Tax, Finance, CE, CPE, EA, CPA, CFP Blog: Divergent Rulings Stir ...

A recent court case has the accountant community in a stir because of the significant impact on CPA study about state income tax. Usually, a state collects tax on the earnings of people with jobs at companies located in the state ??" even individuals who reside in other states. Now, a court in New Jersey has declared that a business located in another state owes tax in New Jersey for employing someone who resides there. At the heart of the matter is determination of where work is conducted by a telecommuting employee. Previous court rulings have determined that an employee telecommuting to work from home is working in the state where the business is located. The new court decision twists that around by claiming that the business has established nexus in the employee’s state of residence. This impacts the allocation of income among various jurisdictions studied to become a certified public accountant. The court judgment means that New Jersey will collect its business tax on any company with an employee arrangement like Telebright Corp. That company is incorporated in Delaware and has offices in Maryland. The web application business permitted an employee to conduct her job under an employment contract by telecommuting from her New Jersey home. This triggered the New Jersey court to rule that Telebright was doing business in the state. By having an employee create computer code that became part of the corporation’s web-based service, the employment from New Jersey makes Telebright subject to that state’s tax. Consequently, Telebright needs to hire someone with CPA courses covering division of income among multiple states. This is normally accomplished by applying a formula that weighs a company’s percentage of sales, property, or payroll. Because all states do not deploy the same calculation, a company could run into a situation of counting the same wages for multiple
states. The court ruling omitted any reference to the employee’s taxable income. But, presumably, New Jersey is entitled to tax on that as well. The employee cannot conceivably have Maryland earnings as a telecommuter while simultaneously causing Telebright to have a presence New Jersey. This issue entails the topic of tax home from CPA exam courses. A person commuting to another state for work owes income tax to that state as a non-resident. The employee includes income from telecommuting days. Thus, even income earned by the individual while working from home in her state of residence is taxed by the state where the business is located. Conversely, the logic in the New Jersey case is that the business has adopted a presence in the employee’s state of residence. New Jersey will apparently tax income of residents in other states earned on the days they telecommute to jobs at New Jersey companies plus tax companies located in other states with telecommuting employees in New Jersey. Determining nexus is usually encountered in CPA exam review material when addressing a foreign company. For example, a business has some allocation of income to an area where its employees manufacture components that are assembled in another region. A single employee is usually sufficient for most political entities to declare nexus for a company. IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

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