Creating a solution to a taxing problem

Where: Bainbridge Island

Who: Jared Vogt, chief executive, and Rory Rawlings, founder and president

What it does: Helps small- and medium-sized businesses calculate and report state sales tax.

Point of pain: If a company has a sales representative in a state, it must collect sales taxes there. The tricky part is there are more than 8,000 sales-tax jurisdictions in the country, making it difficult to keep up with changing rates and regulations, Vogt said.

The roots: Rawlings, a certified public accountant, previously owned a consulting company, and saw one of his clients go through a tax audit in California. The state determined the company was incorrectly charging its customers because of its unorganized system of manually entering data into spreadsheets. The company had to reimburse those it overcharged and pay the taxes of those it undercharged. It was also fined. "It ended up being a very expensive audit," Rawlings recalled.

Genesis: Rawlings was asked to investigate software to help the company standardize its tax accounting. He found that the solution would cost $70,000 to start and $30,000 to $40,000 annually to maintain. "As a medium-sized business, they couldn't afford that," he said. Instead, Rawlings built a system and has been selling that software since.

New beginnings: In January, Rawlings launched Avalara with Vogt and others. They raised $1 million from angel investors and spent much of the year turning the software into a service. It has 24 employees.

Service: Rather than selling software to clients, Avalara allows the customer to access the service over the Web. The service then integrates with a company's back-end accounting systems.

Customers: Since June, Avalara has made a dozen sales.

Pricing: Customers pay based on the number of sales transactions they make in a month.

— Tricia Duryee