In the increasingly “officeless” environment of the digital workplace, Internet retailers, cloud computing providers and other remote sellers should be aware of the sometimes unexpected state tax consequences associated with employees who telecommute. Although there are few reported court decisions, a vast majority of the states assert that having employees located in the state engaged in non-sales activities who telecommute from home is a sufficient presence in the state to require a company to collect the state’s corporate income or franchise tax. It is also clear that having a telecommuting employee in the state creates meaningful sales and use tax nexus risk, but whether a telecommuting employee will create a "physical presence" in the state sufficient to require the company to collect state use tax may depend upon the nature of the employee’s in-state activities on behalf of the company.
The leading case in the still-developing decisional law on telecommuting is the recently-decided Telebright Corp. v. New Jersey Division of Taxation, 424 N.J.Super. 384, 38 A.3d 604 (App. Div. 2012). In Telebright, the Appellate Division of the Superior Court of New Jersey affirmed a Tax Court decision that the presence in the state of a software developer telecommuting on a daily basis for a Maryland company was sufficient to subject the company to an obligation to report New Jersey Business Corporation Tax (“CBT”). Id., 424 N.J.Super. at 395, 38 A.3d at 611. The employee in Telebright performed no sales functions on behalf of the company (indeed, the Tax Court noted that the company solicited no sales in New Jersey, at all), but she was involved in developing a web-based software application that the company marketed to its clients, a fact that the Appellate Division emphasized in finding that the company both was “engaged in business” under CBT statute and had sufficient nexus with the state for CBT purposes.
Of course, federal law P.L. 86-272 will still protect a company from an obligation to report a state’s corporate income tax, if the company’s in-state telecommuting employees are engaged solely in solicitation of sales for orders of tangible personal property that are approved and filled from outside the state. Many businesses that rely on telecommuting, however, are not protected by P.L. 86-272, because they sell services or computer software applications that may not be deemed “tangible personal property” under state law. Furthermore, employees telecommuting from a state engaged in activities other than solicitation (or activities strictly ancillary to solicitation), will not qualify for P.L. 86-272 immunity. Indeed, more than thirty-five state revenue departments have indicated in response to various surveys that the presence of non-sales, telecommuting employees will subject the company to an obligation to report state income tax.
With regard to state sales and use taxes a direct physical presence in a state through employees will also create a risk of use tax nexus. It is clear that if an in-state employee is engaged in sales solicitation or support activities with respect to in-state customers, s/he can create nexus under established Supreme Court precedent. See, e.g., Tyler Pipe Indus., Inc. v. Washington Dep’t of Revenue, 483 U.S. 231 (1987). Even the activities of non-sales employees, however, should be examined carefully to determine the level of nexus risk to the company when making a business decision about whether to engage telecommuting employees in the state employee to telecommute. In some states, a non-sales employee may not create nexus. For example, the California Board of Equalization has indicated in one Sale and Use Tax Annotation (SUTA 220.0256: “Telecommuting In-State”) (June 21, 1999) that a remote seller that had an employee engaged in web design who telecommuted from his home in California was not “engaged in business” in the state for purposes of California use tax because the telecommuter did not have any contact or involvement with customers in the state. Many other state revenue departments have, however, at least in response to informal surveys, taken a less permissive view. Remote sellers should consult carefully with their tax counsel to understands the use tax risks associated with particular telecommuting arrangements.
