START-UP NY: Creating Tax-Free Zones for High-Tech Startups in New York State

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On June 24, 2013, New York Governor Andrew M. Cuomo signed into law legislation creating the SUNY Tax-free Areas to Revitalize and Transform Upstate NY (“START-UP NY”) program.  START-UP NY is Governor Cuomo’s groundbreaking new initiative that transforms Campuses of the State University of New York and other university communities into tax-free zones (“Tax-Free NY Areas”) for certain new and expanding businesses.

The program seeks to attract startup companies to leverage the tremendous research capacity and diverse, talented workforce available at New York academic institutions.  The START-UP NY program complements other recent initiatives from Governor Cuomo focused on promoting tech and entrepreneurialism in New York State, such as the Innovation Hot Spot program and the NYS Innovation Venture Capital Fund.  The program became effective on Jan. 1, 2014.

Tax Benefits

In addition to access to the resources of the sponsoring institution, a participating business will be entitled, for a period of up to 10 years, to a 100% tax elimination credit for its state and local tax liability, or, for a business with a portion of its business in a Tax-Free NY Area, a tax credit pro-rated based on the percentage of assets and payroll located in the tax-free area.

Additionally, the business will be exempt from other state and local taxes, such as the organization tax, the Metropolitan Commuter Transportation District mobility tax, real estate transfer taxes and franchise taxes, and will be entitled to receive refunds of the sales and use taxes paid on the business’ purchases of tangible personal property, utilities and other services.

Individuals working for participating companies are also given significant tax benefits.  Employees of eligible businesses who are working in one of the net new jobs (discussed below) pay no New York state or local income tax on their wages for the first five years of enrollment in the program.

For the second five years of enrollment, wages will be tax free up to $200,000 for individuals, $250,000 for heads of household and $300,000 for taxpayers filing jointly.  The number of personal income tax exemptions for START-UP NY businesses is capped at 10,000 new jobs per year, with each business being allocated a certain amount of those jobs.

Eligibility Criteria

To be eligible for the START-UP NY program, a business must align itself with the academic mission of an eligible New York college or university, which may include funding scholarships or academic services, offering internships or full-time jobs to students and graduates, teaching a course, offering seminars, or otherwise using company resources, intellectual property or expertise to support the academic mission.

Additionally, the business must demonstrate the ability to create “net new jobs” within its first year of operation, meaning that the business cannot be relocating or transferring jobs from another business located in the state, and may not be in competition with other businesses in the local community.  Finally, at the time of its application, the business must be a new business in the State, an out-of state business moving into New York State, an existing New York State business that is expanding and creating net new jobs, or an existing New York State business that has graduated from a New York State incubator program.

To count as a “new business”, the company, among other things, must not be operating or located in New York at the time of its application, must not be moving existing New York jobs into the Tax-Free NY Area and cannot be substantially similar in operation and ownership to a taxable or previously taxable business entity within the last five years.  Certain businesses or industries are excluded from participating in the program, such as retail businesses, restaurants, law firms, medical practices, accounting firms, financial services firms, real estate companies, utility companies and businesses providing personal services.

During the application process, the business and the sponsoring institution will agree to certain benchmarks that must be met in order to maintain enrollment in the program or eligibility for certain tax benefits.  These benchmarks may include the number of net new jobs to be created, the schedule for creating such jobs, and further details such as the job titles and expected salaries of the business’ employees.

Businesses must also submit a statement of consequences for failure to meet these specific benchmarks.  A company may still be granted permission to participate even if it does not meet all the eligibility requirements, at the discretion of the Commissioner of Economic Development (the “Commissioner”) and the New York State Department of Economic Development.

Once accepted, the Commissioner may remove a business from the program for failing to meet the eligibility criteria, including failing to maintain net new jobs or if the business’ activities are no longer consistent with the goals of the program.  Additionally, a sponsoring institution that determines that a business has not satisfied the agreed-upon benchmarks may recommend to the Commissioner that the business be removed from the program. Further, any business that violates New York State laws, materially misrepresents facts in its application, or moves out of the Tax-Free NY Area, will be subject to immediate termination from the program.

Approved Academic Institutions

START-UP NY requires that the business occupy property or land in New York State affiliated with public and private universities, or certain State-owned property designated for use in the program.  Academic institutions applying for the designation must demonstrate how the businesses will align with the academic mission of the school and show how the program will have positive community and economic effects.

While the number of participating institutions is expected to increase, there are already numerous facilities available throughout New York State that are in the process of becoming designated Tax-Free NY Areas.  This includes three facilities available in New York City: the Downstate Biotechnology Incubator, for startup and early-stage biotech companies, BioBAT at the Brooklyn Army Terminal, for second-stage and growth stage tech and biotech companies, and the Downstate Synthetic Chemistry Facility for mature companies.

How do you apply?

Businesses wishing to participate in the START-UP NY program need to apply with the specific college or university that has been designated a Tax-Free NY area.  Once the institution has been approved to participate in START-UP NY, it can begin accepting applications from potential businesses, available online at START-UP NY’s website.  Once the sponsoring institution has reviewed the application, the application is forwarded to the Commissioner for the final decision.  The last date that a company can be accepted into the program is December 31, 2020.

For more information, or to review the forms required for application, please visit START-UP NY Information & Application Forms.  Interested businesses may also review the statute and the regulations governing the program.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.