Five Common Challenges When Changing State Tax Residency/Domicile

Journal of Financial Planning: October 2021


Eric J. Coffill is a senior counsel with Eversheds-Sutherland (U.S.) LLP, resident in its Sacramento, California, office. He has been practicing state tax law for nearly 40 years, including 10 years on the California Franchise Tax Board Legal staff. His practice focuses upon state tax controversies, including state court litigation; state and local tax aspects of business transactions; and tax matters involving high-wealth individuals. 


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State income taxes occupy a prominent place in overall tax planning for individuals, especially high-wealth individuals. Personal income taxes are a significant source of revenue to the states. For example, the Oregon personal income tax is estimated to account for 87 percent of the state’s entire general fund revenue.1  Currently, 42 states impose a personal income tax, with one of them (New Hampshire) only taxing dividend and interest income.2  Of the taxing states, 10 have a single-rate tax, while 32 states and Washington, D.C., have graduated rate income taxes. Hawaii, with 12, has the most graduated brackets in the country.

The impact of state tax liability is not to be underestimated. For example, California has a top marginal rate of 13.2 percent—the highest of any state—and no capital gains rate. The largest combined local and state tax rate in the nation, paid by the highest income earners in New York City, is currently 14.8 percent under recent legislation. Both New York and California, as well as many other states, are considering rate increases, and California is also considering a wealth tax. A further consequence of high state income taxes is their limited deductibility for federal income tax purposes under the $10,000 cap enacted as part of the 2017 Tax Cuts and Jobs Act (although more state legislatures are enacting workarounds).

On the positive side, eight states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—currently have no personal income tax. Unfortunately, some of those “no tax” states are moving in the wrong direction, such as Washington’s recent enactment of a capital gains tax.

Changing Residency/Domicile to Minimize Personal State Income Tax

The figures above suggest the materiality of state income taxes, especially in high-tax states such as California, Hawaii, and New York. A change of residence/domicile from a higher tax state to a lower- or no-tax state (and then avoiding source income issues) is a basic and practical way to decrease state personal income tax liability and preserve wealth. States with personal income taxes generally have two ways to reach the income of an individual: (1) the in-state residency/domicile of the individual; and (2) nonresident source income attributable to the state. Residency/domicile is a critical issue in a state-tax analysis because, as a general principle, a state taxes its own residents on all their income from whatever sources it is derived (typically with a credit mechanism for some or all tax paid to another state on that same income). However, regardless of residency and regardless of whether the individual has any physical presence in the state, a state may also tax a nonresident upon income that has a “source” in that state. The devil is in the details, and the tax law of each state is filled with unique pitfalls and traps for the unwary regarding their definitions of residence, domicile, and source income.

Discussed below are five recent decisions, from five different states, that illustrate some of the common issues and general principles encountered in analyzing and planning for residency/domicile and source income issues.

The Importance of Day Counts and Place of Residence

While each state’s law differs—and often in significant ways—two common factors in a typical tax residency analysis are (1) how much time the individual spends in the states of their former residence and their new residence; and (2) precisely where the individual claims to live in the new state. The application of these two principles is illustrated in the decision below, which is based on New York law. New York law has a “hard” metric regarding the number of days spent in New York, as opposed to the approach taken in many states where day counts are but one of many factors taken into consideration in determining residency. New York law also focuses upon whether the individual has a “permanent place of abode,” as defined, in New York.

