Business Relocation: Tax Traps to Avoid

Relocating a business headquarters to another state can be a strategic move, offering benefits such as lower tax burdens, reduced operational costs, and access to a more favorable business climate. However, while the financial incentives may seem appealing, companies must navigate a complex web of tax implications that can significantly impact their bottom line. Below, we explore the key tax considerations businesses must address when planning to relocate their headquarters to another state.

Corporate Income Tax Structure

One of the first considerations for any relocating business is the corporate income tax structure in the new state. States like Wyoming and Nevada, which impose no corporate income tax, are particularly attractive compared to high-tax states such as California or New York. However, relocating does not always eliminate tax obligations entirely.

Many states use apportionment formulas, such as Single-Factor and Three-Factor Apportionment, to determine taxable income. These formulas are often based on factors such as property, payroll, and sales within the state. For example, even after moving, a business may still owe taxes in its former state if it retains employees, property, or generates substantial sales there. This is due to tax nexus rules, which establish a legal connection obligating businesses to pay taxes in a state where they maintain significant operations or economic activity.

The two most common apportionment methods are:

• Single-Factor Apportionment: Some states, like Georgia, use a single-factor formula based solely on sales within the state. This means that even if a business relocates its headquarters outside Georgia, it may still owe taxes in Georgia if it generates significant sales there.
• Three-Factor Apportionment: Other states, such as California, use a three-factor formula that considers property, payroll, and sales. This can result in ongoing tax obligations if a business retains employees, facilities, or other assets in the former state.

Sales and Use Tax Considerations

Sales and use tax laws introduce another layer of complexity. Under economic nexus rules, businesses may be required to collect and remit sales tax in states where they have no physical presence but meet certain sales thresholds. For instance, a business leaving New York but continuing to sell products to its former customers could remain subject to the state's 4% sales tax requirements.

Additionally, companies maintaining distribution centers or warehouses in their previous state may face ongoing tax liabilities. These obligations can persist even after the headquarters has been relocated, requiring businesses to carefully evaluate their operational footprint.

The following chart outlines “factor-based presence” nexus thresholds for income, franchise, and gross receipts taxes. In states with a factor-based presence nexus standard, an out-of-state entity is considered to have substantial nexus and a filing obligation if its sales, property, or payroll surpass the thresholds set by the state. The chart also outlines the sales threshold in each state with such standards that would subject an out-of-state company to tax even in the absence of a physical presence.


Factor-Based Presence Thresholds and Economic Nexus Rules

Additionally, several states establish economic nexus for out-of-state businesses without setting specific factor-based thresholds. Examples include Indiana, New Hampshire, Oregon (for income tax), Rhode Island, and Wisconsin. These states define their economic nexus criteria through statutes or case law.

Payroll Tax Challenges

Relocating headquarters also impacts payroll taxes, as businesses must comply with the new state’s unemployment insurance rates and employee tax withholding requirements. These changes can result in higher or lower payroll costs depending on the state’s regulations. When relocating, businesses must register with the new state’s unemployment tax agency and obtain a new SUI rate. This process can be time-consuming, and businesses may face higher rates initially if they lack an established history in the new state. For example, a company moving from Illinois to Tennessee may benefit from Tennessee’s lower wage base and rates, while a move to a state with higher rates, such as California, could increase payroll costs.  The chart below shows the various rates across all states for the 2025 calendar year:


State-specific SUI tax rates for 2025

Some states have reciprocity agreements that simplify tax withholding for employees who live in one state but work in another. For example, an employee living in Pennsylvania but working in New Jersey may only need to pay income tax to their state of residence. However, if the new state does not have a reciprocity agreement with neighboring states, businesses may need to withhold taxes for both states, increasing administrative complexity.

Relocating to a new state also impacts workers’ compensation insurance, which is required in most states. Each state has its own rules regarding coverage and premium rates.

Property Tax Variations

Property taxes vary widely between states and can significantly impact a business’s operational budget. Some states, like Nevada, offer property tax abatements and incentives to attract businesses, reducing the overall tax burden. On the other hand, states like New Jersey and Illinois impose some of the highest property tax rates in the country, which can strain financial resources. Personal property is often taxed at a lower rate than real property, or in some cases, is exempt altogether. As a result, the effective tax rate on business properties depends on the share of a parcel’s total value (real property + personal property) that comes from personal property. Local effective tax rates also vary based on assumptions about the split of total parcel value between real and personal property. Therefore, businesses should carefully evaluate property tax rates and assess whether the new state offers incentives that align with their long-term financial goals.

Tax Implications of Moving Logistics

The logistics of relocating a business also come with tax complications. Under the Tax Cuts and Jobs Act (TCJA), most deductions for moving expenses have been suspended for tax years beginning after December 31, 2017, and before January 1, 2026. This suspension primarily affects individuals and does not explicitly require businesses to capitalize moving costs. However, businesses may need to capitalize certain moving expenses if they are directly related to acquiring or improving a capital asset, such as relocating equipment from one location to another. The tax treatment of these costs depends on whether they are considered capital expenditures or ordinary business expenses under existing tax rules.

Additionally, businesses must account for the tax treatment of moving-related reimbursements to employees, which are now considered taxable income under federal law.

Exit Taxes and Ongoing Obligations

Exiting a state does not necessarily mean escaping its tax obligations. States like California impose franchise taxes even after a company departs, requiring businesses to file final tax returns and potentially pay exit taxes. Businesses must also address any outstanding tax liabilities and ensure compliance with the former state’s regulations.

Relocating assets may also necessitate adjustments to federal depreciation schedules, which can impact financial statements and tax filings. These adjustments require careful planning to avoid unexpected tax consequences.

Specialized Tax Implications for Certain Industries

Certain industries face unique tax implications when relocating. For example:

• Manufacturing: States like South Carolina offer machinery tax exemptions, which can reduce costs for manufacturers.
• Financial Services: Financial firms relocating to New York may encounter additional regulatory taxes.
• Job Creation Incentives: States like Alabama and Georgia provide generous tax credits for job creation and infrastructure investment, which can offset relocation expenses.

Understanding these industry-specific tax benefits and obligations is critical for businesses to make informed decisions.

Additional Tax Considerations

Beyond standard tax concerns, businesses must also account for less obvious factors, such as:

• Entity Classification: Tax treatment for LLCs, partnerships, or corporations may differ across states, potentially altering a business’s tax liability.
• Transfer Taxes: Some states impose taxes on asset transfers, such as New York’s tax on real estate transactions.
• Local Fees: Local governments may levy operational fees or other taxes that vary by jurisdiction.
• Employee Tax Burdens: Employees relocating with the company may face new personal tax obligations if moving to a state with higher income tax rates.

Strategic Planning for a Smooth Transition

To navigate this complex tax landscape, businesses should conduct thorough due diligence before making a move.  They should compare corporate income, sales, payroll, and property tax rates in both the current and new states, and assess whether the business will maintain a tax nexus in the former state. Businesses should also weigh any benefits of tax credits, abatements, or other incentives offered by the new state.

By understanding the broader tax picture and planning strategically, businesses can position themselves for long-term financial success while minimizing the risks associated with relocation.

Relocating a business headquarters is a significant decision with far-reaching tax implications. While the potential benefits are substantial, careful planning and expert guidance are essential to ensure a smooth transition and avoid costly surprises.