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New Jersey Hits Maryland Company With Tax For Allowing Telecommuting

1 min readBy: Joseph Bishop-Henchman

Our Center for Legal Reform has four focus areas, one of which is the scope of state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. authority: “States should not impair our national market with protectionist barriers. So long as tax systems are defined by geography, tax assessment and nexus must be based on physical presence within geographic lines. A single transaction should not be subject to multiple taxation or burdensome calculation, assessment, or payment obligations.”

Unfortunately, there is no shortage of horror stories told to us by taxpayers in this area. This morning’s story involves a Maryland company that decided to let an employee telecommute from her home in New Jersey. New Jersey ruled earlier this month (PDF) that the company is now subject to the New Jersey corporate income tax because of that decision.

Craziness, I say. We can probably all agree that the employee in question should be paying her individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. to New Jersey since she’s a resident of the state and using its services. But the company’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. ? Should New Jersey get a piece despite the company having no contact with the state other than this one telecommuting employee? New Jersey’s answer to that question is an obvious one, but is it the right answer?

A bill pending before Congress, the Business Activity Tax Simplification Act, would adopt more sensible rules for determining taxing authority (“nexus”), as well as reign in some of the more aggressive states like New Jersey, Washington, and West Virginia.