Telecommuting is a growing trend that saves the company money, makes life easier for some employees and decreases traffic congestion. These and many other benefits of telecommuting will cause this way of working to become common in the future.

One of the unfortunate side effects of telecommuting, however, is unintended nexus. This can result where a company has no physical contacts with a state other than a telecommuting employee. For sales and income tax purposes, the company may be liable for tax in a state, where, without the telecommuting employee, there would be no such liability.

In this article I deal only with sales and use tax nexus. Nexus for income tax involves similar issues, with significant differences.

The Bright-Line Test
An out-of-state vendor is required to collect use tax (the equivalent of sales tax) only if that vendor has nexus in the state in which the product or service is sold. For instance, a Utah vendor with no nexus in Alabama is not required to collect use tax on sales to Alabama residents, even if the same product or service would be subject to tax if sold by an Alabama vendor.

An out-of-state vendor has nexus in a state for sales and use tax only if that vendor has some form of physical presence in the state. This is a "bright-line" test set by the U.S. Supreme Court in the case Quill Corp. v. North Dakota.1 The question is whether a telecommuting employee constitutes presence under the "bright-line" test of Quill.

Example: Jones is a computer programmer who works out of his home in New York State. He is employed full time by a New Jersey company that sells computer equipment via the Internet. Jones uses a portion of his bedroom as a workspace. His job is to assist in programming and maintaining the company's Web site.

The company has no physical presence outside New Jersey and, except for Jones' presence in New York, would not be required to collect sales and use tax in any state, other than New Jersey. Does Jones' presence in New York result in New York nexus and consequent liability to collect use tax on sales to New York residents?

To answer this question we look at several Supreme Court cases that have dealt with the effect of employee presence in a state on a company's liability to collect tax on sales in that state. While none of these cases involves a telecommuting employee, they give us a good idea of how the Court may rule in a telecommuting case.

International Shoe
The first cases deal with salespeople. International Shoe2 dealt not with sales tax, but with payroll tax. The question was whether a Delaware corporation was required to make contributions to Washington State's unemployment compensation fund on behalf of its Washington State employees. While the case does not deal with sales and use tax, its ruling has been followed in sales and use tax cases.

This case dealt with traveling shoe salesmen who resided in Washington, and whose principal activities were confined to that state. The salesmen only took orders for shoes. They did not have the authority to conclude contracts, and all sales were shipped to Washington customers from outside the state.

The Court, in International Shoe, ruled that the activities of the salesmen were systematic and continuous and resulted in a large volume of sales. Based on the extent of the activities of the salesmen in the state, Washington had a right to impose upon the Delaware company an obligation to contribute to the unemployment compensation fund.

Standard Pressed Steel
The next case also involved a Washington State employee. In Standard Pressed Steel3 the U.S. Supreme Court dealt with a Pennsylvania company that manufactured and shipped product to Boeing, in Seattle, Wash. To facilitate sales to Boeing, the company maintained an employee in Washington. That employee worked out of his home.

His duties were to consult with Boeing regarding its anticipated needs and requirements for the company's products, and to follow up on any difficulties in the use of the company's products after delivery. Based on this person's activities in the state, Washington imposed its Business and Occupation tax (similar to sales and use tax) on the Pennsylvania company.

The Court found that the employee made possible the realization and continuance of valuable contractual relations between the company and Boeing. Accordingly, the Court upheld Washington's authority to impose its tax on the company.

National Geographic
Reading these cases only, one might conclude that a salesman in a state results in nexus, but that the effect on nexus of any other type of employee is open to question. This might have been the conclusion until the Court ruled in the National Geographic4 case. In this case, California's State Board of Equalization (SBE) sought to impose a requirement to collect use tax on National Geographic's mail-order company, based in the District of Columbia.

The SBE's basis for its claim was the existence of National Geographic employees in two California offices. These employees were not salespeople. In fact, they had nothing to do with National Geographic's mail-order business. They were in California to solicit advertising for the National Geographic magazine. Nonetheless, the Court upheld the tax, finding that any presence in the State was enough to give California the right to impose a collection responsibility on National Geographic.

Quill Corp v. North Dakota
Finally, we come to Quill Corp. v. North Dakota. Here the Court dealt with a major mail-order house with sales of almost $1 million to about 3,000 customers in North Dakota. Quill's physical presence in North Dakota was minimal, consisting only of a few copies of software used by customers to make orders and check inventory.

The Court found that the company's physical presence in the state was not sufficient to result in nexus for sales and use tax. Accordingly, the Court refused to allow North Dakota to impose a use tax collection responsibility on the company.

The Court, in Quill, upheld physical presence as the "bright-line" test for nexus. Under this test a company either has physical presence in a state or it does not. According to the Court, "Whether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office."

