The change in the scope of competition became clearer with the formation of Sovos Compliance this year. That company was hammered together by private equity investors who merged Convey Compliance Systems, Taxware and VAT Resource, which together cover much of the indirect tax market.
A major reason for the interest is that automation has made the onerous and expensive job of indirect tax compliance quicker and easier. With the web lowering costs, that has opened the market to more software competitors and attracted investors, such as Vista Equity Partners, that put together the Sovos deals, and Battery Ventures, one of the investors in Bainbridge Island, Wash.-based Avalara.
"It comes back to the availability that cloud solutions has provided. It's a less-expensive solution to have out there," says Chelsea Stoner, a Battery Ventures partner. She summarizes the change this way: "Whereas only the folks at the top that focused on the Fortune 500 were able to afford to afford an investment—we are seeing cloud solutions to go down to very small businesses."
Battery begin investing in Avalara three years ago and Stoner's firm sees very large potential for growth. "It's a very large market that just hadn't been automated," says Stoner. Battery put its bets on Avalara because "They were the only cloud solution in town that had a front to back offering," she says.
Vendors say that interest is also driven by increased governmental scrutiny of filings and collections, along with a global move away from relying on income taxes to seeking more revenue from indirect taxes. And for both the taxes and the payers, the major tool for dealing with these trends is technology.
"I have been saying sales tax automation is inevitable," says Scott McFarlane, CEO of sales tax software vendor Avalara. "The concept of people doing indirect tax manually in a digital world is crazy."
There have been two approaches to the market. Historically, the companies that provided indirect tax products served enterprise companies with large, on-premise computer systems. They are moving to serve smaller companies. On the other end, Avalara started with small companies on the Internet and has been moving up.
"The winds have changed. What you are seeing is the end result of a lot of things that been occurring naturally," McFarlane says.
While most companies emphasize content as key to success, Avalara put its bet on creating a technology-based system in which it connects to hundreds of accounting, ecommerce and other systems that must cope with indirect taxation. With much of that system in place, it has since put more focus on adding content
"We saw the relationship with the manufacturer as key," McFarlane says. "You can't do a sales tax transaction without being tied into the people who create invoices. You can't file returns if you are not connected into the financial application."
Avalara initially went after the sales and use tax market, but has been expanding its target in the last two years. It named Richard Asquith as VP of global tax compliance in October and then purchased VATLive in December. It picked up Hotspot Tax, which markets tax products for the vacation rental industry in March and renamed the line Avalara MyLodge.
McFarlane has a view of what it will take for software suppliers to succeed.
"I believe there is going to be one dominant player in this market," he says. "The winner in this space has to have all connectors in the business and be able to display information in one dashboard."
According to Marshal Kushniruk, who has secured Avalara's connectors, the company has connectors to more than 400 software products, enabling those applications to work with its products.
"Many competitors have some connectors, but most of those are in the enterprise space," says Kushniruk, the company's EVP of Global Business Development "It's going to take them two to four generations to get to where we are today."
Now based in the United Kingdom, Kushniruk points to the wide potential of the European market. In the United States, the focus of sales tax software is on rate calculation. The focus in Europe is compliance. "It is easy to figure out the rate; but it's hard to comply with the markeplace," he says. That is because the number of countries, languages and forms introduces another level of complexity.
"Where we are going to market in Europe we are building connectors into everything that is going into the SME [small and medium-enterprise] is easy to figure out rate it's hard to comply marketplace," he says.
New Kid in Town
Sovos Compliance is quickly trying to establish itself as an important player with wide range of products, bringing together the separate lines market by its three component companies. It also views the indirect tax market as one that is only going to grow and appears to be on the same track of purchasing specialized tax companies as is Avalara.
"The [indirect tax] concerns have spread," says Matthew Walsh, VP of tax for Sovos Compliance. "This is becoming an issue for the states."
The company's products include the Taxware Enterprise and Taxware Sales & Use Tax System and it also offers a web tool kit for customizing Taxware. Internationally, it sells VATWare for countries that utilize value-added taxes. Its Sales Tax Service tracks rates, calculates taxes, prepares returns and pays taxes.
The company this year expanded its vertical efforts with the purchase of ShipCompliant, which develops compliance and tax software for the beverage alcohol market.
