Telebright Corp. v. Dir., New Jersey Div. of Taxation

• Decision Date: 02 March 2012
• Citation: 38 A.3d 604,424 N.J.Super. 384
• Parties: TELEBRIGHT CORPORATION, INC., Plaintiff–Appellant, v. DIRECTOR, NEW JERSEY DIVISION OF TAXATION, Defendant–Respondent.
• Court: New Jersey Superior Court

38 A.3d 604

424 N.J.Super. 384

TELEBRIGHT CORPORATION, INC., Plaintiff–Appellant,

v.DIRECTOR, NEW JERSEY DIVISION OF TAXATION, Defendant–Respondent.

Superior Court of New Jersey, Appellate Division.

Submitted Dec. 6, 2011.Decided March 2, 2012.

Richard J. Bove (Bove & Associates), attorney for appellant.

Paula T. Dow, Attorney General, attorney for respondent (Lewis A. Scheindlin, Assistant Attorney General, of counsel; Marikae G. Toye, Deputy Attorney General, on the brief).

Before Judges REISNER, SIMONELLI and HAYDEN.

The opinion of the court was delivered by

REISNER, J.A.D.

In a published opinion, Telebright v. Director, Division of Taxation, 25 N.J.Tax 333 (Tax 2010), the Tax Court held as follows: a foreign corporation that regularly and consistently permits one of its employees to telecommute full-time from her New Jersey residence is doing business in New Jersey, is subject to the New Jersey Corporation Business Tax Act (CBT Act), N.J.S.A. 54:10A–1 to –41, and must file New Jersey Corporation Business Tax returns. We affirm, substantially for the reasons set forth in Judge DeAlmeida's opinion. We add the following discussion.

I

The facts, derived from the parties' summary judgment motions, are undisputed. Telebright Corp., Inc. (Telebright or the company) is incorporated in Delaware and has its offices in Maryland. The employee in question ¹ develops and writes software code from a laptop computer in New Jersey. The work she produces becomes an integral part of the “ManageRight” web application, a product that Telebright provides to its customers.² As described in her deposition, instead of making physical objects for the company to sell, she creates intellectual property that will become part of the web application the company's customers will pay to use. She programs computer code to be added to a “chunk” of the company's software. When she finishes a project, instead of postal-mailing it to the company headquarters, she uploads it to a “repository” on the company's computer server. Once in the repository, her work becomes accessible to her co-employees, who “deploy” it to the company's web application.

The employee began working for Telebright in Maryland in 2001, but in 2004 her husband obtained employment in New Jersey and the couple moved here. To retain the employee's services, Telebright allowed her to telecommute full-time from New Jersey and initially provided her with a laptop computer for that purpose. She later replaced that computer using her own funds. Since 2004, when the employee began telecommuting, Telebright has withheld New Jersey income tax from her salary and remitted it to the New Jersey Division of Taxation. She submits her timesheets by computer from New Jersey.

The employee is supervised by and reports to a project manager, who telecommutes full-time from Boston. She communicates with the manager by email and telephone calls, and she occasionally participates in conference calls with company clients. She attends company-wide meetings in Maryland once or twice a year but otherwise works entirely from her home in New Jersey.

When the employee began working for Telebright, she signed an employment contract that restricts her future employment elsewhere and prohibits her from disclosing the company's proprietary information. While the contract requires arbitration of disputes, it permits the company to seek injunctive relief if the employee violates those provisions.

II

The CBT Act requires every foreign corporation that is not exempt to pay an annual franchise tax “for the privilege of having or exercising its corporate franchise in this State, or ... for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State.” N.J.S.A. 54:10A–2.³ The Legislature has declared the reach of the statute to be co-extensive with the State's constitutional power to tax.

A taxpayer's exercise of its franchise in this State is subject to taxation in this State if the taxpayer's business activity in this State is sufficient to give this State jurisdiction to impose the tax under the Constitution and statutes of the United States.

[ N.J.S.A. 54:10A–2.]

