The Impact of Telecommuting on State Tax Nexus
A single telecommuter working from home within a state’s borders may trigger income tax nexus for out-of-state employers. This is true even if the out-of-state employer made no sales in the state and even if the employee telecommuted only part time. The findings of last year’s Bloomberg BNA 2012 Survey of State Tax Departments revealed a marked state trend toward this result, with 35 states agreeing that nexus would be established under these circumstances.
The final 2013 survey, scheduled to be released April 26th, asked more specific questions of states and their nexus policies on telecommuting. Preliminary findings show that in some states nexus is triggered even when telecommuters are performing back office administrative business functions such as payroll or product development functions such as computer coding.
New Jersey is one state that has not only asserted this position, but has prevailed on the merits in the Telebright case. Published by the Tax Court in 2010, and upheld on appeal in March 2012, the Telebright case involved an employee who was permitted to telecommute full-time, performing computer coding work from her New Jersey home. Her employer, Telebright, used the coding that she created as an integral part of its web-based services. Telebright had offices in Maryland and was incorporated in Delaware; it had no history of filing income tax returns in New Jersey. The appellate court found that these facts were “no different than a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.” The court held that Telebright was doing business in New Jersey and subject to the New Jersey Corporation Business Tax.
Perhaps not coincidentally, recent headlines have shown a trend toward employers cutting back on telecommuting or in some cases banning it outright. Big name employers such as Yahoo and Best Buy have made such announcements. While state tax implications have not been directly cited as a reason for so doing, they could certainly be a consideration and arguably should be. Given the results of the surveys discussed above, telecommuters now create income tax nexus in a majority of states, sometimes even when performing non-market activities. This state policy, paired with the often outdated apportionment methods used to apportion income, can result in widespread income tax nexus for employers with telecommuters. The situation becomes even more problematic when employees are working from homes in states unbeknownst to their employers.