At a holiday gift sale I attended last weekend, a few of the vendors were using the new mobile payment technology from Square. That followed our own use of Square — which allows small businesses to accept payments via mobile devices — at the GeekWire Gala last Thursday.

For me, the two scenarios highlighted the big market potential for mobile transactions and signaled that Square, and its rivals, may be on to something.

But, as with any transaction, local sales tax collection remains a thorny issue. After all, what if a vendor decided to do business in Portland or Palm Springs or Peoria?

Avalara, the tax software provider, is looking to address those issues by using geolocation technologies to pinpoint exact tax jurisdictions where the sales occurred. The Bainbridge Island company has partnered with Seattle’s Inner Fence — a maker of mobile payment applications — to bring the idea to market early next year.

“Retailers using any location-aware mobile device can now accurately calculate sales tax data based on their exact geospatial location – even if the transaction is in a crowded farmers market, a new construction site or on an offshore oilrig,” said Avalaa co-founder Jared Vogt.

Avalara says that it is the first software-as-a-service company to use latitude and longitude coordinates, instead of zip codes, to deliver tax information. That’s important for businesses who conduct sales in multiple jurisdictions, reducing the chances of an audit.

Inner Fence Co-founder Derek Del Conte noted that “it will be easier than ever for our merchants to fulfill their reporting requirements.”

Inner Fence is a Seattle competitor to Square. Founded in 2004, Avalara raised $21 million earlier this year from Sageview Capital, Benaroya Capital and others.

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