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

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.