State Tax Snapshot: The Income Tax Consequences of Allowing Workers to Telecommute

Steven Roll for Bloomberg BNA writes: Alternative work arrangements that allow a worker to telecommute from home can offer significant benefits to both the employee and employer. For the employee, working at home can eliminate time spent commuting. For the employer, fewer onsite employees can reduce the amount of office space it must lease.

But there could be one drawback to allowing an employee to telecommute, particularly if the employee resides in a state other than where the employer operates. Most state tax departments believe that an out-of-state company could be subject to their income tax solely because of the presence of one or more employees who telecommute from a home located within the state’s borders. Nearly all of the states take this position--even if the employee’s activities are limited to back-office functions such as payroll or product development tasks such as computer coding.

This is consistent with a New Jersey ruling on the issue inTelebright Corporation Inc. v. New Jersey Director, Division of Taxation, 25 N.J. Tax 333 (N.J. Tax Ct. Mar. 24, 2010), aff'd 424 N.J. Super. 384 (March 2, 2012).  In that case, a taxpayer based in Maryland allowed an employee to telecommute from home in New Jersey on a full-time basis. The employee developed and wrote software code, sending it electronically to the taxpayer's computer in Maryland.

The New Jersey Tax Court found the employee's daily presence in New Jerseysatisfied the substantial-nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of the state's labor market. On appeal, the New JerseySuperior Court affirmed. The court reasoned that the employee's activities in the state constituted “doing business” as defined by New Jersey's statute and regulations. Due Process arguments were rejected, with the court finding that the imposition of tax was justified because the employee was working on a full-time basis in the state for the taxpayer. The court reasoned that if the employee violated the restrictive covenants in her employment contract, relief could be sought in New Jerseycourts. As a result, the taxpayer had sufficient minimum contacts with New Jersey to permit taxation.

For the Bloomberg BNA 2013 Survey of State Tax Departments, 36 states, plus the District of Columbia and New York City, said income tax nexus would result for an out-of-state corporation with employees that telecommute from homes within their jurisdiction. As in prior years, most of these states said that their position would remain the same even if the corporation had made no sales in the state or the employees telecommuted for only part of their total work time.

Most of the states (33) also said nexus would arise from a single telecommuter who performed back office administrative business functions, such as payroll, as opposed to direct customer service or other activities directly related to the employer's commercial business activities. Thirty-four jurisdictions said nexus would be triggered by a single telecommuting employee who performs product development functions, such as computer coding.