New START-UP NY Tax Exemption Program—High Hopes and High Stakes

This article originally appeared in the Hinman, Howard & Kattell, LLP quarterly newsletter (Volume 5, Issue 3) in September, 2013.

Gov. Andrew Cuomo, as part of a whirlwind initiative to boost the Upstate New York economy, visited Binghamton University (BU) in early June to unveil his “Tax-Free NY” initiative to boost new development and jobs in the vicinity of State University of New York (SUNY) schools, which are found mostly upstate. Barely two weeks later, on June 24, he was back at BU to sign the resultant legislation—newly redubbed “START-UP NY”—which was passed by the Legislature with lightning speed and bipartisan support in the waning hours of the Legislative session. The question is: will it work?

Objective of “Start-Up NY”

As expansively stated in the Bill Memo: “The START-UP NY program, will enable campuses to serve as economic engines for their communities by harnessing the world-class research and innovation power of New York State’s higher education sector while providing transformative financial incentives to spur business creation and expansion.”

In a Nutshell

The following “Tax-Free NY Areas” will become tax-free for 10 years as a way to entice companies to bring their ventures to the targeted communities: Areas sponsored by public universities and colleges (on or within one mile of the campus); additional areas, primarily dedicated to private colleges and universities, to be allocated by the START-UP NY program board; and up to 20 “strategic state assets” on vacant State land, in closed State buildings, or on State property slated for closure (also to be designated by the program board). “Eligible land” includes “any vacant space in any building located on a [participating] campus.” Vacant land or vacant space located more than one mile from campus may be determined to be eligible with the approval of the Commissioner of Economic Development (the Commissioner). This would, presumably, include such facilities as the BU Downtown Center. Eligible land also includes a “New York State Incubator” with a “bona fide affiliation” with a participating public university. Areas sponsored by public universities and colleges must be approved by the Commissioner in consultation with the applicable university system. The coverage area of the program is more limited in New York City, Long Island, and Westchester than upstate.

Scope of the Tax Exemption

Selected “higher-ed communities” would be 100% tax free—with no sales and use, property, or business tax for 10 years.  Wages of employees of the new businesses would also be tax-exempt for 10 years, but in any given year, the number of new jobs eligible for the income tax exemption may not exceed 10,000. Businesses (or allocated portions located in tax-free zones) would also be exempt from other taxes, such as state or local real estate transfer tax, corporate franchise tax, corporate organization tax, and license and maintenance fees.

Eligibility Criteria for Businesses

*  The mission and activities of the business must align with or further the university’s mission and must have “positive community and economic benefits”

*  The business must create net new jobs after first year of operations

*  The business must be a new business to the State (unless it was returning after having previously left prior to June 1, 2013, or if it demonstrates that it is creating net new jobs)

*  The business must not be engaged in a line of business previously conducted by it or a related entity

*  The business cannot be on the “prohibited list”

Note: “New business” is defined to exclude those “substantially similar in operation and in ownership to a business entity… taxable, or previously taxable within the last five taxable years, [under certain enumerated provisions].” “Net new job” must be new to the state and must be filled for more than six months.

Prohibited List

*  Sales (retail or wholesale) businesses

*  Restaurants or “hospitality” businesses

*  Real estate brokers or management companies

*  Law firms, medical or dental practices, finance and financial services, accounting firms, or other businesses providing personal services

*  Businesses providing business administration or support services (unless it can show it will create at least 100 net new jobs)

*  Businesses providing utilities or engaged in the generation or distribution of electricity, the distribution of natural gas, or the production of steam associated with electric power generation [note: the extraction of natural gas does not seem to be explicitly prohibited under this program]

Also: an academic institution is prohibited from relocating or eliminating any programs or facilities that actively serve students, faculty or staff in order to create vacant land or space for the START-UP NY program.

Mechanics

The President of the academic institution must develop a “plan,” with the approval of the Commissioner and in consultation with the applicable university system.

Businesses interested in locating in a Tax-Free NY Area can then submit an application consistent with the approved plan and including performance benchmarks.

Participating businesses can be terminated from the program if the sponsoring campus or the Commissioner determines that they no longer satisfy any of the eligibility criteria.

Participating businesses located on-campus are subject to prevailing wage and MWBE requirements, and those located on a strategic state asset will require both the business and any contractor or lessee to enter into a project labor agreement. Indeed, the legislation specifies (in Section 437.3) that the business locating on a strategic site “shall be deemed a state agency” for purposes of any contract or lease entered into on such a site. [This could have unintended consequences in terms of subjecting such entities to additional, onerous requirements applicable to state agencies in New York.]

A sponsoring campus may not accept an application, and the Commissioner must reject any such application, where it is determined that the business “would compete with other businesses in the same community but outside the Tax-Free NY Area.” This addresses a major concern with the Governor’s original program bill, which did not contain such a provision.

Another major concern with the Governor’s original bill was the impact on the tax base of the local community within which the Tax-Free NY Area was being established. By creating a 10-year exemption from property and sales taxes, the program had the potential to decimate the two primary sources of revenue for local governments. As the Bill Memo notes, “unlike other tax benefit programs, there are no State reimbursements to local governments to account for local property tax revenue loss.” This concern has been at least partially addressed in the enacted legislation. Section 435 includes all of the following safeguards against undue fiscal impacts on the local community:

*  The plan generated by the University must explain how participation by the identified types of businesses in the program “would have positive community and economic benefits”

*  The University must provide the municipality or municipalities within which the proposed Tax-Free NY Area is located with a copy of the plan

*  If the University’s plan includes space or land located outside of the campus boundaries, the University “must consult” with the affected municipality or municipalities prior to including such space or land in its proposed tax-free area [note: this is not quite a veto power]

*  Before approving or rejecting a University’s off-campus plan, the Commissioner must consult with the Chancellor of the applicable University System

*  Off-campus plans must give preference to “underutilized properties.” These are defined as “vacant or abandoned land or space in an existing industrial park, manufacturing facility, a brownfield site…, or a distressed or abandoned property [as determined by the county, town village or city containing such property].”

The START-UP NY program becomes effective immediately, with tax benefits taking effect in 2014.  "Emergency and Permanent Regulations" were promulgated by Empire State Development in early November and the State officially began accepting applications as of Jnauary 1, 2014.

The START-UP NY program aims to keep existing New York start-ups and other high-tech companies in the State, stem the brain-drain and retain college graduates, build closer linkages between colleges and employers to prepare students for next-generation jobs, and create a business friendly-environment that allows New York to better compete with other states.  But there will be an initial cost to the State: In the three fiscal years ending in March 2017, budget analysts estimate START-UP NY will reduce expected tax receipts by a total of $323 million. As more new businesses are attracted and new wealth is created, State and local coffers will grow. But will the new jobs stay after the tax exemptions expire?

Article written by Kenneth S. Kamlet, Esq. For more information, contact Mr. Kamlet at (607) 231-6914 or via email at kkamlet@hhk.com. 

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