In the Matter of the Petition of Obus and Coulson, DTA. No. 827736 (N.Y. Tax Appeals Tribunal, January 25, 2021), is a recent decision by the New York Tax Appeals Tribunal. New York imposes its income tax on those not domiciled in the state, but who maintain a “permanent place of abode” in the state and who are present in New York for more than 183 days during the year. The taxpayers in the case were a married couple who were domiciled in New Jersey. The husband was a hedge fund manager who primarily worked out of his New York City office and was present in New York for more than 183 days per year. The couple also maintained a vacation home in Northville, New York, where they spent no more than two to three weeks each year. The New York Tribunal held that the husband’s presence in the state, combined with the taxpayers’ ownership of a vacation home, was sufficient to establish statutory residency in New York. Specifically, the Tribunal held that the vacation home constitutes a permanent place of abode. The taxpayers had argued the Northville home was not a permanent place of abode because their primary residence and domicile was in New Jersey for the tax years at issue; that the Northville vacation home was more than 200 miles from the husband’s office; and that their stays at that vacation property were short or infrequent. The Tribunal disagreed and held that the vacation home qualified as a permanent place of abode because it was “suitable” for year-round habitation and the taxpayer’s actual use of the residence only for vacation purposes was not determinative.

The Importance of Carrying the Burden of Proof

As a general principle, proposed tax assessments issued by state tax agencies are presumed to be correct, and the taxpayer carries the burden of proving that assessments are erroneous. In the context of a residency audit, the burden is upon the taxpayer to prove (often under a legal standard of “clear and convincing evidence”) that they have changed their residence and/or domicile. The decision below illustrates the tenacity of and the lengths to which a state revenue department may go in pursuing an assessment against a taxpayer who claims a change of residence. As a practical matter, it is fair to assume that the more money at issue ($41 million in the case below), the more aggressive the state will be in pursuing an assessment and asserting its presumption of correctness.

In Estate of Bicknell v. Kansas Department of Revenue, No. 120,935 (March 12, 2021), the Kansas Court of Appeals, in a 100-page decision, held that the taxpayers failed to prove their Florida domicile for individual income tax purposes for 2005 and 2006. The taxpayers had filed nonresident returns, which the Department audited and then sent the taxpayers a truly impressive bill (including interest and penalties) of $41,069,305. (In 2006, the taxpayer sold his company, NPC International, which was the largest Pizza Hut franchise in the world with 800 stores and 22,000 employees.) The matter moved through the lower courts, which included an eight-day trial, where the district court ruled in favor of the taxpayers. The Department appealed. The Court of Appeals then reversed and remanded the matter for a new trial. Among its findings, the Court of Appeals held that the (lower) district court committed reversible error when it shifted the burden of proof to the Department to disprove the taxpayers’ claimed Florida domicile. Specifically, the lower court had erred in shifting the burden to the Department to produce a witness who would testify the taxpayer was perpetuating a “sham” when they contended they had left their Kansas domicile to establish a domicile in Florida. The Court of Appeals reiterated the burden of proof was upon the taxpayers to prove Florida domicile by a preponderance of the evidence. A lengthy dissenting opinion highlights the contentiousness of the trial, as illustrated by the fight between the parties over the taxpayers’ church membership. The taxpayer testified at trial that church was very important to them, but they did not join a Florida church during the audit period because they could not find one they were “really comfortable in.” Citing Galatians 3:28 and Matthew 22:39, and arguing “Christians believe other Christians are generally ‘suitable’ to associate with,” the Department argued the taxpayers’ failure to join a Florida church was “compelling evidence” the taxpayers did not live in Florida. The Court of Appeals rejected the Department’s argument, stating that “it is neither necessary nor proper for a court or the KDOR to define what a Christian is and how a Christian is supposed to act.”

The Breadth of a Change of Residence/Domicile Analysis

Most change-of-residency exercises involve two interconnected principles under a state’s unique law: (1) domicile; and (2) residency. Typically, a person can only have one domicile, but can have multiple residences. The decision below illustrates Idaho’s approach to addressing these interrelated principles, and the importance of not only developing ties with the new state, but also of breaking ties with the former state, based upon a plethora of relevant factors.

