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Scott McFarlane of Avalara has quietly built an online tax software juggernaut on Bainbridge Island. (Photo: Sheri Pollock)

Operating from a home base on Bainbridge Island, Avalara has quietly grown into a powerhouse in the arena of sales tax collection software. But the recent success has not escaped the eyes of one of the top investment firms. Avalara, led by CEO Scott McFarlane, today announced that it has scored $20 million in later-stage venture funding from Battery Ventures and others.

“The increasing complexity of sales and use tax regulation has amplified the need for Avalara’s SaaS-based offering, as it’s truly a pain point businesses can’t afford to ignore,” said Battery Ventures’ Chelsea Stoner, who is joining the company’s board as a result of the deal.

Founded in 2004 by Rory Rawlings, Jared Vogt and McFarlane, Avalara was on pace last year to top $30 million in revenue. The company raised more than $20 million in funding last year, including investments from Sageview Capital, Benaroya Capital and others. In the latest round, McFarlane said the company was not actively seeking cash.

But the company — which now employs about 275 people — decided to take the cash because of the enormous opportunity it sees ahead.

“Avalara has grown significantly over the past few years and we think the market for our SaaS solution will soon mirror that of payroll automation,” McFarlane said. Total funding stands at $69 million.

Avalara calculates VAT, sales and use taxes on about one billion transactions annually. It also files approximately 500,000 returns and remits nearly $10 billion in sales and use tax collections per year.

Battery’s portfolio is loaded with successful outcomes, from Groupon to ITA Software to Akamai. In the Northwest, the firm has backed companies such as Insitu, A Place for Mom and Opscode.

The second quarter is shaping up to be a whopper in Washington state when it comes to venture capital financings, including the $100 million for Donuts; $30 million for Kona Medical; and $18 million for SEOMoz.

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