New Jersey Telecommuters Create Nexus for Employers

A New Jersey appeals court has upheld the state's right to impose corporate taxes on out-of-state companies that use New Jersey-based telecommuters.

In the case of Telebright Corp. Inc. (Telebright Corp. v. Director, N.J. Super. Ct., App. Div., Dkt. No. A-5096-09T2, 03/02/2012), the New Jersey Superior Court, Appellate Division, upheld a Tax Court ruling that a foreign corporation that regularly and consistently permitted one of its employees to telecommute full-time from her New Jersey residence was doing business in New Jersey. As such, the foreign corporation was subject to the corporate income tax in New Jersey, and required to file corporate income tax returns in the state.

The employee who telecommuted was employed in developing and writing software from a laptop computer. This software, developed from the employee’s home in New Jersey, was then uploaded to a repository on the company's computer server in another state. New Jersey imposed the tax because the employee performed work for the company on a full-time basis in New Jersey. The Court ruled that taxing a business based on its employing one full-time employee in the state did not violate the Due Process Clause. Further, the tax did not violate the Commerce Clause's physical presence requirements because given the employee worked for the company in her home office.

Going forward, taxpayers should be aware that a company with a single employee working within New Jersey, regardless of whether the company has any other property or operations in the state, may be subject to income tax.  As New Jersey is currently phasing in a single-factor sales-factor apportionment formula, a company with large New Jersey sales and only one telecommuting employee may be stuck with an unexpectedly large tax bill.