It also recently partnered with GraVoc Associates, a technology solutions consulting firm, to create what the company called "a comprehensive portfolio of technology products and services designed to help businesses in the SMB space." GraVoc CEO David Gravel said in a prepared statement that his firm is working with Sovos Compliance as a strategic partner and helping it deliver a world-class solution
Walsh says one major asset of Sovos is its content. Software must provide more than just standard rates and says his company can meet specific needs of a wide range of companies.
"We can service vertical markets from the smallest to largest companies," Walsh says.
Like Avalara, Sovos' sales tax products offer connectors to many accounting systems, although currently Taxware's integrations listed on the Sovos website are more heavily weighted to large systems such as Oracle, IBM, Lawson, Peoplesoft and SAP. It does support the four Microsoft Dynamics accounting packages, Intacct, QuickBooks and others.
Walsh emphasizes the importance Sovos places on its wide range of applications. "Sovos recognizes you need to provide different solutions to different clients," he says.
The customers of Thomson Reuters OneSource products are typical of the older world of indirect taxes. They are large organizations that can afford the expensive applications that have been available.
Thomson has about 400 customers in this arena. But that is likely to change as the company broadens its target market, says Chris Carlstead, managing director of OneSource Indirect and Property Tax.
"The competition is growing pretty quickly," says Carlstead. "It's one of the last area's under the CFO that has been ignored."
Currently, the OneSource lineup includes sales tax software that has what the company calls a Universal Tax Determination Engine, part of a system for managing sales tax policy configuration, calculation, sales tax filing and remittance. Similarly, on the global stage its Indirect Tax Determination tax engine handles the same issues for sales tax, VAT and GST, depending on the country.
Carlstead noted his company's historical focus on the enterprise size companies. He did not speak of specific plans but agreed it is likely Thomson will move down market. "Everyone is going to be moving toward a lower cost of deployment," he said. "The winner in the market place is going to be the company that makes an offering easy to use and right size for the type of enterprise in terms of cost."
The company offers integration of its OneSource Indirect Tax Determination system via certificate integrations to Oracle and SAP and cloud-based integrations so Dynamics GP and Concur, along with providing an open architecture that lets other software publishers to integrate their systems with the Thomson system
The growth of the indirect tax market is not just about the Internet's making compliance and reporting easier. The Web makes more companies international players.
"Mom-and-pop online resellers get goods from in China to sell in the United States," Carlstead says. "The next thing you know, they are selling goods in Europe or South America and are exposed to the VAT. In a matter of moments, you could be international."
Hitting the Channel
Vertex also started its business with larger companies but has been moving to serve small and midsized businesses through Vertex SMB.
That latter effort has included the recruitment of mid-market resellers Blytheco, Socius and Wiplfi. It offers its channel a 25-percent commission on sales for the life of those clients that sign up for the Vertex SMB sales tax application.
"We are seeing an uptick in the money going into the indirect tax area," says Peggi Rockefeller, VP of Vertex and general manager of Vertex SMB. She notes the likelihood of legislation that will not let online businesses avoid collecting taxes.
Rockefeller also cites the availability of cheap storage which is enabling businesses to store more and data and make use of that information in running their operations—and that includes getting information from indirect tax data, which falls into the often discussed phrase "big data"
While indirect tax systems collect a great deal of information about a company, previously, this data has not been available for decision making and generating a return on investment. Rockefeller says that is changing.
"We are looking to benefit from things that weren't possible five years ago," she says. Being able to utilize the tax data will enable businesses to be more proactive.
"Let's say you've got a decent size operation and there are changes in taxation in a certain state," she continues. "You will be able to set parameters to test and make sure your point-of-sale system has made the proper changes at all the stores."
Companies will able to know the impact of changes within a day, instead of at the end of a week or the next month. They will be more easily able to prove they have filed tax returns on time and correctly if questioned by tax authorities.
Rockefeller notes Vertex's expansion of its market. The company is positioning its technology for midmarket firms. "At this point, Vertex serves the largest swath of the market that it ever has," she says.
Vertex SMB also launched a new initiative this year with a returns-only product for its cloud-based sales tax application. The product in March, it noted the complexity business face in this arena.
"There are more than 10,000 sales tax jurisdictions in the United States and almost as many tax rates to apply in these jurisdictions collectively. Determining which jurisdictions require returns, identifying which forms to complete, and filling them out and filing on time is a very labor-intensive and complicated task," David Henkin, VP general manager at Vertex SMB, said in a prepared statement.