The Court acknowledged that the physical presence test is somewhat artificial. But, the Court said, "This artificiality, however, is more than offset by the benefits of a clear rule." In saying this, the Court referred to the National Geographic case. The Court clearly meant to convey the idea that any kind of physical presence is enough to result in nexus. When the Court upheld a "bright-line" test for nexus it clearly sought to settle any further arguments about whether nexus exists.

Orvis Co. v. Tax Appeals Tribunal
Since Quill, several cases have looked at the physical presence requirement. One in particular has received attention from commentators. In Orvis Co. v. Tax Appeals Tribunal5, a Vermont company periodically sent employees to visit retailers in New York. The appeals court found nexus, even though the company's presence in New York was not "substantial physical presence."

This court found that "substantial physical presence" was not required to meet the physical presence test of Quill. Instead, "any measurable amount" of physical presence was sufficient for nexus to exist. The court, in Orvis, described as "begrudging" Quill's retention of the physical presence standard. According to Orvis, Quill's bright-line test was meant to preserve immunity from nexus for a vendor whose only connection with customers in a state was by common carrier or mail.

What Does it All Mean?
In the above telecommuter case, the New Jersey company must collect use tax on all New York sales if it has nexus in that state. If its employee lives in New York but works in New Jersey, no New York nexus will result. To date, no case has held that merely having employees that live in and commute from a state results in nexus.

If, however, the employee works full-time for the company in his home, does nexus result? International Shoe and Standard Pressed Steel (cited favorably by the Court in Quill) both involved salespeople working out of their homes. The only difference between these and our telecommuter case is that the telecommuter is not a salesperson. However, the National Geographic case held that any in-state activity can result in nexus. It is not necessary for in-state employees to be salespeople.

Considering the above cases together, especially in light of the admitted artificiality of Quill's "bright-line" test for nexus, it appears likely that a telecommuting employee will result in sales and use tax nexus in the state in which the employee lives and works.

If a traveling salesperson operating out of the home can result in nexus there is no reason why a telecommuting programmer would not result in nexus. Both are present in a state while they are under the control of the company. Both establish the company's presence in a state. The presence created by the salesperson is more obvious than that of the programmer, but as National Geographic tells us, presence is presence.

How Far Will It Go?
Now, how far can we take this? What if an employee works full time in New Jersey but takes work home to New York? What is the difference between this situation and the employee that telecommutes? Must companies instruct employees not to take work home if they live in a state in which the company does not want nexus?

It does not seem likely that a court would find nexus in a case such as this. For one thing, the employee is presumably free of company control when he or she goes home at night. There is a qualitative difference between a full-time employee working at home, and an employee that merely takes work home at night.

A question closely related to telecommuting employees is telecommuting independent contractors. This question raises two issues. The first is whether the worker is an independent contractor. As the well publicized Microsoft case demonstrates, while claims of independent contractor status are common in high tech companies, such status often does not prove out.

The key question to ask to determine whether an independent contractor is really an employee is, does the company have the right of control? Where the company has the right to control a worker, that worker is usually an employee. This is so whether or not the company chooses to exercise that right of control. Ordinarily, a contractor with one main client is an employee.

Assume that the contractor really is independent. Does that insulate the company from nexus? Assume, for instance, that the New Jersey company hires a New York based attorney. It is doubtful that a New York attorney would result in New York nexus. However, if the attorney worked for the company full time would this not be the same as an in-house attorney operating from an office in New York?

Determinations of nexus resulting from the activities of independent contractors are uncertain. In Scripto Inc. v Carson6 independent agents (wholesalers and jobbers) soliciting sales in Florida for an out-of-state retailer caused that retailer to have nexus for use tax purposes.

Similarly, in Tyler Pipe7 the activities of unrelated sales representatives operating in Washington State were enough to cause an out-of-state company to have nexus in that state. Significantly, whether or not the sales representatives were independent contractors was not constitutionally significant. Owing to the adverse results in these decisions, companies should be wary of depending on independent contractor status to insulate against nexus.

Conclusions
It seems likely that a telecommuting employee will result in nexus in the state in which the employee lives and works. A careful employer will want to make sure it knows the locations from which its employees are telecommuting. In addition, use of independent contractors instead of employees is a risky tactic that should be avoided.

1 Quill Corp. v. North Dakota, 504 US 298 (1992).
2 International Shoe v. State of Washington, 326 US 310 (1945).
3 Standard Pressed Steel Co. v. Dept of Revenue of Washington, 419 US 560 (1975).
4 National Geographic v. Cal. Equalization Bd., 430 US 551 (1977).
5 Orvis Co. v. Tax Appeals Tribunal 654 NE2d 954 (1995).
6 Scripto Inc. v. Carson, 362 US 207 (1960).
7 Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 US 232 (1987).