Docket No. 0-876-718-080 is a decision released in early 2021 by the Idaho State Tax Commission regarding residency and domicile for tax year 2014. The taxpayer did not file an Idaho return for 2014, but filed a resident return in California, and Idaho resident returns for 2013 and 2015. Under Idaho law, a “resident” is either a person domiciled in Idaho for the entire tax year, or a person who maintains a place of abode in Idaho for the entire taxable year and spends more than 270 days of the tax year in Idaho. Presence in Idaho for any part of a day counts as an Idaho day unless the presence was for a temporary or transitory purpose. “Domicile” means the place where the individual has their true, fixed, permanent home and principal establishment, and to which place they have the intention of returning when absent. An individual can have multiple residences, but only one domicile, which does not change until a new one is acquired. The Commission stated the two most important factors in establishing domicile is where the person actually “lives” and where they vote, and “these factors will probably establish domicile.” Here the taxpayer worked in other states while keeping his home in Idaho, held an Idaho driver’s license from April 30, 2013, to the present, registered to vote in Idaho on July 2, 2012, indicating he had been a resident of Idaho for one month, and voted in 2012 (and 2016). The Commission found this evidence sufficient to rule the taxpayer was domiciled in Idaho in 2014. While not analyzed in the decision, the Commission stated other factors to be considered are the paying of taxes and statements on tax returns; ownership of property; where the person’s children attend schools; the address where one receives mail; statements as to residency as contained in contracts or other documents; statements on licenses or governmental documents; where furniture or other personal belongings are kept; which jurisdiction’s banks are utilized; membership in professional, fraternal, religious, or social organizations; where one’s regular physicians and dentists are located; where one maintains charge accounts; and “other facts revealing contact with one or the other jurisdiction.”

The Eccentricities of the Particular State’s Law

Again, while some general principles can be stated regarding change of residence/domicile, each state has its own unique law. The Utah decision below illustrates how one will encounter unusual provisions in each state’s law regarding what is required to change residence for state tax purposes. As in Coulson above involving New York’s unique “permanent place of abode” metric, the case below from Utah addresses the application of a state tax regulation that appears to create a near irrebuttable presumption of Utah residency simply because one claimed a residential property tax exemption in Utah for a primary residence. Whether or not one claims an available state property tax exemption is a common element in a typical state tax residency analysis. But, note here how the Utah State Tax Commission has elevated this single factor, under authority of its own regulation, to a place of exceptionally high importance in the overall analysis.

Buck v. Utah State Tax Commission, dated June 9, 2020 (Appeal No. 18-888), is a Utah State Tax Commission decision involving the state’s “presumptive domicile” statute and illustrates the proof problems encountered when showing a change of residency. John Buck is a professional baseball player who, in late 2010, signed a contract to play for the Florida Marlins. He and his wife moved to Florida in early 2011 and lived there in 2012. However, they kept their Utah home for occasional visits. They returned to Utah in 2013. The case focuses upon Utah Code Ann. § 59-10-136(2), which provides a rebuttable presumption that an individual is domiciled in Utah if the individual or the individual’s spouse claims a residential exemption for property tax purposes for the individual’s or the individual’s spouse’s primary residence. The Commission held that the taxpayers were domiciled in Utah for the 2012 tax year because the couple’s Utah home received a “primary residence” partial property tax exemption in 2012, which had been “claimed” automatically each year since 2008. The couple attempted to rebut the statutory presumption by offering evidence they had relocated to Florida in 2011 and that neither the husband nor the wife spent more than 22 days in Utah during the 2012 calendar year. In addition, the taxpayers presented evidence showing they had obtained new Florida driver’s licenses in 2011, registered to vote in Florida in 2011, enrolled their minor children in Florida schools in 2012, and received the majority of their mail at their Florida home during the 2012 calendar year. However, the Commission based its opinion on an interpretation of the presumptive domicile language in the statute to limit the types of evidence that a taxpayer may present in order to rebut the presumption arising from claiming the primary residence property tax exemption. On August 13, 2020, the Utah Supreme Court agreed to hear the case (No. 20200521-SC). The key legal issue on appeal is whether the Commission properly applied the presumptive domicile statute when it found the taxpayers’ evidence regarding their relocation to another state to have no weight in rebutting the presumption created by claiming the primary residence exemption. The case also raises constitutional issues involving the privileges and immunities clause, the equal protection clause, the commerce clause, and the due process clause.

