Avalara? TaxJar? Taxify? BEST SALES TAX APP for Ecommerce

So in this video I'm going to talk about why is sales tax so complicated for ecommerce sellers, why using a tool is essential in this day and age to manage sales tax, the difference between the sales tax app as a sales tax engine versus a sales tax filing tool, 'cause that can be very confusing. And then lastly, I'm going to give a detailed review of pros and cons of some of our favorite slash most used softwares out there for sales tax automation. I'm going to talk about TaxJar, Avalara, Sovos, and Taxify.

1:09

So let's jump in. Why is sales tax so complicated for ecommerce sellers? There are three fundamental reasons, and the first one is every state has the liberty to decide for themselves. They can decide what tax rate to use for sales tax, they can decide how they determine their filing frequency, what's taxable, what's not taxable, the definition of services and products. It's all up to them.

So every single state comes up with their own rules and regulations, and they're different from each other, and they're definitely different from the federal government. So it's not like VAT in Europe where you say, okay, so I know I sell tangible personal property and I can just charge 20% VAT. It does not work like that. Every state has a different rate. It's just up to the state to determine how much they want to charge.

1:57

So the second reason for why US sales tax is so complicated is not only do the states determine their own regulations regarding sales tax, the sales tax rates, the definition of products, the taxability are all subject to change.

And we've seen so many changes all the time. Like one state would decide, okay, we're going to start exempting diapers starting January 1st, 2023. Or Illinois has a temporary exemption for groceries for the second half of 2022. Are they going to extend it? Maybe they will next year, but we don't know. We just need to keep updated with all of these states changes, taxability, on rates, where the jurisdictions, where the boundaries are. So that makes sales tax really tricky.

2:45

And then the third thing that makes sales tax so complicated in the US is it's not just at the state level. A lot of the states that you see on the sales tax return, they want you to tell them how much sales tax you collected that goes to the state, but they also want you to break down the sale by county, by city, and by special jurisdictions. So all of those can be allocated to each jurisdiction.

So you have to track your sales. Not only say, okay, I'm selling this widget to Utah, but you need to know, does this ship to address belong to a county? I need to know the specific city, or if there's any special district related with this ship to address. Because guess what? There might be lodging tax, there might be tourism tax, there's all these special district taxes that need to be added on.

3:55

So you can see why, if you are doing all of this manually, keeping updated with sales tax rates changes, as well as sourcing every transaction into the correct address so you can find the correct tax rate, and making sure you're collecting at all the levels, it's just such a pain.

So we recommend using a tax tool for all of these things, unless you are only in like one place. You have a store of your own and all the sales happen in store, in person, so you know you just need to charge that one tax rate for that specific location for all of your customers. That works too.

But in this day and age everybody's selling online. You don't know where your customers are going to come from, and we want you to have customers coming from everywhere, which means potential sales tax complications from customers in all of their ship to places. So that's why we recommend a sales tax tool. The sales tax tool acts as the tax calculation engine as well as the filing tool, which helps with calculation, collection, as well as reporting. And the best thing is they have built in deadlines, which is usually like a week or two before the actual state's deadline, so they can ensure that you file on time.

4:55 Sales tax engine versus filing tool

Before we go in the specific pros and cons of each of the apps that we've been using, I want to briefly talk about the difference between a sales tax engine versus a sales tax filing tool.

So when you think of the sales tax engine, that is the database that powers the calculation of the sales tax rates. So for example, if you sell on Amazon, Vertex is the sales tax engine. So every time I place an order on Amazon and I check out, I put in my ship to address, Vertex would use my ship to address and locate it within their database to see what's the correct sales tax rate that they should be charging me.

So every website or every sales platform should have a sales tax engine to help calculate sales tax on their back end. That's the API conversation between the sales tax tool and the order, to make sure that the correct sales tax rate is calculated when a customer checks out.

6:02

So Amazon has their built in sales tax tool. Shopify actually has their in-house built in tool as well. Usually like all these big marketplaces and big independent stores like WooCommerce, BigCommerce, Amazon, Walmart, Wayfair, eBay, they all have their sales tax engine built in. You just need to go turn it on to say this is where I want you to calculate tax. And then they can pull from their database when a customer checks out, and then they can tell the system what the percentage of the sales tax rate is and how much sales tax to charge.

It becomes a problem when you have a custom built website that does not have a built in sales tax engine with it, and that's when you need to refer to the software and purchase their custom connection, so they can build a connection between them and your website and they can act as your engine.

For example, I had a client recently, they are on Sticky.io. It's a custom-built website on Sticky.io and they do not have a sales tax engine. So they ended up partnering with one of the softwares out there, and that software will calculate tax for them in real time. But if you are on Shopify, Amazon, Walmart, eBay, Wayfair, Etsy, WooCommerce, BigCommerce, you don't really need an additional sales tax engine. So the calculation is already being taken care of on their end.

