Corporate Tax Departments Will Start Hating Telecommuters

Originally Published on forbes.com on March 29th,2012

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Do you telecommute for your own convenience? Anew New Jersey court decision could make your employer less willing to let you telecommute from another state. 

The decision involves a Maryland company that allowed an employee to work from her new home in New Jersey after her husband’s job forced her to relocate there. Now the state wants to punish the company’s good deed by forcing it  to pay New Jersey corporate income tax.

The employee  is not named in the case, so I’m going to call her Jane Cobol(which should give you some idea as to how old I am).  Jane worked for Telebright Corp on an application called ManageRight.  She worked for them in Maryland until her husband’s job forced relocation to New Jersey.  Telebright decided that she didn’t need to come into the office all that often so they gave her a laptop and let her work from home.  Her boss telecommuted from Boston.

Telebright withheld New Jersey income taxes from Jane’s pay and remitted it to the state.  Otherwise, it is not clear how New Jersey would have known about the arrangement.  The withholding, which may have been done to make Jane’s life easier rather than based on an analysis of requirements, was not enough for New Jersey.  New Jersey wanted some corporate income taxes from Telebright.  Telebright did not think that Jane tapping on herlaptop in Fort Lee was enough connection with the State of New Jersey to allow it to require the payment of corporate taxes.  As far as Telebright was concerned, she could have been anywhere.  Telebright went to New Jersey Tax Court and lost which led to this appeal, which, sorry to spoil the suspense, the company also lost.

Telebright is getting a lot from New Jersey so it needs to pay its fair share:

The employee produces computer code for Telebright in New Jersey. She is entitled to all of the legal protections this State provides to its residents.

And, should the employee violate the restrictive covenants in heremployment contract, Telebright may file suit to enforce the contract in New Jersey’s courts, provided it files a business activities report pursuant.

This is not a happy decision for companies that have telecommuters.  One of Telebright’s defenses that was held frivolous deserves a little more respect:

Telebright first contends that upholding the tax in this case will allow a state to tax any corporation whose employees choose to reside in that state. That argument is frivolous. The State is not imposing the CBT tax because Telebright’s employee lives in New Jersey; it is imposing the tax because she performs work for Telebright on a full-time basis in this State. Taxing a business based on its employing one full-time employee in the taxing state does not violate the Due Process Clause.

Although, they qualify it with “full-time”, what about part-time ?  What about full time employees who sometimes work from home or employess who log onto the company site while on vacation ? Can a company that does business in just a couple of states find itself suddenly hit with nexus because of activities by its employees that could be happening anywhere.  Interestingly when a state owns the home base, the attitude is a little different.  In this Delaware case, a Pennsylvania resident was not allowed to exclude the income from her telecommuting days from her Delaware non-resident return.  Her Pennsylvania telecommuting days were for her convenience, with her employer’s permission, not for her employer’s convenience.  Other states take a similar position.  Most states assess corporate income tax on a formula that weighs a sales percentage, a payrollpercentage and a property percentage. The fomulae are not consistent with one another from state to state.  Combining these two rules, it appears that different states may each count the same wages in determining its percentage.

This decision is very disturbing. Telecommuting has many benefits both for companies and employees.  A company that allows telecommuting has no business reason to control where an employee lives.  Following the logic of this decision, though, a telecommuter moving to another state, where the company does not already have nexus, can subject it to a significant administrative burden and additional corporate tax.  If the company is an S Corporation or a partnership, all of its owners may be impacted.

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