On March 2, 2012, the Superior Court of New Jersey, Appellate Division affirmed the Tax Court’s determination that an out-of-state corporation was doing business in New Jersey, and was therefore subject to the New Jersey Corporation Business Tax Act (“CBT Act”), N.J.S.A. 54:10A-1, based principally on the fact that the company employed a single full-time telecommuting employee in New Jersey. Telebright Corp., Inc. v. Director, N.J. Div. of Taxation, 424 N.J. Super. 384 (App. Div. 2012), affirming Telebright Corp., Inc. v. Director, 25 N.J. Tax 333 (Tax 2010).
The employee in question used a laptop computer to develop and write software code for the Telebright Corporation. Her work eventually became an integral part of the company’s product.
The Appellate Division found that Telebright’s full-time, New Jersey employee carried out the purpose of the organization in New Jersey, by creating computer code that became part of Telebright’s web-based service, and that for purposes of applying the CBT Act, such work is “no different than a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.” Id. at 390.
The Appellate Division rejected Telebright’s arguments that applying the CBT Act to Telebright’s limited activities in New Jersey violated the Commerce and Due Process Clauses of the U.S. Constitution. Id. at 392. The Court reasoned that Telebright “already withholds and pays New Jersey state income tax from [the subject employee’s] salary and is subject to, and must remain apprised of, New Jersey’s labor and anti-discrimination laws concerning this employee.” The Court found no additional burden on Telebright in imposing the obligation to calculate and pay the Corporation Business Tax. Id. at 395.
The decision has received attention in the press and also raised concerns with companies regarding the scope of tax reporting and compliance obligations in particular circumstances (e.g., the type of services that are being offered by the telecommuting employee, whether they are full-time or part-time, and other matters). Although the Telebright decision did not address the full spectrum of possible alternative arrangements, it is strong precedent and forecasts that New Jersey could impose stricter scrutiny on the tax and registration requirements of out-of-state companies.
It also raises issues relating not only to taxation, but to the registration obligations of out-of-state companies. Out-of-state companies with telecommuting employees in the state are therefore advised to carefully review their tax filings (e.g., CBT Act, and sales and use tax) and registration requirements, as well as related employment law compliance issues. This will help ensure full compliance with New Jersey law and to avoid potential exposure to penalties and liabilities.
Summer associate Mickheila Jasmin (UCLA '13) assisted in the preparation of this advisory.