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'Telebright v. Director': New Jersey Appellate Division Rules on New Jersey Corporation Business Tax Impact of Employing New Jersey Telecommuter

Publisher: Day Pitney Alert
March 12, 2012

In a recent decision, Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation, A-5096-09T2, ___ N.J. Super ___ (App. Div. 2012), the New Jersey Appellate Division held that an out-of-state corporation that regularly and consistently permits an employee to telecommute from her New Jersey residence is doing business in New Jersey and is therefore subject to the New Jersey Corporation Business Tax Act ("CBT Act").

Telebright Corp. Inc. ("Telebright") is a Delaware corporation that has its offices in Maryland. Telebright employs an individual (the "Employee") in New Jersey to develop and write computer software that becomes an integral part of a product that Telebright provides to its customers. Once the Employee finishes a project, she uploads it to a repository on Telebright's computer server where it becomes accessible to co-employees who deploy it to the company's Web application. She submits her time sheets by computer from New Jersey and is supervised by and reports to a project manager in Boston via e-mail and telephone. Telebright withholds New Jersey income tax from her salary.

The CBT Act requires every foreign corporation to pay an annual franchise tax for the "privilege of doing business" in New Jersey. The New Jersey Division of Taxation's regulations define "doing business" as "all activities which occupy the time or labor of men for profit." Any for-profit corporation carrying out any of the purposes of its organization within New Jersey is deemed to be "doing business" in the state.

The Appellate Division found that the Employee carried out the purpose of Telebright's organization in the state by creating computer code from her New Jersey residence. It therefore held that Telebright is subject to the CBT Act. It analogized the current facts to that of a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.

The court rejected Telebright's argument that applying the CBT Act to the facts would violate the Due Process Clause and Commerce Clause of the United States Constitution. The court made clear that taxing a business based on its employing one full-time employee in the taxing state does not violate the Due Process Clause. The state is not imposing the CBT Act because the Employee lives in New Jersey, but rather because she performs work for Telebright in the state. In doing so, the Employee is entitled to all of the legal protections the state provides to its residents. In addition, should the Employee violate her employment contract, the company may file suit in New Jersey court. Based on the foregoing, the court ruled that Telebright has sufficient minimum connections with New Jersey to permit taxation consistent with the Due Process Clause. The court also found the Employee's full-time employment in New Jersey was not de minimus and therefore satisfied the Commerce Clause substantial nexus requirement as set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).