The statute is to be construed broadly in light of that purpose. See Roadway Express, Inc. v. Dir., Div. of Taxation, 50 N.J. 471, 483, 236 A.2d 577 (1967), app. dis., 390 U.S. 745, 88 S.Ct. 1443, 20 L.Ed.2d 276 (1968). ⁴

The Division of Taxation's regulations define “doing business” comprehensively as “all activities which occupy the time or labor of men for profit.” N.J.A.C. 18:7–1.9(a). Any for-profit corporation “carrying out any of the purposes of its organization within the State shall be deemed to be ‘doing business.’ ” N.J.A.C. 18:7–1.9(a)1. The regulation lists five non-exclusive factors to be considered in determining whether a corporation is “doing business” here:

1. The nature and extent of the activities of the corporation in New Jersey;

2. The location of its offices and other places of business;

3. The continuity, frequency and regularity of the activities of the corporation in New Jersey; 4. The employment in New Jersey of agents, officers and employees;

5. The location of the actual seat of management or control of the corporation.

[ N.J.A.C. 18:7–1.9(b).]

We agree with Judge DeAlmeida that Telebright is doing business in New Jersey. We add only that Telebright's full-time New Jersey employee “carr[ies] out the purpose of its organization” here, by creating computer code that becomes part of Telebright's web-based service.⁵ See N.J.A.C. 18:7–1.9(a)1. For purposes of applying the CBT, that is no different than a foreign manufacturer employing someone to fabricate parts in New Jersey for a product that will be assembled elsewhere.

On this appeal, Telebright does not directly contest that its activities satisfy the statutory test for doing business. Rather, it argues that applying the CBT Act to its limited activities in New Jersey would violate the Commerce and Due Process Clauses of the United States Constitution. U.S. Const. art. I, § 8; amend. XIV, § 1; see N.J.S.A. 54:10A–2 (application of the CBT Act extends to the limits the Constitution will allow).

To some extent, the Due Process and Commerce Clause inquiries overlap:

The Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State's power to tax out-of-state activities. The Due Process Clause demands that there exist “ ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,’ ” as well as a rational relationship between the tax and the “ ‘ “values connected with the taxing State.” ’ ” The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. The “broad inquiry” subsumed in both constitutional requirements is “ ‘whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state’ ”—that is, “ ‘whether the state has given anything for which it can ask return.’ ”

[ MeadWestvaco Corp. v. Ill. Dep't of Revenue, 553 U.S. 16, 24–25, 128 S.Ct. 1498, 1505, 170 L.Ed.2d 404, 412 (2008) (internal citations omitted).]

As explained in Quill Corporation v. North Dakota, 504 U.S. 298, 306–08, 112 S.Ct. 1904, 1909–11, 119 L.Ed.2d 91, 102–04 (1992), the Due Process Clause is concerned with the fairness of exercising a state's authority over a business, that is, with whether the business should know, based on its activity within the state, that it can expect to be regulated by that state. The Commerce Clause, on the other hand, is concerned with preventing states from imposing undue burdens on interstate commerce.

Due process centrally concerns the fundamental fairness of governmental activity. Thus, at the most general level, the due process nexus analysis requires that we ask whether an individual's connections with a State are substantial enough to legitimate the State's exercise of power over him. We have, therefore, often identified “notice” or “fair warning” as the analytic touchstone of due process nexus analysis. In contrast, the Commerce Clause and its nexus requirement are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy. Under the Articles of Confederation, state taxes and duties hindered and suppressed interstate commerce; the Framers intended the Commerce Clause as a cure for these structural ills.

[ Id. at 312, 112 S.Ct. at 1913, 119 L.Ed.2d at 106.]

Telebright first contends that upholding the tax in this case will allow a state to tax any corporation whose employees choose to reside in that state. That argument is frivolous. The State 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. Taxing a business based on its employing one full-time employee in the taxing state does not violate the Due Process Clause. See Standard Pressed Steel Co. v. Dep't of Revenue, 419 U.S. 560, 562, 95 S.Ct. 706, 708, 42 L.Ed.2d 719, 722 (1975) (the presence of one employee within the State of Washington was sufficient to subject the company to the state's business and occupation tax without violating due process); Nat'l Geographic Soc. v. Calif. Bd. of Equalization, 430 U.S. 551, 557, 97 S.Ct. 1386, 1390–91, 51 L.Ed.2d 631, 637–38 (1977) (confirming that Standard Pressed Steel remains good law).

The employee produces computer code for Telebright in New Jersey. She is entitled to all of the legal protections this State provides to its residents. See Nat'l Geographic, supra, 430 U.S. at 561, 97 S.Ct. at 1392–93, 51 L.Ed.2d at 640. And, should the employee violate the restrictive covenants in her...