My daughter is a dependent and I can’t claim her this year on federal because of an agreement of every other year. Do I have to physically remove her from state before I file?

I don't think you need to remove her if there is a question of whether or not someone else will claim her as dependent...just answer yes and you will not get the deduction. If there is no question (not a software program filling out the form for you)  then  just be sure you don't add a number for her as dependent.