As if the Yahoo and Best Buy moves against telecommuting employees were not enough to make companies rethink telecommuting there may now be tax consequences to letting telecommuters live in another state other than the one the company is headquartered in.
It is all about tax collection
According to attorney Brendan Lund, a “ground-breaking New Jersey case, Telebright Corporation, Inc. v. New Jersey Division of Taxation (2012), creates tax consequences, where none previously existed, for an employer who allows its software developers to telecommute from another state and write code that is included in software that the company sells to customers.” In this particular case a developer had moved to New Jersey, following her husband, and Telebright allowed her to continue coding and developing from her home in New Jersey. Telebright is headquartered in Maryland and the company did not require the employee to come to Maryland.
Breaking new ground
It has always been the case that companies that have sales people in states other than the headquarter state have always paid taxes on those employees and on product sold. Back office employees were never included in this calculation. But as more and more companies have used the advantage of technology employees can live almost anywhere. I know of a number of smaller companies that are “virtual” and everyone lives in different locations. As a result states are looking at things differently. According to Lund:
The New Jersey court concluded that the Telebright employee produced computer code for her company in New Jersey while she enjoyed all of the legal protections that New Jersey provided to its residents. The court concluded that the full-time New Jersey telecommuting employee was, by writing software code for the application, creating a portion of the product that Telebright was selling to customers and that this was sufficient business activity for New Jersey to tax a portion of Telebright’s corporate revenues.
This case in New Jersey is new ground and Lund says that high tech companies need to pay particular attention to the implications of this ruling, especially those that are start-ups because it may have a significant impact on their financial position. I think this has greater implications beyond high-tech firms. Many firms use technology to allow attractive candidates of many sorts live and contribute in multiple locations. It would not be a big leap of imagination for a state tax attorney to apply New Jersey’s standard to positions other than software developers. Any employee who contributes to a product could be seen in the same light and subject their companies to the tax consequences.
For some companies the potential cost of the increased taxes may be enough of a deterrent that they may pass on out-of-state applicants. This could cost the company in talent acquisition. HR certainly needs to work with Finance to understand exposure in order to make more informed decisions in situations dealing with out-of-state talent. HR will certainly also have to make a decision just how much impact that candidate has on the actual product.
This is a new area and only one state is doing this so far. But given how hungry most state governments are for revenue it will not be long before others start traveling down this road. Be prepared!