7:28

On the other side, a sales tax filing tool is a tool that will pull all your data from your sales channels and then summarize it in the way that each state wants you to, and then the tool usually can report it to the state on your behalf as well and submit the payment for you.

So that's why a lot of the time when you say, oh I need a sales tax software, we would ask you, do you need a software to calculate tax for you, or do you need a sales tax software to file sales tax returns for you? Because those are two different issues.

In the next part of this video I'm going to talk about all three tools that we use with our clients. I'm going to talk about the pros and cons, specifically focusing on them as a sales tax engine as well as a sales tax filing tool.

8:17 Avalara

Let's talk about Avalara first, because Avalara is the biggest and most comprehensive and robust sales tax software out there. They were public, but the middle of this year they were acquired by a private equity firm so they can focus more on certain technology advances that they want to make.

And we used to only have a small amount of clients on Avalara, but this year we've seen a big increase on our client's usage on Avalara, because Avalara came out with a more affordable tool to have client filings done through a partnership with accounting firms. It's called Managed Returns for Accountants. So for example, if you want to use Avalara, it's actually more economic to work with us through our partner dashboard, 'cause we can offer you a discount and support as well.

9:08

So let's talk about Avalara as a sales tax engine. As a sales tax engine, Avalara is, I would give it 10 out of 10 for sure, 10 out of 10 on the calculation part, because their database is super comprehensive, very robust, they update it all the time. And I actually have it on my phone that I check Avalara status to make sure nothing is down, 'cause once Avalara is down, there's so many of our clients that their calculation won't work anymore.

Their database is very good. They do geo-locating so they can do rooftop calculation of the sales tax rate, which is so accurate. They also have integrations with so many different platforms that they can act as the engine for. I think last time I checked they have over 700 plus connections. So if you're on QuickBooks, if you are on Sage, if you're on NetSuite, if you are on like Sticky.io that I just talked about, you can use Avalara. If there's not a current connection and integration between your platform and Avalara to calculate tax for you, I think their development team is more than happy to customize a development for you, so that works with your company's platform and need. So 10 out of 10 for calculation.

10:22

Now let's talk about filing. So with filing, I just want to say the Avalara tool, because it's comprehensive, because it can work for Fortune 500 companies, they have lots of things that small business owners don't necessarily need, but you can't escape those steps in setting up your Avalara profile. So the setup process can be a little long and can be a little burdensome to some people. But if you follow the steps that's outlined for you, you get through all of it, you should be all set to go.

We always hear this phrase of garbage in, garbage out. So you want to make sure everything you put in there, all of your settings, where you're collecting sales tax, you need to map your products to their product tax code, you need to map all the products and services you offer, and you have to put in all the exemption certificates in there to set up your profile. But once you set it up correctly, all the data that comes out on the other end should be very reliable as well.

So that's kind of my complaint, is the process of setting up Avalara can be exhausting. It can take some time and it can be confusing. So this is when you want to work with their implementation specialist, or you can reach out to us and we can help you with setting up Avalara.

11:45

Another thing, I guess, about filing through Avalara is all the payments to the state doesn't come directly from your bank account. Avalara does a big draw for all the states, like combined amount they're submitting to all the states. So you will see a big draw from your bank account instead of all the small ones into different states. So Avalara will do a draw of your funds and then they hold it and then they disburse it into different states. From an accounting perspective, I really like to see how much money is going into each state instead of just one big lump sum amount coming out of my bank account.

But that being said, there's lots of good things about Avalara's filing tool. They give you more time than TaxJar, which I'm going to talk next. So you have until the 11th of every month to approve the returns. You can make adjustments, delete transactions, void transactions, mark transactions as exempt. You can download the transactions so you can do a lot of reconciliation and auditing on your data before they get filed. All the amounts that you over collect will get remitted through Avalara. So I really like that about Avalara. And if you don't approve it by the 11th, by like 5:00 PM Eastern time that day, Avalara will do it for you and will make sure you still get filed on time.

13:07

The biggest disadvantage with Avalara is the cost. It does cost a good amount of money to use Avalara as your sales tax engine. They usually calculate it by the number of transactions they need to process, and it could be 10,000, it could be 20,000, could be $30,000, just depending on your business transaction volume. With filing, it's between 40 to $50 to have them file your returns for you, which is more expensive than other tools. But the big cost with Avalara is that sales tax engine part instead of the filing part.

With Avalara being acquired, there's lots of talk about what's going to happen to Avalara, and I purposely delayed making this video because I want to see what was going to happen with Avalara. And I can confidently say that our customer service experience has been great. There has been no interruption in Avalara servicing our clients. So I don't foresee any problems going forward with Avalara, and I hope good things happen with Avalara and they can make it more affordable to small businesses.

