Telebright Corp., Inc. v. Director, New Jersey Div. of Taxation, 424 N.J. Super. 384 (App. Div. 2012). Plaintiff, a Delaware company with offices in Maryland, has an employee who telecommutes from New Jersey. Plaintiff sells a web application to customers, and the New Jersey employee develops and writes software code from her computer in New Jersey that “becomes an integral part” of plaintiff’s web application.
Companies that do business in New Jersey must pay an annual franchise tax and file Corporation Business Tax returns, pursuant to the Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -41 (“CBT”). The Division of Taxation’s regulations define “doing business” comprehensively. On cross-motions for summary judgment, the Tax Court found that plaintiff did business here by virtue of the presence of its telecommuting employee. Plaintiff also contended that subjecting it to the CBT violated due process and the Commerce Clause of the United States Constitution. The Tax Court disagreed, and the Appellate Division affirmed in an opinion by Judge Reisner.
Citing U.S. Supreme Court opinions, Judge Reisner noted that the Due Process and Commerce Clauses overlapped to an extent, though due process is concerned with whether it is fair for a state to exercise power over a business based on its activity in that state while the Commerce Clause “is concerned with preventing states from imposing undue burdens on interstate commerce.” The panel found “frivolous” plaintiff’s due process argument that subjecting to the CBT would “allow a state to tax any corporation whose employees choose to reside in that state.” Judge Reisner observed that New Jersey “is not imposing the CBT tax because Telebright’s employee lives in New Jersey; it is imposing the tax because she performs work for Telebright on a full-time basis in this State.” Judge Reisner cited two U.S. Supreme Court opinions as directly on point.
Plaintiff’s Commerce Clause argument was that the presence of just a lone employee in New Jersey did not create the “minimum connection” between plaintiff and New Jersey that is required by caselaw. Plaintiff relied on a U.S. Supreme Court case, but Judge Reisner noted that, in the cited case, no employee was present in the taxing state. She also cited a subsequent case that expressly said that “a small sales force, plant or office” in the taxing state could subject a foreign business to taxation. Moreover, the panel cited another U.S. Supreme Court case as “rejecting as ‘frivolous’ the argument that having one employee in the state was de minimus and therefore defeated the state’s right to impose a tax.”
Finally, Judge Reisner rejected the argument that the CBT tax imposed an undue burden on plaintiff. Plaintiff was already withholding state income tax from its New Jersey employee and was subject to New Jersey’s labor and anti-discrimination laws. “Telebright offers no explanation as to why the additional effort of calculating and paying the CBT [which the Division of Taxation had noted could be as low as the statutory minimum of $500] would constitute an undue burden on its conduct of interstate commerce.”
The appearance of the “F” word (“frivolous,” of course) not just once but twice in an opinion with regard to plaintiff’s arguments probably says it all.