1642 - Get your butt in here

Are you or do you sometimes telecommute? Are you telecommuting across a state line? If your employer suddenly has a change of heart, this could be why. This is from the Wall Street Journal.


If you let employees telecommute from out of state, you may face tax trouble.

Matthew Bobman, a certified public accountant in New York City, warns that companies have been found liable for state corporate tax "when the only connection to that state was that they had an employee telecommuting in that state."

In March 2010, for instance, the Tax Court of New Jersey ruled that a company whose main offices are in Maryland was "doing business" in New Jersey because an employee telecommutes from there.

The company, TeleBright Software Corp., is appealing the decision, arguing that having one employee in the state who develops software from home falls short of the statutory definition of "doing business." The company asserted that it doesn't solicit customers or make sales in New Jersey.

Just how much of a tax hit companies face depends on state rules. Some impose income tax based on an out-of-state company's sales in the jurisdiction. Others also take into account the company's payroll and property in the state. However they figure the bill, lots of states seem to be on the same page as New Jersey. In a survey issued in April, 35 states, the District of Columbia and New York City said an employee who telecommutes from a home in the state would create "nexus"—a connection that warrants imposing income tax on an out-of-state employer.

Most states don't offer companies clear guidance in this area, says Steven Roll, an assistant managing editor at BNA Tax & Accounting, which conducted the survey. And, he notes, states may face greater pressure to crack down, as they're "struggling to close significant budget gaps."

Mr. Bobman offers a potential solution: Have the telecommuting employee resign, form a C or S corporation and invoice the ex-employer for work. But he warns that the former employer would have to pay the former employee more to cover new expenses and lost benefits. And, although it would be a challenge, states could still make a case for taxing the former employer.

With tax shortages going on everywhere, every state is trying to figure out where they are missing opportunities to cash in.