Remote work creates a spectrum of state and local tax issues.

• Author: VandenBrul, Drew

The pandemic has upended life as we knew it. It has created many hardships and drastically changed lives. But the pandemic also has brought one change that is a welcome relief to many employees: remote work. Over the past two years, many employees have grown accustomed to remote work and the flexibility it provides. Many have relished the ability to work from home without the hassle of a commute or a rushed daily morning routine. In turn, many employers have already decided to move to a fully remote workforce or a hybrid approach--allowing employees to work from home for some portion of time. Meanwhile, others are still contemplating whether to make this change permanent.

However, no good deed goes unpunished; such changes require a reevaluation of tax obligations. While employees focus on employment taxes, employers need to consider not only employment taxes but also a broad array of other state and local tax issues, including nexus, apportionment, compliance, and financial statement reporting. All of these present a rapidly changing range of impacts on effective rates and financial statement reporting, registrations, tax compliance, data gathering, and documentation. This column discusses items tax professionals should consider when evaluating the state and local tax ramifications of a remote work environment.

Background

As businesses enter the cliched "new normal," it may appear everything has changed. In fact, the issues that have surfaced because of the increased remote workforce are not new. Almost a decade ago in Telebright Corp. v. Director, New Jersey Division of Taxation, 424 N.J. Super. 384 (N.J. Super. Ct. App. Div. 2012), the New Jersey Superior Court's Appellate Division affirmed that an out-of-state employer could be liable for the state's corporation business tax (CBT) by virtue of one employee telecommuting from the state. It is worth examining this case in more detail.

The employer maintained its principal place of business in Maryland but employed one telecommuting employee in New Jersey. The employee worked from New Jersey writing software code for the company, which was incorporated into a web application provided to

TeleBright's clients. Apart from the one employee telecommuting from the state, TeleBright had no other connections with New Jersey.

The New Jersey Division of Taxation (Division) took the position that TeleBright was liable for the CBT because it was "doing business" in New Jersey by permitting the employee to work from her home within the state. In response, TeleBright asserted that it was not "doing business" in the state and further challenged the Division's position based on both Due Process and Commerce Clause grounds under the U.S. Constitution.

As with many states' business taxes, the CBT is imposed upon the "privilege of doing business" within the state. In Telebright, the court analogized the employee's software writing to that of a manufacturing employee who fabricated parts in New Jersey for a product that was then assembled out of state.The court reasoned that the statute should be construed broadly and, without difficulty, concluded that TeleBright was "doing business" in the state by virtue of the telecommuting employee.

Turning to the constitutional issues, the court explained that the Due Process Clause is concerned with "fairness." Citing to U.S. Supreme Court cases in which the Court has held that the presence of one employee within a state is sufficient to subject a company to that state's business tax without violating due process, the New Jersey court determined that TeleBright had sufficient minimum contacts with the state to satisfy due process. (1)

Regarding the Commerce Clause, TeleBright argued that employing one individual within New Jersey was de minimis and did not create a "definite link" or "minimum connection" between TeleBright and New Jersey to justify imposition of the CBT. With arguments similar to those that would be raised later in Wayfair, (2) TeleBright argued that taxing businesses on the basis of telecommuting employees would impose "unjustifiable local entanglements" and an "undue accounting burden" upon businesses employing telecommuters.

Rejecting these arguments, the court reasoned that the telecommuting employee was working full time in New Jersey creating a portion of the taxpayer's product and, as such, the company benefited from all of the protections New Jersey law afforded the employee. Moreover, TeleBright was already withholding and paying New Jersey state income tax on the employee's salary--thus, the additional effort of calculating and paying the CBT should not constitute an undue burden.

While Telebright involved New Jersey law, the issue raised is not unique to New Jersey. In fact, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state's business taxes. Although the issues themselves are not new, the impact of those issues is now much greater since more individuals are working remotely than ever before. Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce.

Nexus

Generally speaking, a remote employee will create nexus for the employer for tax purposes and--as Telebright illustrates--such connection will likely withstand constitutional scrutiny. Nexus created by remote-working employees can create significant...