Governor Cuomo of New York State has a new economic development plan called START-UP New York. This program was organized to strengthen the private-public partnership between business and the government of New York State as well as help fuel innovation and economic growth and development. In short, New York State is encouraging new and expanding businesses to organize in New York through business-friendly tax incentives. These incentives are only available if the business aligns its business mission with the sponsoring organization’s mission; all sponsoring organizations are public and private colleges or universities.
This is an overview of the business eligibility requirements as set forth in the draft regulations issued under the START-UP NY program. The draft regulations are available for public comment until 5PM Monday, December 30, 2013. More information about the program and the public comment contact is available here.
Under START-UP NY, the legislature has set aside a lot of space for entrepreneurs to set up their offices. All office space is part of public and private NY university/college property. Colleges and universities may offer existing vacant space for the program; schools in certain geographic regions are permitted to also use off-campus land for START-UP NY applicants. To make sure education resources are not overextended, the program restricts college/university campuses from offering too much office space for entrepreneurs. For example, SUNY colleges upstate of Westchester may use vacant space and land on campus for this program, and only up to 200,000 square feet of additional land within one mile of campus for applicant office space.[i]
Tax Benefits under START-UP NY
START-UP NY assists organizations that contribute to New York’s economic development and innovation. Under this program, eligible businesses (eligibility is described below) will be permitted to operate tax free for ten years. This includes business, corporate, state, local, sales, and property taxes. Employees of those businesses would not pay personal income tax (state tax) on their wages for the first five years. After five years, employees will not pay tax on their income up to $200,000 – $300,000 depending on their filing preferences.
The proposed regulations set forth the following eligibility requirements for businesses seeking to participate in START-UP NY. At the outset, it is important to note that there are thirteen types of businesses that are ineligible for this program:
- Retail/Wholesale business
- Real estate brokers
- Legal services (i.e. law firms)
- Medical practices, including dentistry
- Real estate management
- Financial services
- Personal services (i.e. dry cleaning or photofinishing)
- Administrative or support services[ii]
- Accounting firms or services
- Businesses providing utilities
- Businesses distributing utilities
As long as a business is not found within one of the proscribed thirteen sectors set forth above, entrepreneurs may begin assessing their eligibility according to the following six items: business start date, business form, legal compliance, business mission, business growth, and business originality. This is a summary of those six eligibility components.[iii]
Generally, a business must be new if it is to participate in START-UP NY. There are a couple of definitions for “new business.” At first, it means that the business is not operating in New York at the time it applies to START-UP NY. The definition does not exclude businesses currently operating in other states, but, in those circumstances, currently operating businesses cannot transfer existing jobs into the tax free areas. If a business outside of NY wants to apply to START-UP NY, it must create new employee positions here in this state.
Businesses that have graduated from a NY Incubator are new businesses for the purpose of this program. Businesses that operated in state but moved out of New York on or before June 1, 2013 may take advantage of the program if the Commissioner of Economic Development finds that the business will substantially restore jobs in New York that were lost in the move out of state. If a business wants to expand into a tax-free area, the owners can apply to the program; if the Commissioner determines that the business will create new jobs in the tax-free area and that jobs will not be eliminated in connection with the expansion it may be accepted into a tax-free area.
Any business organized as a sole proprietorship, partnership, limited liability company, or a corporation may apply to the program. This appears to eliminate certain business forms that professional organizations usually take, such as a limited liability partnership. In any event, many of those business forms are ineligible under the program as it is currently conceived.
New businesses applying to START-UP NY must comply with workers compensation rules, unemployment insurance, environmental laws, and all other employment laws and regulations. Applicants must also be up to date on their taxes—federal, state, and local property taxes.
START-UP NY is a public-private partnership between the government and industry. Therefore, business mission statements of the applying entities must align with the purpose of the sponsoring organization. Sponsor organizations under START-UP NY are academic institutions all over the state.
In addition to aligning mission statements, each applicant must show its business will contribute to the community in some positive way. One example of such a contribution is stimulating the economy. This could include offering internships or vocational training, as well as collaborating with the local economy and fostering entrepreneurship. Community contribution is a broad concept, but revolves around promoting and creating economic opportunity within the sponsor’s community.
Applicants must also be involved with the sponsoring organization. This can be through scholarship, teaching, or sharing intellectual property with the sponsor. START-UP NY is focused on establishing a strong entrepreneurial economy through this collaboration. So applicant involvement can vary as long as there is some sort of direct collaboration with the sponsoring institution.
Applicants must show that their business will create new net jobs. Under START-UP NY, a new net job is a job created by the applicant under the program that is:
- New to New York;
- Is not transferred from a business outside New York through reorganization or transfer;
- Is not given to a person employed in New York within the past five years by a related person;
- Mandates at least thirty-five hours of work time a week;
- Is located within one of the tax-free areas; and
- Is filled for at least six months of the year in the tax-free area.
In general, the business must be a new business. It should not be a business that used to exist in New York within the last five years that is being reinvigorated through the program by the same business owner. If the applicant wishes to bring in a pre-existing business, the applicant is only eligible to participate in START-UP NY if the business moved outside of New York on or before June 1, 2013 and the Commissioner determines that the applicant will restore the jobs that were lost when the business moved. Other local existing businesses seeking to expand into a tax-free area are eligible if the Commissioner determines that the business will make new net jobs with the move and that it will not eliminate jobs within the state when it expands to the new area.
Maintaining Eligibility under START-UP NY
Once accepted under START-UP NY, businesses must continue to meet standards imposed under the program in order to continue receiving the tax-free benefit. The program requires that all businesses at least maintain the number of new net jobs that were created under the incentive. Specifically, the average number of employees must reflect or exceed the average numbers from the year before the business submitted an application for START-UP NY plus any new net jobs created during the business’s tenure in the program. Numbers should be gathered quarterly, at the end of March, June, September and December, to get the average. Businesses must submit an annual report of their numbers to the Commissioner of Economic Development.
[i] Upstate SUNY schools may go outside the 1-mile radius with approval from Empire State Development.
[ii] Unless the Commissioner of Economic Development grants permission
[iii] The regulations impose additional eligibility requirements for applicants seeking to locate in downstate NY. Those businesses must be in the formative stage of development or be involved in high technology such as design, development, information technology, advanced materials, processing engineering, etc.