The Next Payments Disruption

Sales tax is a minor annoyance to most consumers who have to remember to do the mental math when calculating the total cost of their purchases. But that headache can turn into an expensive nightmare for business owners. Sales tax is taken on every purchase – more or less – but only paid to the state governments monthly. And while large enterprises avail themselves of entire accounting departments to make sure all of the tax “i’s” are dotted and “t’s” are crossed, small businesses on the other hand, deal with a somewhat different solution.

“Currently, merchants are pretty much on their own, especially the small ones. They either file and pay themselves, opening their business up for potential liability if they file or pay incorrectly,” DAVO Technologies CEO and co-founder Owen Brown told MPD CEO Karen Webster in a recent interview. “Or they fall into the trap of using their sales tax to fund operating expenses and then when it comes time to pay those taxes they don’t have the cash on hand.”

And falling into that trap can be expensive for small businesses – since they face a plethora of fines and penalties from a variety of entities for underpaying, incorrectly paying or paying taxes late.

Luckily, according to Brown, it is also a trap that DAVO thinks it can help SMBs avoid entirely with the DAVO Sales Tax Solution.

“We want to bring our sales tax solution to these small merchants and benefit them by giving them an automated process that basically solves multiple pain points for them.”

But not just by automating compliance. But by making sure that the sales tax revenues never even make it into their merchant bank accounts in the first place.

DAVO’s patented technology platform hooks into a merchants POS or backend accounting software and impounds the businesses’ sales tax on a daily basis. However, Brown said, DAVO is a payments company which means more than tabulating or even segregating a merchants’ taxes – it actually completes the payments with the state.

“We pull their summary data on a daily basis which allows us to automatically impound or client the merchant sales tax for them and then we file and pay them as well,” Brown told Webster. “The key to our patented process is that we involve ourselves in settlement so we can actually have the sales tax split off before it ever gets to a merchant’s bank account. From the state’s point of view that is a great advantage, because there’s no chance for merchants intercession of the funds. And from the merchant’s point of view it’s a big improvement because while there’s no great emotional attachment to taking $100 out a day and paying it off directly, it can be hard to write a $3,000 check at the end of every month.”

And DAVO’s leadership knows that from direct personal experience. Brown’s co-founder David Joseph was a restaurant operator and noticed it was terribly easy to slip into spending tax revenue and hit a month’s end shortfall.

“If you’re running a restaurant and a window breaks, you’re going to use the cash on hand to fix it,” Brown told Webster.

As they began investigating the space, they also came to see that while there are a variety of emerging solutions – particularly in the eCommerce arena – the small brick-and-mortar store was being overlooked and underserved.

“Most of the other players in the field have dedicated themselves to the eCommerce merchants,” Brown explained. “So far it is that side of the business that really has hosted most of the competition. Most of them are superb taxability look-up engines. They are accounting firms that came up with a technological solution. We are more a technology company in the payments space that has a sales tax solution, among others.”

Because, as Brown told Webster, his firm’s technological ability to take a payee/payor relationship and compress it down from 30 days (or 60 or 90) into a single day has wider applications than just tax. For example, he noted, DAVO also offers a franchise solution that allows smaller franchise businesses to easily collect their royalty and advertising fees – which is not so easy today.

“Big players like McDonald’s don’t have any trouble collecting franchise fees, but there are 2,700 small franchises for whom this is a significant pain point,” Brown told Webster. “Currently these merchants deal a lot with the proverbial ‘check is in the mail,’ or they are getting paid by credit card.”

Brown also noted that has been key to facilitating relationships between utilities and merchants with limited, or not so great credit.

“Many utility firms now use smart meters that can calculate usage daily. We can actually help utilities lower their [merchants’] rates because they know they are getting paid every day. Merchants with a poor credit rating have in the past had to put $1,000 in escrow to get their utilities turned on – by opting into daily payment with this system they don’t have to.”

DAVO is both a new and old business. Though the company sought its first patent in 2001 (one they ultimately did not follow all the way through with), by the time they got their second (and critical patent) finalized it was 2010. They officially launched a year later.

They are now going to market –  through various partner channels to gain exposure. They launched on Feb. 20 with First Data, and Brown confirmed that they are also in talks to work with other acquires. DAVO is also collaborating with POS firms and small and medium payroll processors.

Going forward, particularly in reference to their sales tax product, Brown says the firm has a very clear vision – to be able to offer this for free to merchants.

“Our ultimate objective is to provide our solution to merchants for free where the states white label our products and roll it out voluntarily to small merchants across their state. Merchants would gain never having to file again or execute payment again, while the state would get to collect their sales tax revenue daily such that it never even has to pass through the merchants’ bank accounts.”

The world loves flashy solutions to flashy problems – and small retailers’ sales tax issues do not immediately present themselves as flashy.

They are, however, expensive, prevalent, sometimes complicated and fraught with problems – meaning that while the issue might not be flashy, it is one that is calling out for a disruptive solution. DAVO Technology has spent almost 15 years developing that solution and now gets to find out how disruptive it really is.