When I tell people I’ve spent the last six months diving into global tax compliance I often get blank-faced looks in response - tax isn’t exactly seen as the sexiest sector out there. However, I disagree. Understanding and complying with global tax regimes is essential for any business looking to grow internationally (so, pretty much all software/AI businesses). It can be excruciatingly painful and complex, but it is becoming increasingly impossible to ignore. In fact, I believe cross border compliance, and indirect tax in particular, is going through a bit of a renaissance (or ‘SOC-2 moment’, as I describe below) which means fertile ground for startuWhy Indirect Tax?

Indirect tax covers all transactional taxes including sales tax, VAT and GST. This topic doesn’t always get Silicon Valley’s best and brightest engineering minds out of bed in the morning which means there hasn't been a whole lot of competition until recently (more on this in the state of the market section below).

What's interesting about indirect tax is that there's been a lot of change in this space recently that has created some significant macro tailwinds:

• 🌏 Businesses are going global earlier and earlier: this means they have to deal with cross border transactions and indirect tax compliance at an earlier stage when they don't have the right infrastructure and resources to do so.
• 📜 Indirect tax regulation is quickly changing which presents opportunities - COVID-19 depleted international governments funds and a major way to recoup this has been through cracking down on international transaction taxation. Various jurisdictions are especially focused on cross border technology sales (as evidenced by a recent EU mandate for payment processors, like Stripe, to report companies to the EU commission with more than 25 transactions / quarter in the EU, regardless of whether they are registered for VAT or not). These are all efforts from tax authorities to move towards a mandate of real time digital transaction reporting (aka e-invoicing) so that they can minimize indirect tax evasion. Certain jurisdictions have already started to implement these measures (e.g. Mexico and Spain).
• ✨ AI can begin to automate compliance operations - to date, the indirect tax sector has been fraught with manual, expensive processes. A fragmented market of tax lawyers and accountants helped US companies make sense of foreign markets. Additionally, most tax research has been done by manually combing through legislation which is costly and prone to error. There are obviously some processes (that usually require interpreting parts of the law that are ambiguous) which are not so easy to replace with software. But there are many workflows that can be vastly improved and largely automated with AI. E.g. determining whether different product categories are taxable vs non taxable across various jurisdictions; collecting and monitoring unstructured tax rate data across the web - all tasks well suited to LLMs.

‍

All this to say, that indirect tax is becoming something that's harder to ignore for modern global companies. In many ways, it feels a little bit like the SOC-2 moment for startups. Prior to companies like Vanta, startups never really thought of certifications like SOC-2. Now it's a 'need to have' if you want to sell to enterprise.

We believe we're going to see a similar movement with indirect tax compliance as governments clamp down on cross border transactions from fast growing software and AI companies.

‍

The State of the Market

First off, a lot of companies decide to ignore indirect tax until it becomes a problem (i.e. they get a notice, it's a blocker for fundraises etc). But for reasons I've explained above, those days are coming to a close and there are significant costs associated with non compliance (e.g. paying your liability out of pocket, fines).

So how do you manage it so that the tax man doesn't come knocking?

The solutions that are currently on offer for indirect tax compliance can be split into a few key buckets. It's important to note that the below categories are not mutually exclusive (it's likely that multiple solutions are used in conjunction):

• Local tax lawyers / advisors - this has tended to be the default for a lot of US companies (especially for jurisdictions outside the US). As noted, there is no doubt that there are some services these advisors provide that would be hard for technology to replace. This includes anything where legislation / law needs to be interpreted for the specific circumstances of the business. That said, many companies use advisors for things like monitoring exposure (nexus studies), registration, filing and even calculation - all of which can now be automated.
• Incumbent tax automation solutions (e.g. Avalara, Vertex) - these players have been around for decades and gained a lot of prominence in the US post the South Dakota vs. Wayfair ruling (which allowed US states to require remote sellers to collect sales tax even if they lack a physical presence in the state). Here are the main problems we see with these solutions - 1. they are very US focused with poor international coverage, 2. they are old, clunky products (they do some things well but you have to fill in the gaps with other solutions), 3. they are expensive and 4. their support is notoriously sub par.
• Modern tax automation solutions - there are a few newer players out there but 1. they are, again, very US focused (some claim to be 'global' but just push you to an international advisor), 2. tend to focus on a particular category (e.g. e-Commerce) and 3. still rely on manual processes for tax code collation and monitoring.    

‍

The Opportunity

We believe that there is an opening for a truly global tax and compliance engine that allows technology businesses to transact seamlessly around the world.

This solution would:

• Have sales tax, VAT, GST compliance functionality on platform (i.e. not outsourced)
• Leverage AI to automate / streamline a lot of the research and monitoring processes that were previously manual
• Be almost PLG in nature (easy to setup and maintain) so that earlier stage companies can set and forget
• Be priced in a simple, reasonable way that works for earlier stage companies

What gets me truly excited is that if you can actually build an AI-powered tax engine and platform, then it serves as the bedrock for a broader cross border commerce platform that includes services related to withholding tax, e-invoicing and local billing.  

All with the aim of helping businesses go global from day 1.    

By abstracting away compliance and cross border payment admin we believe this not only levels the playing field for startups to compete against global incumbents but also helps governments and local economies benefit more from international trade.