Moving to a state with no income tax can take the tax off income that follows you. It cannot take the tax off income a state assigns to itself. Your operating income stays taxable where the company works, and one common closing structure pulls the sale gain into the same place. Residency and sourcing are two questions, not one.
Does moving to a no income tax state before selling my business actually save the tax?
Moving before a sale saves state tax only on income that is taxed to the person rather than to the place. Gain treated as intangible income can follow a new residence. Operating income apportioned to the states where the company works does not follow, and in several structures neither does the gain on the sale.
The rule has two halves. A state taxes residents on all of their income, wherever earned, usually with a credit for tax paid elsewhere. It taxes nonresidents on income sourced to that state, wherever they live. A move rewrites the first half and leaves the second untouched.
As of September 2026, that split is the whole analysis. The planning question is never “where do I live.” It is “which dollars follow me.”
What is the difference between residency and sourcing?
Residency decides whether a state may tax all of your income. Sourcing decides whether a state may tax a slice of it because the income was produced inside that state. A nonresident owner whose company has property, payroll, or enough sales in a state can owe tax there. Residency and sourcing are decided under different statutes.
Residency turns on domicile, plus, in a number of states, a mechanical day-count test layered on top. Sourcing turns on apportionment rules that look at the business, not at you, and only after the company’s contacts cross that state’s nexus threshold. A federal statute still shields some sellers of tangible goods whose only in-state activity is soliciting orders, and states keep narrowing it. A seller who wins the residency question and loses the sourcing question has paid for a move and kept the tax bill.
How does a state decide whether I really changed residency?
Domicile is the state you treat as your true home and intend to return to. Changing it requires abandoning the old one and establishing the new one in fact, not on paper. States weigh where you sleep, where your family lives, where your home of greatest value sits, and where your business and civic life continue.
Several states add a second test that gives intent no weight. Keep a permanent place to live in the state and spend more than the statutory number of days there, commonly more than 183, and you are a resident by statute even though your domicile is elsewhere. Counting rules differ, and in many states any part of a day counts.
The burden is generally yours. In most states an assessment carries a presumption of correctness, and you have to prove the change was genuine. Auditors work from calendars, phone records, card statements, and travel data, so build the file as you go.
- A dated day log for the year of the move and the year of the sale.
- A closing statement on the old home, or a surrendered lease.
- Registrations, licenses, voter records, insurance, and bank relationships moved on comparable dates.
- An explanation for every continuing tie back to the old state.
Will my pass-through business income still be taxed in the old state after I move?
Pass-through business income is apportioned to the states where the company operates, and it stays taxable in those states after the owner moves. An S corporation or LLC computes its apportionment factors at the entity level. Those percentages flow to your K-1. You file nonresident returns in the operating states whether you live there or not.
Filing thresholds, composite returns, and entity-level elections change the mechanics, not the state’s claim. Formulas differ as well, and many states now use a single sales factor, which turns the question into where your customers are. Massachusetts moved most business corporations to that formula for tax years beginning on or after January 1, 2025, and amended its nonresident regulation to match.
I read the company’s apportionment schedules and its state filing history before I read anything about where you live, because the schedules tell you which states already have a claim.
Law: Chapter 50 of the Acts of 2023 (Massachusetts), effective for tax years beginning on or after January 1, 2025. Regulation: 830 CMR 62.5A.1(6), amended January 2025.
Can a state tax the gain on the sale if I am a nonresident when it closes?
A state can tax a nonresident’s gain when its own statutes source that gain to the state. Two 2022 decisions show how far apart the answers sit. California sourced nonresident shareholders’ share of an S corporation’s goodwill gain as apportionable business income. Massachusetts, facing a passive owner with no other tie there, found no statute authorizing the tax.
In the California case, nonresident trusts held stock in a unitary multistate S corporation that sold a subsidiary in a transaction reported as a sale of that subsidiary’s assets, goodwill included. The trusts argued their share was income from an intangible, which California sources to the owner’s residence. The Court of Appeal held the pass-through sourcing regulation controlled, so the gain was business income apportioned at the corporation’s level, and added that the goodwill had a California business situs anyway.
Case: The 2009 Metropoulos Family Trust v. California Franchise Tax Board, 79 Cal. App. 5th 245 (Cal. Ct. App., May 27, 2022). Authority applied: Cal. Rev. and Tax. Code 17952; Cal. Code Regs. tit. 18, 17951-4.
In the Massachusetts case, a nonresident holding company sold its fifty percent interest in an LLC operating entirely in Massachusetts. It had no property, no employees, no other connection to the state, and no unitary relationship with the business it sold. The Supreme Judicial Court held the tax would be constitutional, but that the statutes relied on did not reach that seller. Therefore, no tax.
Case: VAS Holdings and Investments LLC v. Commissioner of Revenue, 489 Mass. 669 (2022).
Do not read that second result as a safe harbor. The Department of Revenue confined it by guidance to owners that are not unitary with the business and neither are nor were actively engaged in it. A nonresident founder who built and ran a Massachusetts company, then moved away and sold his stock months later, was taxed there on the gain as income derived from a trade or business, including employment, carried on in the commonwealth.
The gap has drawn legislative attention. The governor’s fiscal year 2026 budget proposal would have treated a pass-through entity’s business as conducted directly by its nonresident owner. It was not enacted, and as of September 2026 the nonresident sourcing statute still has not been amended. Treat it as a proposal that can return.
