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New Tax-Free Zones in New York State

Data suggests that as many as 75% of the new jobs created on New York college campuses move out of state within a year of their creation.  START-UP NY, which debuted on January 1, 2014, is designed to stop the flight of these jobs to low-tax states like Texas.  The law permits colleges and universities to create tax-free zones using undeveloped land or vacant buildings on, near, or “affiliated with” their campuses.  The initiative is specifically targeted toward start-ups and high technology businesses, but sponsoring institutions have considerable discretion about which businesses to invite.  For the company that fits an academic institution’s profile, tax benefits for the business and its employees can be very significant for up to ten years.

The Profile

Eligible businesses must be

  • new in New York State,
  • relocating from out of state, or
  • adding new jobs in New York.

The law specifically excludes retail and wholesale businesses, doctors, lawyers, dentists, accountants, real estate agents, restaurants, hotels, and financial services companies, among others.  Contrary to cable advertising images, it is not clear that an ice cream plant or a bike shop would qualify, but other tax incentives may exist for these entities.

In addition, the business purpose of these start-up or high-tech employers must align with the school’s academic mission.  This may mean conducting applied research, hiring from the campus population, establishing internships or other mutually beneficial partnerships, or being consistent in other ways with the school’s culture and curriculum. The individual sponsoring academic institutions will issue specific guidelines for applicants.

Tax Incentives

Businesses in the START-UP NY program can operate virtually free of state and local taxes.  If all operations are within the tax-free zone, the business can claim a credit that will totally eliminate New York State income taxes.  If the company operates both in and out of the enterprise zone, the credit will be pro-rated based on the percentage of assets and payroll within the area. In addition, these high-tech or start-up companies will be exempt from a host of other state and local taxes, including sales tax, the organization tax, license and maintenance fees, the Metropolitan Commuter Transportation District (MCTD) mobility tax and state and local real estate taxes.

Individual employees will also pay no state income taxes on wages for the first five years. For the second five years, they will pay no taxes on income up to $200,000 for individuals, $250,000 for a head of household and $300,000 for taxpayers filing a joint return.

The Application Process

This is a three step process.

  • First, colleges and universities must apply for inclusion in the START-UP NY program.  This began in late 2013.
  • Then, once an academic institution’s plan is approved, businesses may begin applying directly to the school.
  • Finally, after the college or university approves an application, Empire State Development, the state’s top economic development agency, has sixty days to review it.

If ESD does not overrule the applicant’s acceptance, the company may immediately begin operating in the tax-free space designated by the college or university.

START-UP NY also specifically encourages applications from enterprises that want to do business in an area that is not close to a college campus.  That “affiliated with” clause in the eligibility guidelines can cover quite a lot of ground.  New York seems determined to fight high-tech brain drain.  If your heart is set on Herkimer, but you can’t find a sponsoring institution in the area, don’t be dissuaded.  Your best choice is to contact START-UP NY directly for further guidance.

Nasir Pasha, Esq.

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Managing attorney and co-host of podcast Legally Sound | Smart Business

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