For Corporations, a "Virtual Office" in New Jersey Can Lead to an Actual Tax

by Cole Schotz
Contact

For out-of-state corporations that do business in New Jersey through the use of “virtual offices,” the recent decision by the Appellate Division of the Superior Court of New Jersey in Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation is a reminder that employees who “telecommute” from New Jersey will not relieve their employers of certain corporate tax obligations.

Telebright Corporation, Inc. (“Telebright”), which was incorporated in Delaware and maintained its offices in Maryland, employed a woman who lived in and telecommuted from New Jersey.  Her job was developing and writing software code from a computer in her home, which she uploaded to a repository on Telebright’s remote computer server.  Other than attending company-wide meetings in Maryland once or twice a year, she worked entirely from her home.

From the beginning of the employee’s tenure, Telebright withheld New Jersey income tax from her salary and remitted it to the New Jersey Division of Taxation (“Taxation”).  Taxation determined that Telebright was subject to the New Jersey Corporation Business Tax Act (“CBT Act”) and, thus, was required to file New Jersey Corporation Business tax returns.  The New Jersey Tax Court upheld that determination, and Telebright appealed to the Appellate Division.  On appeal, Telebright did not dispute that the employee’s activities satisfied the statutory test for “doing business” under the CBT Act.  Instead, Telebright argued that applying the CBT Act to those limited activities violated the Due Process and Commerce Clauses of the United States Constitution. 

In support of its due process argument, Telebright claimed that upholding the CBT tax against it would allow a state to tax any corporation whose employees resided in that state.  The court in Telebright rejected that argument, reasoning that Taxation imposed the CBT tax because the employee worked for Telebright on a full-time basis in New Jersey, and not because she lived there.  Taxing a business based on the presence of a full-time employee, the court held, does not violate the Due Process Clause.  The court further reasoned that if the employee violated the restrictive covenant in her employment contract, Telebright could file suit against her in the New Jersey courts.  Thus, Telebright had sufficient minimum contacts with New Jersey to justify taxation under the CBT Act, consistent with the Due Process Clause.

The court in Telebright then addressed Telebright’s argument that imposition of the CBT Tax violated the Commerce Clause.  As the court noted in citing Supreme Court precedent, imposition of a tax does not violate the Commerce Clause if the tax (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the service provided by the state.  Telebright did not dispute that the latter three prongs of this test were satisfied, arguing only that employing one person in New Jersey does not create a “definite link” or “minimum connection” between Telebright and the state.  Notably, Telebright also argued that, given the prevalence of telecommuting, taxing companies on the basis that their employees work from remote locations would impose “unjustifiable local entanglements” and an undue accounting burden on those companies. 

The court in Telebright rejected that argument, holding that the fact that Telebright’s full-time employee worked from a home office, rather than one owned by Telebright, is immaterial for purposes of determining whether the employee’s activity had a “substantial nexus” with New Jersey.  As the court noted, the employee produced a portion of Telebright’s web-based product in New Jersey, and the company clearly benefited from all of the protections afforded to the employee under New Jersey law.  Thus, because the tax related to an activity with a substantial nexus with New Jersey, the application of the CBT Act did not violate the Commerce Clause.  Accordingly, the Appellate Division affirmed the Tax Court’s decision.

The Appellate Division’s decision in Telebright is instructive for corporations seeking to economize by establishing virtual offices in New Jersey.  While maintaining such offices may allow corporations to reduce the traditional cost of maintaining a physical presence in New Jersey, the presence of even one employee in the state is sufficient to trigger the most familiar of business expenses: the corporate business tax.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Cole Schotz | Attorney Advertising

Written by:

Cole Schotz
Contact
more
less

Cole Schotz on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!