Guidance: Massachusetts Technical Information Release 22-14 (November 30, 2022). Case: Welch v. Commissioner of Revenue, No. 24-P-109 (Mass. App. Ct., Apr. 3, 2025). Statute: Mass. Gen. Laws ch. 62, 5A; 830 CMR 62.5A.1.
| Decision | What was sold | Seller’s position | Outcome for the nonresident |
|---|---|---|---|
| Metropoulos (Cal. Ct. App. 2022) | Goodwill gain from an S corporation’s sale of a subsidiary | Nonresident trusts in a unitary S corporation | Apportioned at the corporate level. Taxable. |
| VAS Holdings (Mass. 2022) | A fifty percent LLC interest in a Massachusetts business | Nonresident owner, no in-state activity, not unitary | Constitutional, but no statute reached it. Abated. |
| Welch (Mass. App. Ct. 2025) | Stock in a Massachusetts corporation the seller founded | Nonresident at sale, resident while he ran it | Gain derived from an in-state trade or business. Taxable. |
How does a section 338(h)(10) or 336(e) election change the state tax answer?
A section 338(h)(10) or section 336(e) election converts a stock sale into a deemed asset sale for federal tax purposes. The target is treated as having sold its assets. That moves the gain out of the intangible bucket that follows the owner and into the operating entity’s apportionment formula, where the operating states take their share.
Both exist because buyers want a stepped-up basis. A 338(h)(10) election requires a corporate buyer acquiring at least eighty percent of the stock within twelve months, and where the target is an S corporation every shareholder must consent, including any who sell nothing. A 336(e) election reaches similar ground without a corporate buyer and is made on the seller’s side, though it is the less common of the two.
State conformity is not uniform. Most states follow the federal characterization and some do not, which must be confirmed state by state before the election is priced.
Law: 26 U.S.C. 338(h)(10); 26 U.S.C. 336(e); Treas. Reg. 1.336-1. Allocation: 26 U.S.C. 1060.
Now apply it. You move, you sell stock, and you expect the gain to be intangible income taxed where you now live. The buyer asks for the election. Goodwill lands in the residual class under the allocation rules, and in conforming states that gain is business income apportioned to the operating states. Your K-1 arrives with state percentages on it. Whether you are paid for that depends on what you negotiated, because a gross-up is a bargained term, not a standard one.
The election that closes your deal can quietly undo the move that preceded it.
The same problem arrives through other doors. A sale of all the membership interests in a multi-member LLC is a purchase of assets by the buyer, and many states look through to the entity’s activity to source the sellers’ gain. Converting the target into an LLC before closing does the same work without a section 338 election. Ask what the deal becomes after tax structuring, not what the letter of intent calls it.
What nonresident filings and withholding should I plan for before closing?
Nonresident owners of a multistate business face three recurring mechanics: withholding on distributive shares, composite returns filed by the entity on the owners’ behalf, and elective entity-level pass-through taxes. Each one has a different effect on your net proceeds. All three must be modeled before the purchase agreement is signed, not at filing season.
- Nonresident withholding. Many states require the entity to withhold on income allocated to out-of-state owners, and some let an owner opt out by agreeing in writing to file and pay.
- Composite returns. Convenient, but joining one can cost you deductions, credits, or a lower bracket.
- Entity-level elections. Some states let the entity pay the tax. Whether your new home state credits it is a separate question, and in a no-tax state there is no credit to give.
- Deferred payments. Earnouts, escrow releases, and installment payments generally keep the source they had at closing, and an earnout tied to your continued work can be treated as compensation instead.
- Final returns. A mid-year change usually produces a part-year return in the old state, though a day-count test can still make you a full-year resident.
When should I make the move relative to signing a letter of intent?
Residency should be settled and documented well before a letter of intent exists. A move made once a deal is on the table invites the state to argue the change was tax-driven rather than genuine, and the timeline is discoverable. Auditors read the intent date, the moving invoices, and the utility bills side by side.
Nothing forbids a move during a sale process, and tax motive alone does not defeat a domicile change that is real. The problem is proof. Conduct that starts the month after a broker circulates a teaser reads differently from conduct that started years earlier. I ask for the residency timeline and the draft letter of intent together, and I refuse to assume the deal stays a stock sale.
A residency change made after the letter of intent is a fact the state gets to read backward.
What should I do first?
The first step is a map, not a move. List every state where the company has property, payroll, or customers, because those states most likely hold an apportionment claim on your operating income and, in a deemed asset sale, on your gain. Work the structure and the residency question together, under the rules in force when you sign.
- Pull three years of state returns and apportionment schedules, and list every state where the company files.
- Add the states where it should be filing but is not. Unfiled years surface in diligence and come back as a price cut or an escrow.
- Model the sale twice, as a stock sale and as a deemed asset sale under a 338(h)(10) or 336(e) election, with state tax line by line.
- Check whether each operating state follows the federal election, and price it before you agree to it, so any gross-up covers the state cost.
- If you are moving, fix the change date, build the day log from day one, and close out old ties on dated records.
- Confirm withholding and composite obligations in each operating state, and decide who funds them at closing.
- Re-check each state before signing, since sourcing rules and legislative fixes are moving. This analysis is stated as of September 2026.
Keep reading
The Seller’s LibraryThe built-in gains tax runs five years from conversionThe Seller’s LibraryDiligence will test whether your S election is validThe DocketAn arbitration award against your business. You have ninety days.
Have a lawyer read it before you sign.
A sale is decided in a handful of documents you sign exactly once — the letter of intent, the working capital definition, the indemnity. There is no rush. When you want those read properly, we are here.
Before founding Prencipe International, Joe practiced at the top law firms in the world, including Freshfields Bruckhaus Deringer, Baker McKenzie, Morgan Lewis & Bockius, and served at the U.S. Securities and Exchange Commission. He has spent his career on high-stakes disputes and transactions for businesses that cannot afford to lose. He represents owners selling the company they spent a career building -- reading the letter of intent before it is signed, and the purchase agreement while there is still room to change it.
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