How real estate giant Zillow handles sales and use tax compliance

Originally published on CPA Practice Advisor.

While many of us use Zillow as a resource for up-to-date home-related information, the company’s story of maintaining sales tax compliance and transitioning to automated accounting solutions provides insights for accountants supporting growing clients.

Scott Peterson, Vice President of U.S. Tax Policy and Government Relations for Avalara, sat down with Jason Heckel, Senior Director of Tax at Zillow Group, to understand how he manages sales tax compliance in his role.

Scott: What comes to mind when someone mentions sales tax?

Jason: One word: challenging. And far more challenging than income tax. Sales tax is ever-changing; it’s state by state and no states particularly agree on how to handle it. You’re talking about at least 50 different laws when you have questions like: What is taxable? How is it taxed? Is it a tax borne by the customer? Being on top of every one of those laws is extremely challenging, if not impossible. The migration of the business world to digital and remote sales, coupled with the lack of clarity on the taxation of these transaction creates headaches for companies such as ours.

There is the misconception that income taxes are a big challenge and indirect taxes are revenue multiplied by a set rate. It's so much more complex than that.

Scott: When did Zillow first address sales tax compliance? And why?

Jason: I was one of the first tax-related, internal hires at Zillow. The company understood the importance of tax compliance early on. They understand that when a company is not compliant, there can be costly consequences.

In Zillow’s case, or for any other business considering taking a company public or looking at an IPO, you're potentially sitting on a huge liability for sales and use tax, which can really affect your ability to move forward as an organization and grow. They invested in this role to minimize the risk and liability as the company continues to grow.

Scott: How do you maintain business efficiency while ensuring Zillow’s sales tax compliance?

Jason: At Zillow, we live in a technology environment and operate like a startup even though we are a billion-dollar company. One of our core values is ‘move fast and think big.’ As part of that, we try to operate extremely fast and be very efficient in everything we do.

As it pertains to sales tax, the key is to have all major stakeholders from different business functions involved, and to have the right resources, software, and tools in place to react quickly and move forward with the business. No one wants to slow down because of a tax issue, so you must operate quickly and efficiently.

Scott: What steps do you take to minimize company risk?

Jason: I try to stay in front of anything that might pose a tax risk to the company. The financial statement impact is just too important and I have to stay on top of sales tax specifically. It is essential for a tax expert to have a ‘seat at the table’ for certain business decisions — getting the right people in the same room to understand tax implications and risks. Then, it’s my responsibility to constantly monitor risk and exposure on my company’s behalf.

Scott: Why is it important for a sales tax expert to have a seat at the table and who is involved in this process?

Jason: It’s important that all critical areas of the business are involved to ensure all points of view are considered.

First, it’s important to bring in the revenue side of the business to understand the complete suite of products your company is selling. Then, you need to understand who is buying these products and how they are being sold so you can help determine the correct taxability. 

Then from a technology perspective, you need to understand the corporate applications and billing systems that are in use to understand how things are being calculated and applied to the customers.

And then finally, from the accounting and general ledger perspective, you need to make sure you are considering the correct accounting and tax liability based on the information provided.

Scott: How does sales tax differ when it comes to a software business?

Jason: State jurisdictions are still trying to catch up to what technology is doing. For example, Software as a Service does not exist in tax codes everywhere, nor do all the states agree on the definition of SaaS. Every state seems to handle the taxability of software a little bit differently so that complicates matters even more.

Scott: What has been your strategy for approaching taxation of digital goods?

Jason: With taxation of digital goods, you can’t necessarily look to the law and think you’ve got the best answer because a new case could come out and be completely different than the actual statute. Then you're just lost in the mix and you're not sure what to do. You have to stay on top of it all, and unfortunately, there really isn’t an easy answer.

Scott: How much time do you spend trying to stay ahead of tax changes?

Jason: I spend at least four to five hours a week — each and every week — reviewing our systems. I’m analyzing how the company is changing and how we can adapt our other software systems to stay ahead.

Scott: How do you prioritize sales tax compliance among all your other financial and accounting obligations at your company?

