· All the existing benefits remain in place; these include the wage tax credits, investment tax credits and utility rate reductions.
· A new QEZE Tax Reduction Credit can eliminate State income tax for the QEZE.
· A new QEZE Credit for Real Property Taxes includes the right to a refund if the credit is not utilized for the current tax year.
· The sales tax benefit is now an exemption instead of a refund, and its coverage is greatly expanded.

The focus of the new legislative changes to the Program is to reward those businesses which maintain a steady base of employment within the State as a whole, and increase employment within their Zone location(s). The eligibility for all of the new benefits is based upon retaining an Employment Number equal to or exceeding the employment level of the business during a Base Period, looking at the employment history of the business both (i) within the Zone location(s), and (ii) outside of Zone locations, but within the State. This analysis is referred to in the statute as the Employment Test. During the Benefit Period of this statute, in order for a QEZE to claim any of the tax benefits on an annual basis, it must meet the Employment Test for that taxable year.

New Definitions

The Employment Test is deemed met for a taxable year if the QEZE's employment numbers are equal to or exceed the average employment numbers from the Base Period, looking at both employment within the Zone and within the State, but outside of the Zone. The Employment Number concept is similar to that used in calculating wage tax credits under the original Economic Development Zones Program. Each business is required to measure its employment by analyzing the number of individuals who are employed by that company on the last day of each calendar quarter and who, at some point in time during the year, have worked for the company at least six months. The measurement standard requires the inclusion of only those who are full-time employees, however, part-time employees may be aggregated to create a full-time equivalency.

To determine the Base Period employment, an existing Zone business must calculate its average Employment Numbers first within the Zone location(s), and second, outside the Zone location(s), but within the State, for a five-year period. This period is the five taxable years immediately preceding the Test Year for the QEZE. In the event that the business has not been in existence in New York State for five years, then the measurement is simply based upon an average over the lesser period of time. All newly created businesses, and businesses new to New York State, have a Base Period of zero, and therefore, automatically meet the Employment Test for the full Benefit Period under the statute.

Other new definitions which need to be understood include the Test Year, the Test Date and the Benefit Period. The Test Year means the last taxable year ending on or before the Test Date. The Test Date means the later of July 1, 2000 or the date prior to July 1, 2005 on which the QEZE is certified. In other words, the Test Date for all existing Zone Certified Businesses is by default July 1, 2000, and if they use the calendar year as their fiscal year, their Test Year would be the taxable year ending on December 31, 1999. The Benefit Period is fourteen years for the purposes of the Tax Reduction Credit and the Credit for Real Property Tax, and commences with taxable years beginning on or after January 1, 2001. The Benefit Period for the sales tax exemption is ten years, and is available beginning March 1, 2001.

It is important to understand the distinction between the Base Period and the Test Year. The Base Period is a fixed five year period, and the average employment during that period is used as a "qualifier". Current employment must equal or exceed the average Base Period employment for a QEZE to be eligible for the new benefits in any given year of the Benefit Period. If the QEZE qualifies for credits, then the Test Year comes into play. The Test Year is a fixed one year period, and is used as a "quantifier" to determine the amount of QEZE Credits.

Tax Reduction Credit

The new QEZE Tax Reduction Credit allows for a credit against New York State Income Tax. The Tax Reduction Credit is the product of the Benefit Period Factor, the Employment Increase Factor, the Zone Allocation Factor and the Tax Factor. A QEZE must calculate each factor in order to determine the amount of the credit.

· The Benefit Period Factor is equal to 1.0 for years 1-10 of the Benefit Period, decreases 20% per year for years 11 - 14, and is zero in the 15th year.

· The Employment Increase Factor may never exceed 1.0 and is the greater of the following: (i) the increase in the Employment Number since the Test Year divided by the average Employment Number in the Test Year, or (ii) the increase in the Employment Number divided by 100.

· The Zone Allocation Factor takes into account the percentage of the QEZE's assets and employee expenses in Zones. To calculate this factor, the QEZE's total assets in the Zones are divided by the total assets in the State and added to the QEZE'S total wages and employee compensation paid in the Zones divided by the total wages and employee compensation paid throughout the State, with this sum being divided by 2.

