doing is spending the wee hours of each night, hours, trying to figure out what taxes I should file on. And then second guessing whether or not I even completed the form properly. Right? So it's a, this seems to be. Again, like you said, super cost-effective makes a ton of sense. So this is just awesome. We're really delighted to have a chance to partner with you, Matt and the entire team at Avalara. And thank you, Matt so much for your time today. Sharing a little bit more with us. But maybe before we sign off, I would love to hear if you have any other final recommendations that you'd want or suggestions you want to share with, with farmers. I mean, you're down there in North Carolina. I know you said you grew up in Ohio. You appreciate farming.
Matt: 23:03
Well, we grew up, we had 24 acres in Southern Ohio and I'm in, just outside of Raleigh, Durham, North Carolina. And I have a friend who lives in Farmville. They have, I think like a thousand acres they're a huge tree farm. They sell their stuff to the universities. I have a deep respect, trust me if I wasn't trying to sell software, I would be out there with land doing exactly what y'all are doing. Uh, we were talking earlier, I have a Dodge Ram. It is probably one of my favorite things in the world. I love my wife. I love the baby, loves the pontoon boat. The Dodge Ram is, is up there. And I keep telling everybody only thing I'll ever drive for the rest of my life is an even bigger Dodge Ram mine's the 2012. But you know, I think y'all are focused on how you grow the business, how you increase your sales and how you get more products out there. You don't want to spend time thinking about sales tax. You want to think about growing your business and, you know, for Avalara and what it would cost to use us. It's a. It's a very small amount for what it's going to take off your plate as your business is growing. So I just, my hats off to all y'all and I say this, I really wish sometimes what I'm doing on a day to day. I'd rather be out on the farm with you guys doing exactly what you are, because I love that vitamin D and I wish I was outside in the sun. This afternoon, it's a beautiful day in North Carolina. So, we're here to help and we really appreciate what you do. You're the, you're the reason, why why we're able to eat the way we do. So we, we appreciate everything.
James: 24:26
Yeah, absolutely. I know. Share that same appreciation. Thank you so much, Matt. We thank all of our farmers for helping to put food on the table and to care for their local communities. We're really delighted to have a chance to partner with Avalara and try to help you guys not only grow, but manage your business and save time. So you get that time back to get out on that barge boat and spend time with your daughter, right. So wonderful. Well, as we mentioned at the beginning of the podcast, we're really excited to share Avalara also as our official conference partner for the upcoming Direct Conference. And Matt will actually be speaking at that conference. So we're going to be having a more detailed overview where we'll go through very specific examples. We also have some fantastic blogs that you can also go read to learn more. Destination-based states versus origin based states. We have a great blog about how it works between Avalara and Barn2Door that can give you more explanations and for all existing Barn2Door customers. Again, there's that fantastic Avalara consult it's a $450 value. That's completely free to Barn2Door customers. So we encourage you guys to take advantage of that. Thank you again for tuning in for this episode of the Direct Farm Podcast. And we look forward to speaking with you again next week. Take care and signing off. Cheers.