By: Clare Porreca, CPA, MT
Moving a business to a new state is a complex decision. Among the many factors to consider is the state and local tax (SALT) implications on the business, employees, and owners. In today’s blog, we outline some of the major considerations.
An important SALT concept is “nexus,” which occurs when a business has a presence in a state. Once nexus is created with a state[i], the business will likely need to register ‘to do business’ in that state. While this will avail the business the rights to the courts and other services in the state, it may subject the business or its employees to various state tax return filing requirements. Each state has different nexus standards, and within a state, there may be different standards for different types of tax (i.e., sales taxes vs. income taxes).
We suggest you start this process by asking a simple question: In what states do I have a physical presence? Some considerations are:
- Will all employees be moving to the new state?
- Where is the business’s property and inventory located?
- Will there be multiple offices in different states?
- Will any employees be working remotely in the old state?
Having nexus in multiple states could create a planning opportunity to shift income to states with lower tax rates. In fact, where to locate a warehouse or headquarters often starts with understanding the SALT landscape.
State & Local Tax Impact
Once you know the states in which you have nexus, analyze the tax impact of moving from one state to another. Part of that analysis is understanding the different taxes that could apply based on your entity type. The major taxes to considered are:
- Income Taxes
- Sales & Use Taxes
- Franchise Taxes
- Local Business Taxes
- Entity-level Taxes on Flow-through Entities
Depending on the states involved, there are other factors that could significantly affect the tax implications. Two examples are:
- Some states have credits that are not available in other states. For example, research & development credits, property tax credits/rebates, job creation credits, etc.
- If your business is set up as an S-corporation, you may need a specific state S-election as not all states recognize the federal S-election. If you miss the deadline to do this, your business would be treated as a C-corporation in that state until a valid state S-election is approved. This could significantly increase your tax burden in that state.
Residency & Individual Income Taxes
If your business is set up as a flow-through entity (partnership, S-corporation, or LLC), know the individual income taxes in the new state, as the taxes to be paid on the business income most likely will be taxed on the owner’s individual income tax return. The tax impact could also change significantly if you are changing your personal state residency in addition to moving the business to a new state.
If you wish to change your state residency, take the proper steps to establish your domicile in the new state, as stated in our previous blog.
You should discuss the legal implications of moving to a new state with your attorney. Depending on your legal structure, you may need to dissolve your current entity in the old state, create a new entity in the new state, merge or convert into a new entity, and/or become a qualified foreign entity in the new state. Understanding the various options and choosing the most beneficial one prior to moving will be critical. If you wait to figure it out after you have already moved, you may not have as much flexibility with the options.
Some other items to consider are :
- Registering to do business in the new state
- Setting up payroll in the new state, if applicable
- Applying for a sales tax license in the new state, if applicable
- Registering your business name in the new state if you use a “doing business as”
- Requesting a tax clearance certificate from the old state, if applicable
As with any major business decision, the tax implications of moving to a new state should not be the only factors considered. The move must make sense in all aspects, but the tax implications could play a significant role in the overall financial analysis. The Tax Warriors® at Drucker & Scaccetti have extensive experience with analyzing the SALT impact in various states. Call on us if you are considering a business move and want to understand the tax implications.
[i] We are using the term ‘state’ but any considerations must include municipalities within that state.