Tax and the Telecommuter

A software-development firm is held liable for corporate tax in New Jersey because of the activities of a lone employee in the state.
Robert WillensMarch 14, 2012

Employing someone to create computer code out of state is the same thing as hiring someone to manufacture parts in a state for a product that will be put together elsewhere: both corporate activities are taxable.

In the latest ruling of a state court on the issue of nexus — taxation based on location — a New Jersey appeals court held on March 2 that employing a telecommuter in another state subjected Telebright Corp., a Maryland-based software developer, to the N.J. Corporation Business Tax (CBT).

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The employee in question in the case developed and wrote software code from a laptop computer in New Jersey. The work she performed became an integral part of “ManageRight,” a web application Telebright provides to its customers.

When the employee finished a project, instead of mailing it to the company’s headquarters, she would upload it to a repository on the company’s computer server.

The employee began working for Telebright in Maryland in 2001. But in 2004, she moved to New Jersey. To retain her services, the company allowed her to telecommute full-time from New Jersey. In Telebright Corp., Inc. v. Director of Taxation, a New Jersey Superior Court found that the company was liable for N.J. CBT because of the activities of its lone employee in the state. This month the appeals court upheld that ruling.

The N.J. CBT Act requires every foreign corporation to pay a franchise tax “for the privilege of having or exercising its corporate franchise in this State, or . . . for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State.”

The regulations define “doing business” comprehensively, as including “all activities which occupy the time or labor of men for profit.” Any corporation “carrying out any of the purposes of its organization within the State shall be deemed to be doing business.”

The regulations list several factors to be considered in gauging whether a company is doing business in New Jersey: the nature and extent of the activities in New Jersey; the location of its offices; the continuity, frequency, and regularity of the activities in the state; the employment in New Jersey of agents, officers, and employees; and the location of management or control of the corporation.

Telebright’s full-time New Jersey employee “carries out the purpose of its organization” by creating computer code that becomes part of the company’s web-based service. In the appeals court’s view, that’s no different than a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.

Robert Willens, founder and principal of Robert Willens LLC, writes a tax column for