Filing sales taxes is a nightmare: TaxJar gets $600k to bring automation to online retailers

By Michael Carney , written on March 12, 2014

From The News Desk

Benjamin Franklin famously said, “in this world nothing can be said to be certain, except death and taxes.” If he were alive today he might have amended that statement to say, “nothing can be said to be certain, except the complexity and misery of filing taxes.” For individuals, managing deductions and wading through exemptions is tedious enough, but for business owners, particularly those operating in multiple jurisdictions, the task is even more onerous.

TaxJar aims to solve this problem, with a focus on the sales tax liabilities of online retailers. It’s a problem that has gotten even more complicated in recent years with a number of states passing legislation to require collection. The company’s tax management software automates the process of tracking taxable transactions and filing taxes in the various state and federal jurisdictions in which they occur.

Today, the two-year-old San Diego company announced its first outside financing in the form of a $600,000 Seed round from angels including Facebook VP of Partnerships Dan Rose, Magento co-founder and COO Roy Rubin, and other executives from companies including eBay, Intuit, and ShipWire.

Currently, a large percentage of online merchants are either non-compliant with sales tax regulations or are utterly overwhelmed by the administrative burden of adhering to the law. Merchants often have to file taxes with each local jurisdiction (within each state) in which they complete a sale. Currently, the process  requires reconciling each individual transaction at the end of a tax period using super sophisticated tools like a spreadsheet listing each buyer’s billing zip code cross referenced against a municipality map. It’s the kind of work that makes Chinese water torture seem like vacation.

TaxJar aims to remove these burdens by integrating automated tax collection into marketplaces and shopping cart applications including Amazon, PayPal, Shopify, Etsy, BigCommerce, and WooCommerce, among others.

It’s a smart distribution strategy that could help the company avoid many of the horror stories typically associated with chasing small and mid-sized business (SMB) customers. Merchants pay for the service on a SaaS basis, with prices beginning at $9.95 for up to 1,000 monthly transactions (after a free 30 day trial) and increasing based on volume.

TaxJar addresses a wide range of merchants, according to co-founder and CEO Mark Faggiano, spanning from those processing “just” $100,000 in annual sales to those generating eight-figure revenues. There are upstream competitors offering comprehensive tax compliance solutions to Fortune 1,000 businesses, but the lower middle market category which TaxJar is targeting is a greenfield opportunity. It might be said that the company’s biggest competitor is the status quo, which in most cases means the above-described horor of manual bookkeeping and tax filing, or simply ignoring the problem entirely.

“This problem isn’t going away, if anything it’s getting more complicated,” Faggiano says. The company’s customers know as much and, as a result, have been more than satisfied to offload the burden. Faggiano cites the company’s sky high net promoter score (NPS) as evidence of this fact, claiming that it far-exceeds SaaS industry averages declining to reveal the exact figure.

Currently, TaxJar simply calculates a merchant’s tax liabilities in each jurisdiction at the end of each period but still requires that they manually submit filings. The company’s product roadmap calls for the addition of sales tax return e-filing, as well as an improved tax rate lookup service and support for additional sellers, Faggiano says.

As drastically as TaxJar is improving the lives of its merchants, the biggest beneficiary of this service may in fact be the beleaguered state coffers which stand to see a dramatic increase in tax revenue due to increased compliance. Many states have in the past offered financial incentives to businesses whose services that help increase tax remittance and compliance, Faggiano says, meaning this could one day represent a secondary source of revenue for TaxJar if it can receive the same treadment.

TaxJar consists of just a five person team today, but all of the team members have worked together in some capacity over the last 10 years. Faggiano explains the lean operation, saying that everyone involved is adept at both building tax and financial software and acquiring SMB customers. He points to CPO Kevin Reeth’s prior success in founding business income and expense tracking platform (acquired by GoDaddy) and his own experience co-founding tax extension e-filing service FileLater (acquired by as examples of this fact.

The company is just getting started, but there’s little doubt that it’s addressing a real pain point. If TaxJar can deliver a compelling product and efficiently acquire customers, then the opportunity looks to be significant.

Filing taxes may be about as fun as getting a root canal, but it’s an unavoidable reality for the roughly 6 million SMBs operating in the US. TaxJar aims to make the process as efficient and painless as possible. No one will look forward to paying taxes, but they'll be plenty happy to avoid the administrative tasks typically associated with doing so.

[Image via Thinkstock]