TaxJar Raises $600K as Congress Resumes Debate on Internet Sales Tax

When TaxJar CEO Mark Faggiano introduced himself to Bay Area angel investor and 500 Startups co-founder Dave McClure in San Diego recently, he explained that TaxJar is a local Web startup that helps online merchants track how much sales tax to pay, and where to pay it.

“Your life is about to get very interesting,” McClure replied, and Faggiano nodded in agreement.

Congress has been moving slowly but inexorably to enact Internet sales tax legislation that could make online retailing a lot more complicated. Proponents of the proposed Marketplace Fairness Act argue that online sellers currently hold an unfair advantage over traditional brick-and-mortar retailers because online sellers don’t necessarily charge their customers a local sales tax.

Whether Congress will pass the proposed legislation is anybody’s guess, Faggiano says. Nevertheless, the full U.S. House Judiciary Committee is convening in Washington D.C. this morning to hear both supporters and opponents at a hearing on “Exploring Alternative Solutions on the Internet Sales Tax Issue.”

“The general consensus is that something is coming,” Faggiano says. “We’ve come out against this legislation even though it would help our business, because it does not make things any easier.”

The situation already is pretty complicated. How much sales tax an Internet merchant must collect and forward to state and local tax jurisdictions depends on TaxJar logo 2014a number of variables, including where the merchant is based, total annual sales, and whether the merchant has a “presence” in the state where a customer makes a purchase. For example, Faggiano says a new law in Minnesota requires online sellers who maintain some inventory in the Gopher State to collect retail sales tax on sales to Minnesotans, even if the seller is renting or sharing storage space and has no employees in Minnesota.

Faggiano says he founded TaxJar last year to solve the complex problem that Internet sellers face in determining whether local tax rules apply for each order they fill.

TaxJar says its software-as-a-service automatically screens more than 100,000 sales tax rules to determine which ones apply, beginning with the 45 states that tax retail sales. Sales taxes imposed at various levels of local government also might apply, as well as taxes set by special tax jurisdictions for such things as education, mass transit, and stadiums. Payment schedules also vary, depending on the jurisdiction.

Meanwhile, TaxJar is announcing today that it has raised $600,000 in early stage funding from individual investors, including Dan Rose, vice president of partnerships at Facebook; Harris Barton of H. Barton Asset Management; and Magento co-founder and COO Roy Rubin.

TaxJar says it plans to use the funding to win new customers and to implement a number of new features, such as a tax rate lookup service, sales tax return e-filing, and data sources that can support additional online sellers.

Still, the market for sales tax software is becoming increasingly competitive.

Just last month, Bainbridge Island, WA-based Avalara, which provides business software for accurate tax compliance, said it had added another $30 million in a venture round that brings total funding to more than $100 million for the 10-year-old company. Other rivals include ADP’s Taxware and Thomson Reuters’ Sabrix.

But where TaxJar’s rivals are focused primarily on serving big retailing customers, Faggiano says TaxJar is targeting the masses who sell their stuff through Amazon, eBay, Shopify, PayPal, BigCommerce, and Etsy.

“We’re trying to be the small business provider that takes away the problem and the hassles, mostly for companies with less than 50 employees,” he says. TaxJar’s customers vary from small merchants with less than $100,000 a year in online sales to mid-market merchants selling millions of products across multiple channels and collecting millions of dollars in sales tax.

Faggiano concedes that Amazon handles the tax logistics for retailers using its platform. But he contends that doesn’t mean sellers are satisfied with Amazon’s service—or that they’re content to pay the fees Amazon charges to determine how much sales tax a seller owes in various places. Faggiano’s goal is to simplify tax filings for online businesses with TaxJar and for certified public accountants with TaxJar Pro.

“We’ve got plenty of tailwind,” Faggiano says. “There’s a huge opportunity for us.”

Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

Trending on Xconomy