New Jersey’s Tax Court recently ruled that Maryland-based Telebright Corporation was required to file New Jersey Corporation Business Tax returns when the firm’s only link to New Jersey was its employment of a telecommuter there. The decision has both positive and negative implications for telework: The court displayed enlightened understanding of telecommuting, treating it as important commercial activity benefiting both employers and employees. However, it also approved a tax policy likely to discourage non-New Jersey employers from offering New Jersey residents telecommuting arrangements, shackling the use of telework — and potentially employment — in that state.
New Jersey is not the only state claiming authority to tax a nonresident company simply
because the firm employs an in-state telecommuter. While uncertainty remains about how
states will handle individual cases, the inclination of many state tax departments to assert this
authority is concerning. The trend threatens telecommuting’s growth nationally at a time when the country urgently needs to use it more — to create jobs, conserve oil, decrease carbon emissions and assure business continuity during emergencies, for example.
States facing cases like Telebright should adopt the New Jersey Tax Court’s progressive
understanding of telework. However, they should draw a different conclusion from that
understanding and resist taxing out-of-state employers whose only connection, or “nexus,” to
the state is a limited tele-workforce.
Overview of Telebright
Srisathya Thirumalai was a Maryland resident Telebright employed to write software code. When Thirumalai relocated to New Jersey, the firm retained her as a telecommuter. Telebright had no other employees in New Jersey and did not file New Jersey Corporation Business Tax returns. The Division of Taxation determined it should, because, by employing Thirumalai in New Jersey, Telebright was “doing business” there. Telebright argued before the New Jersey Tax Court that it was not “doing business” within the meaning of New Jersey’s Corporation Business Tax Act (CBT Act) and that subjecting the company to the Act would violate the U.S. Constitution’s Due Process and Commerce Clauses. The court rejected both claims.
The court also noted that a federal statute limiting states’ power to tax the income of
certain nonresident companies was inapplicable. The statute — P.L. 86-272 — bars states from
taxing out-of-state businesses that restrict their in-state activities to soliciting orders for sales
of tangible personal property, as long as the orders are both approved and filled from outside
the state. Because Thirumalai did not solicit orders, P.L. 86-272 did not shield Telebright from
The Ruling’s Pros and Cons
The Telebright court rightly treated cross-border telework as a profitable business practice useful to both employers and workers, and the court also underscored the legitimacy of a home office as a worksite. Courts nationwide should embrace the Tax Court’s advanced appreciation of telework.
However, the court’s decision also jeopardizes the growth of telework in New Jersey, harming both the state’s residents and its economy. Companies outside New Jersey concerned about taxation there may well refuse to allow either current or prospective employees from New Jersey to telework. By decreasing telework opportunities, the policy approved in Telebright can also limit employment in the state.
Say someone from New Jersey cannot find in-state work but receives a job offer from a Maryland firm. When her home sale efforts prove futile, she proposes telecommuting. Because the company has no other connection to New Jersey and wants to avoid taxation there, it denies her request. She must turn the job down, needlessly prolonging her unemployment. When New Jersey residents remain jobless for a sustained period, the state clearly loses. Personal income tax revenue falls. Because unemployed people have less to spend, sales tax revenue falls. Reduced sales can cause reduced business income tax revenue. A tax policy undoubtedly intended to raise revenue can easily backfire.
The Trend Telebright Illustrates
Other states, too, are asserting that telecommuters within the state who conduct non-solicitation activities may create income tax obligations for their nonresident employers. Responding to a recent Bureau of National Affairs (BNA) survey, thirty-five states said that a nonresident company’s employment of a non-soliciting telecommuter within the state would, by itself, subject the company to income tax liability (BNA, Inc., Special Report: 2010 Survey of State Tax Departments, Vol. 17, No. 4, April 23, 2010).
However, whether a state would tax a nonresident company in any particular case is not completely clear: “[G]uidance, in the form of case law or statutes setting forth the types of activities that trigger nexus and taxability, is lacking in many states.” Although the survey “fills in essential details,” because “nexus determinations are fact-specific and subject to interpretation, the states’ answers should not be relied upon as definitive policy statements,” BNA says.
To harness telecommuting’s many benefits, states should adopt the Telebright court’s view of interstate telework as interstate commerce profiting employers and employees alike. However, states should not — as the Telebright court did — deter telework by requiring nonresident companies to file income tax returns just because they hire a single resident to telecommute. Even a small group of telecommuters should not trigger tax liability. Rather than saddling nonresident employers with extra tax burdens if they hire some in-state telecommuters, states should offer them tax breaks. Especially in the current economy, states should encourage businesses to hire their residents on terms that do not force the residents to move.
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