The Lurking Issue of Nonresidents’ Source Income

An individual who is not a resident of a state may still find themselves subject to tax by that state on income with a “source” in that state. Thus, moving out of a high-tax state for the purpose of avoiding taxation by that state of an upcoming large realization event, e.g., a sale of a business, is a futile act if the income from that event nevertheless will have a taxable source in that former state of residence. The principles of source taxation of nonresidents is a topic unto itself, but source income issues for nonresidents can be especially problematical under state law in the context of stock options. That is because to the extent the income received represents compensation for prior services performed in a state, that state will typically treat some or all of that income as taxable source income. This is a common issue arising in the context of startups, sales of founder’s businesses, and IPOs. The decision below illustrates this complexity in the scenario of RSUs under California law.

Appeal of N. Prince (2021-OTA-088, January 5, 2012) is a decision by the California Office of Tax Appeals that illustrates the problems associated with nonresident source income from equity-based compensation such as nonstatutory stock options, incentive stock options, and restricted stock units (RSUs). The taxpayer began working for Facebook in 2007 in Palo Alto, but then continued to work for Facebook outside California. His compensation included six grants of RSUs during 2007–2010 that all required him to continue working for Facebook in order to receive the stock. All the RSUs were vested in 2012 when the taxpayer was a California nonresident. At the time he left California in 2010, the fair market value per share was $7.27 for Facebook stock, and the taxpayer used that figure to allocate (source) income from the RSUs to California. The state’s Franchise Tax Board (FTB) audited and assessed additional tax by multiplying the taxpayer’s total income from each of the RSUs by the ratio of the taxpayer’s California workdays from the grant date to the vesting date over the total number of workdays during the period. The OTA stated there was no dispute that the taxpayer received the RSUs as compensation for services and that his gains from the RSU’s became subject to tax in 2012 under IRC section 83 (which is incorporated into California law). FTB’s Regulation 17951-5(b) does not provide a specific method of allocation for compensation from services—only that the method be “reasonably attributable to personal services performed in this State.” The taxpayer argued the stock “skyrocketed” in value after the taxpayer left California and that his alternative allocation formula was reasonable. The OTA disagreed and responded, “the income recognized from the RSUs is equally attributable to appellant’s services provided to the company throughout the entire vesting period and not disproportionately attributable to services provided within or without California.” Accordingly, FTB’s method of allocation was ruled to be correct. However, the OTA did point out that FTB’s method here is not a mandatory formula that must be used in every situation.

Concluding Thoughts

The above recent decisions illustrate no more than a handful of the many issues to be considered when clients are thinking about a change of residence/domicile to minimize or eliminate state income taxes. An individual has a right to travel and to move freely between states.3  Further, the United States Supreme Court famously remarked that it is the legal right of an individual to decrease the amount of which otherwise would be his or her taxes, or altogether avoid them, “by means which the law permits.”4  One such means is to move to and reside in a state with a favorable income tax climate. Indeed, the monetary difference between annually paying little or no tax, and high tax (such as under the current New York state and city rate of 14.8 percent or the California rate of 13.3 percent) on a large realization event can be staggering. However, keep in mind that life is short, and taxes are simply an expense that is a part of life, so maintain perspective when choosing a place to live on a permanent basis. Choosing the best tax-driven decision may not be the same as the best life-driven decision. 


  1. Oregon Department of Revenue. 2019. “Oregon Personal Income Tax Statistics Characteristics of Filers–2019 Edition–Tax Year 2017.”
  2. Loughead, Katherine. 2021, February 17. “State Individual Income Tax Rates and Brackets for 2021.” Tax Foundation.
  3. See e.g., Saenz v. Roe, 526 U.S. 489, 501 (1999).
  4. Gregory v. Helvering, 293 U.S. 465, 469 (1935).
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