OMERS Ventures
Published in

OMERS Ventures

Getting down to brass tax: a taxtech Overview

Written by Eugene Lee and Thom Ryan

When one considers the areas for innovation in enterprise SaaS, tax probably isn’t the first thing to come to mind.

Taxtech has the characteristics of a very attractive pond to fish for a couple of reasons; 1) it occupies a massive addressable market (for context, the largest software provider in the space, Avalara, has a ~$16B market cap). 2) The current competitive landscape is dominated by old school professional services firms that, for the most part, have not adapted with the times. 3) Tax compliance is increasingly complicated — as firms become international, as governments look to increase their coffers and as legislation adapts to an increasingly online world, tax is not as straightforward as it was even 10 years ago. Finally, taxes are, by definition, mission critical to an organization, embodying the holy grail of enterprise SaaS investing.

To understand why we believe tax is such an interesting vertical, we first need to understand some of the basics.

Tax 101

In terms of analyzing the world of tax, we have broken down how companies interact with taxes into two distinct buckets: operational expenses and functional credits. As a simple heuristic, operational expenses are cash outflows to the businesses whereas functional credits are cash inflows to the business.

It should be noted that often when firms prepare an income tax filing, they will include an application for the relevant credits, so often these two buckets are not separated in practice.

Operational expenses

There are a variety of different taxes that companies must adhere to — income, employment, excise & sales are the broad buckets but there are many more that are not explicitly called out here (i.e. corporate property tax). Below is a summary of some of the primary operational taxes a company pays:

Generally, to adhere to income & excise taxes, companies will prepare a filing on a quarterly basis, whereas payroll tax is accrued and paid on whatever pay intervals occurs. For both income & excise, these taxes are a low-frequency, relatively straightforward calculations and are typically handled by a firm’s accounting software. Concurrent with the rise of the on-demand workforce, there have been several startups crop up (such as that focus on contractors — however these companies typically tend to be more holistic solutions that focus on invoicing, expense management etc. Finally, payroll tax is often offered by payroll specific softwares, such as Deel & Papaya Global.

Much of the recent innovation in the operational expense space has addressed sales tax compliance, or if internationally focused, a VAT lens. There are a couple of reasons for this, most of them boiling down to geography. In the United States a 2018 Supreme Court Ruling against Wayfair essentially changed the basis for sales taxation from the location of the seller (often one sales tax jurisdicition) to the location of the buyer (1000’s of jurisdictions). Coupled with the rise of e-commerce expanding the reach of sellers and the fact that sales tax is levied not only at the state level, but can also get as granular as the municipality (there are 11,000 + sales tax jurisdictions in the United States), managing sales tax has become more complicated than ever.

Functional credits

Broadly, a tax credit is a financing vehicle set up by a government to incentivize/reward desirable corporate behaviour. In the United States, there are a number of tax credit programs at both the state and federal level, typically allowing for companies’ to write off their R&D spend against either profits, or more recently, payroll expenses. The federal program has been around in some form or another since 1981, recently being made permanent in 2015. The program is generally pretty accessible, but few take advantage, with a broad mandate across a variety of industries. At a high level, in order to qualify for an R&D credit, a company’s project must:

  1. Develop the product for commercial purposes (make $$)
  2. Display an element of technical uncertainty — ie. the the result of the project is not known at the outset
  3. Follow a process of experimentation; formulate a hypothesis, iterate on potential solutions + (hopefully) draw logical conclusions

The order of operations with a functional credit is as follows: the company will engage in its normal operations over the course of the year, accruing and recording qualified costs such as personnel, materials etc. At the end of the calendar year, the company will take stock of its costs and submit a technical write up — a document that outlines the technical uncertainty and outcome that the company’s R&D spend was focused on.

Historically, there has been a lot of money left on the table with R&D programs. This can be attributed to a handful of reasons; fear of audit (the IRS audits ~1 in every 10 claims), lack of bandwidth to prepare reports and general ignorance about the existence of the programs. Lastly, the credit reimbursement process has always been retroactive in nature — cost reimbursements can take up to ~18 months to hit a company’s bank account, which is a long cash cycle especially for smaller companies. Recently, companies such as Boast.AI have introduced financing solutions; estimating and fronting the credit value in advance of the filing to convert the retroactive to the proactive.

The market today

Below, we prepared a market map of the tax technology landscape, including both buckets as well as mapping out some of the incumbent players. The key piece here to call out is that there is yet to be technology-first player attacking the entirety of the tax stack, however players like Pilot, Bench and Fondo are excelling through a tech-enabled model.

In addition, many adjacent softwares in the Office of the CFO stack offer tax preparation software (payroll, processing — Stripe). This market map encapsulates a bit of that, as the Big 4’s entire business model is to offer adjacent services on top of core tax (and audit).

There are a few key conclusions we have come to as a result of our research:


  1. Scale Arbitrage: Many startups across the whole tax stack are pursuing a business playbook of scale arbitrage — essentially productizing the complicated FP&A departments of BigCo and offering these advantages/benefits; whether it be sales tax compliance by Anrok or credit preparation by, to midmarket/SMB customers .
  2. (Mandatory) data ingestion: Across the entire “Office of the CFO” tech stack, every component software highlights the integration of data from disparate parts of the organization. However, as highlighted in the outset of this overview, taxes are legally required (mission-critical), hence the opportunity for mandated data collection allows for more legitimacy in these claims.
  3. Incumbents: Unlike some other areas of the office of the CFO, the incumbent landscape looks ripe for destruction. Many current providers today are still reliant on manual, outdated processes and there is a general lack of tax innovation. A plausible explanation for this is that tax is often an adjacent service offered — historically an afterthought as other aspects of the finance tech stack experienced innovation.


  1. Functional credits “take rate” pressure — With the dearth of new taxtech startups focused on getting more government money into the hands of companies, we have observed pressure on the remittance take rate that these companies charge…
  2. Functional credits as a wedge: However, in spite of increasing competition in the tax credit preparation space, firms have landed and expanded their product offerings — from attacking the rest of the tax stack to Boast.AI becoming the system of record for tax start ups, to Mainstreet’s next big product release. We think this, along with “data ingestion” could be the gateway to owning the general ledger and the accounting function.

So what?

Taxtech is an area we continue to be excited about and seek opportunities to put capital to work.

We envision a future where taxes transform being backwards-looking to increasingly strategic + forward looking (ie. understanding your tax liability, real time). Tax considerations will continue to be woven into corporate strategy and tax platforms will become more holistic compliance platforms, with the ultimate benefit being that resources currently encumbered with tax will be able to be freed up on more value-additive opportunities.

From a functional credits perspective, this is already taking place — for example Boast.AI has transformed credit from a retroactive source of capital to a proactive one. However, we envision a future where the future of tax software will be both technology-led and holistic, tackling all aspects of the tax stack.

If you think we’ve missed any key players in this analysis, don’t hesitate to let us know. And if you are building in the tax space, please reach out!



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
OMERS Ventures

OMERS Ventures

OMERS Ventures is a multi-stage VC investor in growth-oriented, disruptive tech companies across North America and Europe.