Jason: Sales tax compliance must be a priority. At Zillow, we’ve automated , and that has been fabulous for our company. Using an automated tax compliance solution has been well worth the money and time, and helps ensure we are compliant.

Scott: Was there a specific event or activity that made you rethink the state of your company's sales tax compliance?

Jason: For Zillow, it was the acquisition of Trulia in 2015. Because it was such a large acquisition, there was a substantial public announcement in the media. Any major announcement like that brings attention to you in many ways, and can alert sales tax auditors. I was hyper-aware of this exposure because when I was working at a previous company, auditors heard about us when we were mentioned in a newspaper. The visibility brought attention to our need to reanalyze our tax compliance and tax determinations. And your exposure only grows as times goes on.

Scott: How do you evaluate your current accounting systems and processes?

Jason: As part of a recent transition, we were forced to reevaluate processes, procedures, and systems. In some ways, I was given a lucky break to be forced down that path with the entire finance organization.

Scott: What were your considerations when choosing an automated accounting solution?

Jason: A big part of our decision was driven by the plugins that were offered for our invoicing systems. We use Zuora as our billing, finance, and commerce platform and it took literally an hour to set up, and we made some adjustments in just a few minutes.

That ease of use was a big part of why we chose our sales tax compliance solution. There is also a simple, easy way to dashboard the relevant information: What are our taxes? What were our revenues by jurisdiction? That's how we manage our 'sales action plans.'

Scott: What tools or processes were you using for sales tax ompliance before you automated?

Jason: In terms of actual reporting, we were literally doing it by hand. It was extremely manual.

We were notified by a couple of states and we were filing in those states, but we could see that it was just going to increase. As time went on, we knew we needed a better solution.

Scott: How did you evaluate a sales tax automation solution?

Jason: I contacted several vendors. I anticipated a software solution and decided, early on, that the best solution would likely be to automate the true sales tax compliance side of it.

I wanted an all-in-one solution and I wanted to avoid multiple vendors. Some vendors had a software solution, but not a compliance team that could produce the returns, and vice versa. I knew we needed a software solution that was easy to use, easy to plug in, and had the backend side of tax compliance Zillow needed. Knowing my requirements in advance made it easy to determine which vendor to go with.

Scott: What advice would you give peers regarding sales tax compliance?

Jason: I have found that there are a few key points that will help guide your decision. These may seem like common sense steps, but when navigating all the requirements and vendor offerings, it's a good idea to have a road map.

1. Don’t wait too long and stay ahead of it. If you are considering automating sales tax calculations or reporting, the vendor selection process, budgeting, and analysis can take a while. Your exposure only grows as time goes on so it’s best to start the process early.
2. Have a clear understanding of what your business requires — now and in the future — so you can properly scope and price.
3. Consider how a solution would work with your existing technology systems and how it integrates with billing, ERP, ecommerce platforms, etc.
4. Mitigate your exposure and risk as quickly as possible. Regardless of your sales tax solution — manual or automated — it’s essential that you understand your company’s sales tax liabilities, risk, and exposure.

Bios:

Jason Heckel is Senior Director of Tax at Zillow Group. A tax specialist with more than 14 years of experience working for and with both private and public multinational companies, Jason has expertise with SEC reporting, large corporate income tax reporting, mergers and acquisitions, entity restructuring, IRS and state tax examinations, as well as indirect tax analysis including nexus and taxability studies.

Zillow Group houses a portfolio of the largest and most vibrant real estate and home-related brands on mobile and the web. With its living database of more than 110 million U.S. homes, Zillow serves people throughout the home lifecycle, including buying, selling, renting, and financing. The company also provides Zestimates, starting points for determining a home’s value, Rent Zestimates, and other home-related information. In 2015, Zillow acquired Trulia, an acquisition that greatly changed the way Zillow conducts business and operates on a day-to-day basis.

Scott Peterson is the Vice President of U.S. Tax Policy and Government Relations for Avalara, Inc. In his role, Scott leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara, Scott was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years Scott acted as the Chief Operating Officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline, Scott spent 10 years as the Director of the South Dakota Sales Tax Division where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over 200 cities, and the sales and use tax for four tribal governments.