Massachusetts Court Upholds Ruling that State Can Tax Nonresident on Gain from Sale of Stock

By: Kate Hooker, State Income Tax Director

At a glance

• The main takeaway: Business owners and executives who receive equity compensation may still be subject to tax on the gain from the sale of that equity in their state of employment even after changing residency prior to the sale.
• Assess the impact: Relocating before a liquidity event does not guarantee state tax avoidance if the gain is rooted in prior in-state work.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you analyze the applicable state tax rules, calculate state tax liabilities, and recommend potential alternative structures to minimize multistate tax obligations.

Schedule a free consultation today to learn more! 

The full story

There are varying, albeit limited, situations in which a state can tax a nonresident’s gain from the sale of stock or other equity interest in a business. The general rule that a majority of states follow is that an individual’s gain on the sale of an equity interest in a business (i.e., an intangible asset) is sourced to and taxable by the individual’s state of residence. 

However, a recent Massachusetts Appeals Court decision illustrates a situation where the general rule on the sale of stock was not followed. This case highlights the broad interpretation of what constitutes income “derived from or effectively connected with” a trade or business in the state — even when the taxpayer no longer resides in the state when the sale occurs.[1]

A closer look at the case

Craig Welch (the Taxpayer) was the founder and former CEO of AcadiaSoft, Inc., and worked mainly from his home in Massachusetts. The Taxpayer was granted shares in the business as part of his equity compensation and spent over a decade building the business. From 2005 to 2015, the Taxpayer was integrally involved in the sales and growth efforts that resulted in the increased valuation of the business and investment from other sources. In early 2015, the Taxpayer relocated from Massachusetts to New Hampshire shortly before accepting an offer to sell all of his AcadiaSoft stock and resign his employment, which he made contingent on the sale of his shares. The Taxpayer filed a part year Massachusetts return for 2015 and sourced all of the gain from his equity sale to New Hampshire, his state of residence at the time of the transaction.

The Massachusetts Department of Revenue assessed taxes on the gain, arguing it was effectively connected to his past employment in the state. The Appellate Tax Board (ATB) sided with the Department of Revenue, finding the gain to be “compensatory” and derived from his extensive efforts in building the company. The Taxpayer then appealed to the Massachusetts Appeals Court.

Understanding the Court’s ruling

The Appeals Court upheld the ATB’s decision, placing significant emphasis on the 2003 amendment to G.L. c. 62, § 5A(a) which broadened the definition of Massachusetts source income for a nonresident to include income “derived from or effectively connected with” any business or employment carried on in the Commonwealth, regardless of the taxpayer’s residence or employment status at the time the income is received, and includes gain from the sale of a business or an interest in a business.

The court highlighted several factors that indicated the gain was connected with the Taxpayer’s employment services performed in Massachusetts:

• The Taxpayer was the founder and long-serving CEO, playing a critical role in AcadiaSoft’s development, strategy, and growth resulting in the value of stock.
• He received the stock in connection with his early work for the company, when he was unpaid or minimally compensated. A 2009 stockholder agreement provided financial incentives tied to continued employment, further linking the stock to his services.
• His resignation was made contingent on the sale of his shares, suggesting a final employment-linked negotiation.

In light of these facts, the court concluded that the gain was not a mere return on investment, but rather the culmination of years of “sweat equity” — effectively deferred compensation connected to the Taxpayer’s trade or business/employment in Massachusetts.

The bottom line

While the ruling by the Massachusetts Department of Revenue in this case is somewhat unique due to the state-specific rules, and therefore unlikely to lead to other state’s taking the same position (without changing their rules), there is a growing trend where states are becoming more aggressive in their attempts to reach a nonresident’s income from intangible assets. Business owners who may be considering an exit need to be aware of the potential state tax implications of an exit transaction. Moving to a low or no tax state prior to the sale may not necessarily provide the full amount of anticipated tax savings. 

Aprio’s SALT team has experience advising business owners on the state tax consequences of equity compensation and the impacts of future transactions. Our team will analyze the applicable state tax rules, calculate the state tax liabilities, and recommend potential alternative compensation structures to minimize your multistate tax obligations. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Welch v. Commissioner of Revenue, No. 24-P-109 (Mass. App. Ct. April 3, 2025).