· The Tax Factor is simply the tax payable by the taxpayer, and is ascertained under §210, the larger of (a) or (c) for a corporation, §601, (a) through (d) for S corporations, limited liability companies, partnerships and individuals, §1455 the larger of (a) or (b)(2) for banking institutions and §1502, the larger of (a)(1) or (a)(3) for insurance companies.

A new business, located only in a Zone, can effectively eliminate its entire State tax burden with this credit, even the elimination of the alternative minimum tax, and the effects are equally beneficial for an existing business with a significant presence in a Zone which has increased employment.

Real Property Tax Credit

The QEZE Credit for Real Property Taxes is also calculated as a product of factors which include the Benefit Period Factor, the Employment Increase Factor (both as defined above) and the eligible real property taxes. Eligible real property tax is that tax imposed on property in a Zone which is owned by the taxpayer seeking the credit. It has been determined by the Department of Taxation and Finance that a sale/ leaseback transaction and a PILOT Agreement executed in connection therewith, constitute a valid basis for a QEZE claiming a Credit for Real Property Tax based on the amount of payments made under the PILOT Agreement. To date, the Department of Taxation and Finance has indicated that even in those leasehold situations, such as "triple net" lease where the tenant is responsible for the payment of the totality of the real property taxes, such payments are not eligible for the Credit for Real Property Tax.

Unlike the Tax Reduction Credit, this credit may not be used to eliminate the alternative minimum tax; it may only eliminate the entity's tax liability to the higher of the alternative minimum or the fixed dollar minimum [§ 210(c) or § 210(d)]. To the extent that a QEZE is entitled to a Credit for Real Property Tax and unable to use the credit in any year, it is entitled to claim a refund from the State of New York of the unused portion of the credit. The net effect of this tax credit is similar to that of the Tax Reduction Credit for a new business located only in a Zone location. For the first ten years of operation, it will realize a refund from the State of New York of 100% of its real property taxes paid.

Sales Tax Exemption

The sales tax benefit has been recreated as an exemption identified by a certificate rather than a refund. The exemption certificate covers the majority of purchases for a ten year period, and is no longer limited to "bricks and mortar" type building materials. The exemption is only applicable to the State portion of the sales tax, although local governments have the option to grant comparable sales tax relief through the passage of a local law. The exemption certificate is issued by the State to the QEZE upon request, but is useable by the QEZE only if the year in which the exemption is claimed immediately follows a year in which the Employment Test has been met.

Priority of Credits

The Department of Taxation & Finance has mandated that tax credits attributable through the Empire Zones Program are to be applied to a taxpayer's tax return in a specific order:

· Tax Reduction Credit
· Investment Tax Credits and Employment Incentive Credits
· Wage Tax Credits
· Real Property Tax Credit

As previously stated, the Tax Reduction Credit can eliminate all of a taxpayer's New York State tax liability for the first ten years of the Benefit Period. To the extent that after the application of this credit there remains a tax due to the State, Investment Tax Credits, Employment Incentive Credits and Wage Tax Credits can be applied. It is important to note that these three types of credits can only reduce a taxpayer's tax due by 50%, and in no event can they reduce it below the alternative minimum tax. What is not as clear is whether the 50% reduction is applied to the original tax due to the State, or the balance due after the application of the Tax Reduction Credit. The Department of Taxation & Finance is expected to make a ruling on this in the near future. A new business which passes the "New Business" test as set forth in tax forms DTF-601 and DTF-603, can request a refund of 50% of the unused Investment Tax Credits and Wage Tax Credits on an annual basis.

The final credit to be applied is the Real Property Tax Credit. In the even that after the application of all of the other Empire Zone Credits, the tax payer has a tax due in excess of the alternative minimum tax or fixed dollar tax, Real Property Tax Credits can be applied to reduce the tax due to the greater of these two amounts. The taxpayer can request a full refund of any unused Real Property Tax Credits on an annual basis.

This new legislation gives Empire Zones more power to attract new businesses to the State of New York. The methodology for calculation of the benefits is very favorable for new businesses, and this provides an excellent tool to use with both start-up businesses and those looking to expand or relocate.