Tips For Telecommuting After Telebright

In a case appealed from the tax court, the New Jersey Superior Court, Appellate Division, recently affirmed that an out-of-state employer was subject to the New Jersey corporation business tax because it allowed one of its employees to telecommute from New Jersey.

Factual Background

The employer, Telebright, is a Delaware corporation with its principal place of business in Maryland.1 Telebright initially hired the employee in question to work for the corporation in Maryland.2 In 2004, the employee relocated to New Jersey, after her husband received a job in the state. In order to retain the employee's services, Telebright agreed to allow her to telecommute.3 Hereafter, the employee worked full-time from her home in New Jersey writing software code.4 The software code she wrote was ultimately incorporated into a web application offered by Telebright to its clients.5 Telebright withheld New Jersey gross income tax from the employee's wages, and remitted those with-holdings to the New Jersey Division of Taxation.6 Except for the one employee, Telebright had no other significant connections with New Jersey. It did not maintain an office or financial accounts in New Jersey, nor did it solicit sales in the state.7

In 2006, the division sent Telebright a 'nexus survey' inquiring about the corporation's contacts with New Jersey.8 In its response, Telebright acknowledged that it employed one software developer who telecommuted from New Jersey, and that the corporation was with-holding New Jersey income taxes from her wages.9 The division responded by notifying Telebright that it was obligated to file a New Jersey corporation business tax (CBT) return.10

Initially, the division asserted that Telebright was obligated to file a CBT return because it maintained "an office" in the state. Later, the division changed its reasoning, and took the position that Telebright was obligated to file a CBT return because it was "doing business" in New Jersey by allowing the employee to work from her home in the state.11

Telebright subsequently challenged the division's determination that it was subject to the Corporate Business Tax Act (CBT), and argued that the application of the CBT to the company's activities in New Jersey would violate both the due process and commerce clauses of the United States Constitution.12 The tax court of New Jersey rejected Telebright's arguments, and affirmed the position of the division that Telebright was doing business in New Jersey and, therefore, subject to the CBT.13 Telebright then appealed to the New Jersey Superior Court, Appellate Division.14

The superior court began its analysis by noting that the CBT requires a foreign corporation to pay an annual franchise tax "for the privilege of doing business...in this State."15 The court next noted that the reach of the CBT was to be "co-extensive with the State's constitutional power to tax," and that the statute was to be "construed broadly in light of that purpose."16 The court had no difficulty concluding that Telebright was doing business in New Jersey and, therefore, under the statute was subject to the CBT.17 In reaching that conclusion, the court analogized the software writing performed by the Telebright employee to work performed by a manufacturing employee who fabricated parts in New Jersey for a product that was later assembled outside the state.18

The court next considered Telebright's argument that applying the CBT to the company's limited activities in New Jersey would violate the due process clause of the United States Constitution.19 The court noted that the due process clause primarily was concerned with the "fairness" of a state exercising authority over a business, i.e., whether, based on its activities within the state, a business should realize that it could be regulated by that state.20 The court noted that the employee in question produced software code for Telebright while in New Jersey, and was entitled "to all of the legal protections th[e] State provides to its residents."21 The court also noted that, if the employee violated the restrictive covenants in her employment agreement with Telebright, and provided that Telebright had filed a business activities report with the state, Telebright could file suit in New Jersey state courts to enforce those restrictive covenants.22The court also noted that the United States Supreme Court had, in other cases, held that the presence of one employee within a state was sufficient to subject a company to that state's business and occupation tax without violating the due process clause.23 The court, therefore, concluded that Telebright had sufficient minimum contacts with New Jersey to permit taxation without violating the due process clause.24

Lastly, the court considered Telebright's argument that application of the CBT to the corporation would violate the commerce clause.25The court noted that Telebright's argument in that regard focused on whether the tax was "applied to an activity with a substantial nexus with the taxing State."26 Telebright argued that employing one person in the state was "de minimus," and did not constitute a sufficient link or connection to allow the imposition of the CBT.27 Telebright also argued that taxing businesses on the basis of telecommuting would impose unjustifiable local entanglements and an undue accounting burden upon businesses employing telecommuters.28

The court had little difficultly rejecting both of those arguments.29 The court found a sufficient nexus in that Telebright had a full-time employee working in the state who was producing a portion of the company's web-based product.30 The court also rejected Telebright's argument that filing a CBT return would be an undue accounting burden, noting that Telebright was already withholding New Jersey state income tax from the employee's salary and was subject to New Jersey's labor and anti-discrimination laws concerning the employee.31 The court, therefore, affirmed the decision of the tax court that Telebright was subject to the CBT.32

Analysis

At first glance, it may be tempting to view the Telebright decision as only relevant to employers who do not have brick and mortar offices in New Jersey. In fact, Telebright is also relevant to employers who have traditional offices in New Jersey for several reasons.

First, the position taken by the New Jersey Division of Taxation in Telebright represents the position taken by the tax departments in the majority of states throughout the country.33 Consequently, New Jersey employers should consider that they may be required to pay business taxes imposed by states...