14:17

So if you are a big enough business, if you have over five millions in sales, if you have lots of exempt transactions and you have a catalog of products and services that needs to be treated differently, and you are okay with the cost, then I think Avalara is great. Or if you have Shopify Plus, which you will get tax for free, so you get the engine part for free and you just need your return filed, and you're okay paying 40 to $50 a return, Avalara is great for you as well.

14:51 TaxJar

So that is Avalara. And now let's move on to talk about TaxJar. TaxJar is the other one that I really wanted to wait to give an update on. So we haven't been a big fan of TaxJar because of its limitations, but we have a good amount of clients using TaxJar because it's fairly cheap.

15:48

The monthly subscription cost starts around $19 a month and it could go up to seven or $800 a month, and that subscription cost covers the sales tax engine and putting your data together, so it combines both, if it's an integration that TaxJar already supports. If it's an integration that TaxJar doesn't support, then you have to pay to get a custom integration. For example, we have clients that are on their own website and their IT team decided to use TaxJar. So they are building a direct integration with TaxJar and they're paying a good amount of money as well, and that's not covered by their monthly subscription cost.

What the subscription does cover is it will allow you to create a portfolio in TaxJar. It'll connect TaxJar to your sales channel so it can sync data over. If it doesn't have a direct integration, you can always manually upload the data. And TaxJar's dashboard helps you track whether you've hit economic nexus or not. And it has a super cool function that if you are selling on FBA, they will tell you if you have your inventory stored in those warehouses. So it will have a little shield on your dashboard telling you you actually have physical presence in these states. And I haven't seen that anywhere on the other app. So I thought that was super cool with TaxJar.

16:57

I want to just point out a few things that you need to pay attention to. First of all, it's a very strict deadline. You have to get everything in by the fifth business day of that month. Maybe it's not even the business day, maybe it's just the fifth day of that month, and make sure everything's approved. So you only have five days to make sure your data's accurate, to reconcile everything, to audit everything. So it's a tight, tight window.

And second of all, the auto enrollment process is very rigid as well. So it's not as easy to enroll in auto enrollment and have TaxJar file it for you than at Avalara, but it can be done. They want a lot of information to have you enroll in auto file, and then you have to do lots of like approving access for TaxJar. So that could take some time.

And then the third part about TaxJar, and it's the part that I am not comfortable with, is they do their own calculation. So they'll have a tab that says this is how much tax they calculate you need to pay for each state, and that's the amount they're going to remit. It doesn't matter how much money you've collected.

18:35

So sometimes you collected more than what TaxJar is remitting, so you end up keeping the money that you are not supposed to keep, which is illegal. And on the other hand, sometimes you are paying hundreds or thousands of dollars more than what you collected, because TaxJar is only remitting what they calculate. It doesn't matter how much you actually collected.

They're making some improvements in a few states. They're saying, okay, if you over collected, I will remit everything. But that's not in all the states. I want to say half of the states they're not doing that. So what about all these money that you are either holding on that doesn't belong to you, or you're paying out of pocket? It does not give the flexibility of adjusting the amount to match what you collected. So that's my biggest opinion, I guess, against TaxJar.

And then just something to notice is it's really expensive to have TaxJar generate back filings for you. I want to say it's either 300 or $500 a return. And they don't file internationally, they don't file in local home rule jurisdictions, versus Avalara does, because it's a big company, it's global, it supports all of these functions.

But the good thing with TaxJar is it's flexible. The integration, I heard, usually if you need it to be a sales tax engine, the integration is fairly smooth and it starts at a great price point. So if you are just starting out and you just have a few states you are selling in the US, you don't have very complicated transactions like exempt sales or customer exemptions or taxability differences between all of your different products and services, and if you don't care about sometimes paying a little bit more, sometimes pay a little bit less, then I think TaxJar could really work for you.

19:35

One last thing that I want to mention about TaxJar is it was acquired by Stripe a while ago, and in the middle of the year, kind of like Avalara, it's like one week TaxJar decided something and then the next week something happened with Avalara. So Avalara was their acquisition by a PE firm, and with TaxJar I think they've stopped advertising for TaxJar, 'cause I read TaxJar's blog every week and the blogs have stopped, their advertising have stopped, all of Stripe's focus have been shifted to Stripe Tax instead of TaxJar.

So TaxJar's support has gone down a lot, and it's very hard to talk to a real person and to get your questions resolved. If you have any questions about your auto enrollment, your filings, the amounts on there, the only way to contact them is to email them, and it takes them 48 to 72 hours to get back to you. And because of their short window of five days to make sure the numbers are correct, a lot of the time they don't reply within two or three days, and then pass that five day window, and then your return is not guaranteed to be filed on time.

