We are visiting state taxation today. Our trip this time will take us to New Jersey, and it will highlight how tax law can simultaneously arrive at a technically correct but bumble-headed conclusion.
Let’s say you manufacture parts in New Jersey. Would you expect to file and pay state income tax to New Jersey?
That one is easy - of course. You are doing business there – in the meaningful sense of the phrase. You have a building, you have employees. You park your car out front. You visit Chipotle for lunch. You are there.
Let’s make this more challenging. You do not manufacture parts. You do not manufacture anything. You develop software. Your offices are in Rockville, Maryland. You do not have offices in New Jersey. You do not park your car in New Jersey or visit their Chipotle for lunch. You are not there. You have an employee who moves to New Jersey. You like her. You keep her on board.
Like a Jim Croce song, you have a name. Your name is Telebright.
Let’s have her work from her new home. She begins her workday at 9:00 a.m. by checking with her project manager, who is based in Boston. She receives daily work assignments. When done, she uploads her work and sends it to you. She is expected to work 40 hours a week. She could live on the moon, for what location matters to her work.
She does not solicit customers. She does not have sales responsibility. She does not refresh products, or stock shelves, or install, or service. She does not supervise employees. She does not have management authority. You do not even reimburse for her office-in-home. She travels twice a year to Maryland. By the way, you do not pay for the travel – rather she pays for those trips out of her own pocket.
You – being enlightened – take New Jersey withholding taxes out of her paycheck so that she has no rude April 15th surprise.
New Jersey surfaces, somewhat like the mutant alligator in a bad Sci-Fi network movie. New Jersey says that you are doing business in the state, and it wants you to … (wait on it) … pay corporate income taxes!
The case goes before the New Jersey Tax Court. The court cites the New Jersey statute:
Every domestic or foreign corporation which is not hereafter exempted shall pay an annual franchise tax for each tax year, as hereafter provided … for the privilege of doing business , [or] employing or owning capital or property … in this state.”
The Court then reflects philosophically:
The term ‘doing business’ is used in a comprehensive sense and includes all activities which occupy the time or labor of men for profit.”
It rolls up its sleeves and grittily reviews the law (N.J.A.C. 18:7-1.9(b)):
Whether a foreign corporation is doing business in New Jersey is determined by the factors in each case. Consideration is given to such factors as:
(4) The employment in New Jersey of agents, officers and employees.”
Oh, oh. This is going to go wrong, isn’t it? Or is it possible the court will recognize that a lone employee in the state hardly amounts to a corporate beachhead? Here is the Court:
There is no one, single controlling factor nor is there a bright line standard that determines whether a foreign corporation’s in-state activities meet the Director’s regulatory requirements for doing business. Rather, it is only by close scrutiny of all the facts of the case, taken as a whole, that a final determination can be made. ”
It then digs in like a free agent seeking a new sports contract and drives for the bright line.
It cannot be disputed that plaintiff satisfies factor 4 … by employing Ms. … in New Jersey.”
[Telebright] agreed to permit Ms. … regularly to perform her duties at her New Jersey home.”
This consistent contact with New Jersey was not sporadic, occasional or intermittent.”
But the Court pauses. Will it realize that you are being a good sport for even keeping her employed after the move? Will it acknowledge that this is not a 19th century economy, when a county seat could not be more than a day’s travel for any resident of the county? It hesitates:
“While it is true that [Telebright] has never maintained an office in New Jersey, nor solicited business here ….”
No! Not now Tax Court of New Jersey! You are so close!
The Court shakes it off:
… [its] daily contact with the State through its employee is sufficient to trigger application of the CBT Act.”
The mere fact that Ms. … is the only … employee in this State does not change the court’s decision.”
Yes, the court determined that Telebright was responsible for New Jersey corporate tax because it permitted an employee to work from her home in New Jersey.
Why does this upset me?
One reason is that reasoning like this would have me filing taxes with India if I hired an on-line bookkeeper there.
Another reason is that I have read court decisions like this for more than two decades now. After a while it is like watching WWE wrestling – there really isn’t much suspense about who is going to win. There was a time when a state at least tried to develop coherent doctrines and workable principles. In recent years however state tax has become more like a hijacking on a Sopranos episode.
Another reason is this is an employee-hostile decision.
I have a friend and client, for example, who lives in Kentucky and commutes to California. Yes, you read that right. He works a week here in Kentucky and a week near San Francisco. He is situated well enough at the company that he floated the idea of having an “office” here. The company turned him down. Why? Because they do not have a footprint in Kentucky and his “office” could create one. So he commutes every other week to California. I suspect he may be their only Kentucky-resident employee.
If you were Telebright, what would you do? Would you not permit your employee to work from home, never mind the reasons? Would you even keep her as an employee?
Who gains here? Tony … er, Trenton gets a few dollars from its next mark … er, taxpayer. Who loses? For now, the company loses. In the future, the loser will be the next employee who wants to work from a New Jersey residence for an out-of-state company whose tax advisor has read Telebright.
