Insights to tax considerations of relocation, expansion, or consolidation of operations.
The coronavirusoutbreak has caused major disruptions worldwide. The threat has impacted all business in many unexpected ways. In adjusting to the new “normal”, many businesses are contemplating moving operations or offices to new states. As you consider relocating, you may wonder how this will impact your business and what you should weigh in the decision-making process. Site selection is a challenging undertaking which may come with inherent risks. These decisions could yield various tax implications, such as the creation of nexus (i.e. filing requirements) in new states. These implications could have ripple effects across income tax, payroll tax, and other indirect taxes. Careful consideration should also be given to countless credit and incentives made available by states and localities.
Income Tax Considerations
When considering moving, you may want to assess how that state will tax the business, the investors/owners, and the employees. Many states impose both an income tax on corporations and personal income tax. However, some states such as Florida impose a corporate income tax but not personal income tax. Other states such as Texas impose a Franchise Tax based on revenue and also has no personal income tax. A state like Nevada has neither corporate or personal income taxes, but does impose a Commerce Tax once a certain threshold is met. Separate and apart that the relocation may establish nexus in a state, each state has its own distinct rules in computing state taxable income, with the usage of an apportionment formula. While the application differs by state, all formulas comprise of a sales factor, where the relocation of employees in some states can possibly have either beneficial or adverse effects on the “sourcing” of sales. Aside from state taxes, local governments may also impose their own tax, registration and/or licensing requirements. Therefore, companies should consider whether the income tax consequences of moving to a certain state will significantly affect their business before moving to that state.
In this new norm of a remote workforce, does relocating your business to a new state mean employees will also relocate? Maybe they will remain as remote employees? Some action items you may want to consider include:
- Notify Payroll Provider and register to file quarterly payroll in new state (payroll company may do this)
- Comply with new state’s new hire notification requirements including unemployment insurance
- Consider proper location of the employee’s withholding. Each state has different requirements that should be considered, such as the convenience of employer rule (For example, absent a bona fide employer office, this could result in employees working in Florida, resulting in their wages be allocated to New York)
contact a member of Withum’s Tax Group.
Other Indirect Tax Considerations
Sales Tax– States differ greatly in how they impose sales tax. Should you create a sales tax requirement in your new state you may need to register to start collecting sales tax in your new state.
Property Tax– Some states such as Florida, California, Texas and Colorado implement a personal property tax. If your new state imposes a personal property tax you will need to register for local Property Tax.
Credits & Incentives
Various states offer incentive programs to encourage business investment and should be identified before the relocation to receive the highest benefit possible. Some of the most common credits and incentives include grants, state tax abatements, and state credits.
Other Business Considerations
Aside from tax implications of moving to a new state, there are general business implications you may need to consider:
- Register with the Secretary of State (consider consulting with your legal counsel if applicable)
- Notify the IRS and Department of Revenue of the Change in Address
- Open local bank accounts in your new state/notify current lender
- Notify vendors of the change of address.
- Transfer all insurance policies including workers compensation, liability and property.
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