20:44

So I can see that the parent company Stripe is not putting as much resources as they used to in TaxJar, but they're shifting their resources to Stripe Tax. Which I'll just mention super quick, Stripe Tax, it's a tax engine, it calculates tax rates. If you use Stripe as your payment processor, it'll calculate sales tax rates for you, but it is not a filing tool, and they don't have a filing tool. And that's why I don't understand why they don't put more effort into making TaxJar good.

21:18 Taxify and Sovos

The last app that I want to talk about is called Taxify, and it's part of Sovos, S O V O S. So we can talk about these two together, because Taxify is one of the brands under Sovos. Sovos supports international filings, but Taxify focuses on the US. But they use the same engine, like for their database for sales tax, they use the same engine. So we can talk about those two together.

A good chunk of our clients are on Taxify and Sovos, so we have lots of experience with them. And I just want to say that their biggest advantage is their customer service. You can always get on a call with someone, you can always talk to a real person. You can ask them, why is my number not showing up? Is this return going to be filed on time? And a person can talk to you about it. And I think that's just so valuable and so unique in today's world. I didn't have to know how to set up Taxify, and I can call someone and they can walk me through all the steps. They can check to see if the filings are ready to be auto filed. So that's the biggest advantage that I see with Taxify.

22:28

The second advantage with Taxify is how flexible it is. Like Avalara, you can edit the numbers, you can void transactions, you can import more transactions, and you can say this transaction is exempt or not, and I want to include it in this return or not. You have lots of flexibility over the data that's in Taxify.

Thirdly, as a sales tax engine, Taxify has super good database as well. We've verified their calculation with the state's website for multiple states and it matches exactly. So I want to say Taxify slash Sovos, their database is as good as Avalara's, maybe, I don't know, 95% as good, but it's pretty good. And we trust their calculation a lot. They can work as a sales tax engine if you have a custom website, but they're usually more expensive than Avalara when they're used as a sales tax engine.

23:44

But as a sales tax filing tool, they're between TaxJar and Avalara. They're a little bit more expensive than TaxJar. Their base price starts at 34 instead of 19, but they're not in the hundreds like Avalara. They're just a little bit more expensive than TaxJar.

But it gives you a lot of flexibility in your data. You can remit what you calculate, and with Sovos you have until the 12th of the month to approve the returns and they'll get it filed for you. I think at $27 a return, and TaxJar is $30 a return to have them file for you, which I think are pretty comparable. And they support local filings. You can generate back filings at the same rate, instead of 300 or 500 a return with TaxJar.

So we really like Taxify slash Sovos, because you have lots of flexibility and transparency of the data that you can control. You can choose to file what you collected instead of what they calculate, which is the big drawback with TaxJar. And you can also have a longer window to get your returns filed. So we really like Taxify for that reason.

24:37

So if you are starting your business, or even up to 5 million, 10 million, I think Taxify can service you well, unless you have a specific product that you know is not taxable in certain states. If you have lots of exempt customers, exempt transactions, and you want to keep track of your exempt certificates, then Taxify doesn't have that capability. You'll have to move up to Sovos or go to Avalara.

Other than that, I think Taxify and TaxJar are very similar in serving the clientele. And if you want better support, to pay for a little more in pricing, I would go with Taxify.

The only drawback with Taxify is it doesn't have as many connections as TaxJar and Avalara. The direct connections they built out does not include a big amount of platforms. Especially with Shopify recently, their connection with Shopify is not working and they're working on it. I've talked to support, they're trying to establish that connection again. So if you are a new business signing with Taxify, you'll have to manually import your data from your Shopify store to Taxify. But you can just do that on an import template that they provide, and it's pretty easy and pretty fast.

25:56 Which one to choose

That's my review of the three apps that we use the most with our clients. There are other things to consider for sure. So let me know in the comments what software you're using, what your situation is, and I'm more than happy to give you my advice on which one of those would work best for your situation.

If you are over two millions in annual sales and you'd like us to take this over for you, we can manage the tools, we can manage the filings with the tool's help, then let us know. Feel free to reach out to us and we're more than happy to help you.

If you are under the 2 million threshold and you still need some help, all of this information that I talked about was actually in our sales tax course. There's a module specifically on these three tools, and I also walk through how to set it up, how to use the tool to manage your filings, and how to find the numbers to make journal entries. So that's all included in our LedgerGurus University as well.

So again, thank you so much for being here and listening to this updated tool review. I am so glad I could finally share this with you after months of observation of the three different companies. Please feel free to reach out with questions and comments. Like and subscribe to our channel and we'll see you in the next video.