Recent Changes to New York State's Empire Zone Program
Volume 2009 / Issue 12
April 23, 2009
Legislative changes have been made to New York State Tax Law and the General Municipal Law that will affect many aspects of the Empire Zone Program (EZ). In two Technical Service Bulletins (TSB-M-09(5)C and TSB-M-09(4)I) dated April 15, 2009, the NYS Department of Taxation and Finance describes these changes and the steps that taxpayers will need to take to comply.
Effect on tax return filings
In effect, the State is requiring all previously certified EZ businesses, to go through a process of becoming recertified. Empire State Development (ESD), which is NYS’s lead economic development agency will run the process which is described in more detail below. Upon completion of this review ESD will issue a Empire Zone Retention Certificate (EZRC), establishing that the business is eligible to retain its benefits under the new criteria. The EZRC must be attached to any return claiming EZ credits for 2008 and later years. In addition the EZRC must be attached to any return claiming carryover credits from earlier years.
Returns filed for calendar year 2008 and afterward that do not have an EZRC attached, will be denied the benefit of EZ credits claimed on that return. Thus 2008 returns that have been timely filed by March 15 or April 15, 2009, are at risk for having anticipated refunds reduced or eliminated and/or additional amounts due and owing as a result of these changes. Upon completion of the recertification process and receipt of an EZRC, taxpayers will need to file amended returns, with the EZRC attached, to reclaim the previously denied benefits for 2008.
NYS indicates it will waive penalties, however it will charge interest at 7.5% for underpayments of tax that result from the denial of credits under this new policy. Moreover, it appears that the State is planning on taking advantage of the use of taxpayers’ funds throughout the recertification/amended return process: interest on overpayments related to EZ credits will not start to accrue until the 180th day after the EZRC is filed with the tax return and no interest will be paid on the refundable portion of the credits. Moreover, businesses must wait for 6 months after receiving the EZRC, before they are eligible to file the amended return to reclaim the previously denied credits. Thus, the State will have the interest free use of these funds for at least a full year (6 months, plus 180 days) after the EZRC is issued.
Recertification Process for Existing Empire Zone Certified Entities
In 2009, ESD will be conducting a review of all previously certified businesses in order to make a determination as to whether or not the business should retain its certification. The review will be conducted using the information previously provided on the “Business Annual Reports” which are generally filed on an annual basis. The new legislation requires ESD to determine whether the business failed to provide economic returns to the state in the form of total wages and benefits and investment in its facilities, that exceeded the tax benefits the business used and had refunded to it. This has been referred to as the 1 to 1 Cost-Benefit Test.
An additional level of review will be conducted for businesses that were certified before 8/1/02. The focus of this additional review will be to identify businesses that the State feels have engaged in an activity referred to as “Shirt Changing”. A business that caused individuals to transfer from existing employment with another business with similar ownership and located in the State, to similar employment with the certified business, or if the business acquired, purchased, leased or had transferred to it real property previously owned by an entity with similar ownership, will be considered a “Shirt Changer”. ESD is instructed to determine the date of the earliest event that would constitute grounds for decertification and to make the effective date of such decertification, retroactive to that date.
Businesses that are decertified as a result of the ESD review will be entitled to appeal the decision subject to certain notice and information submission deadlines. Appeals will be made to the Empire Zone Designation Board (EZDB) and will only be successful if that board makes a unanimous determination that there are sufficient grounds for continued certification.
It is not at all clear that the state possesses the legal standing or authority to make these kinds of retroactive changes to the law and regulations governing the EZ Program and it remains to be seen what kinds of actions will be taken by affected taxpayers to confront this legislation.
New Rules for Businesses First Certified after April 1, 2009
Manufacturing businesses that are certified after 4/1/09 can meet a 10 to 1 cost benefit ratio rather than the 20 to 1 ratio that was previously required. Non-manufacturing businesses must still meet the 20 to 1 ratio.
The real property tax credit for newly certified businesses is being scaled back to 75% of the amount otherwise calculated.
The Future of the EZ Program
The Empire Zone program was previously scheduled to expire on June 30, 2011. It is now scheduled to expire on June 30, 2010. Companies that were certified before the expiration date will continue to receive benefits as originally provided. For example the QEZE real property tax credit is generally received for 14 years. However, as previously discussed, these businesses may be subject to decertification and/or other future legislative or regulatory changes that could impact their ability to realize the full benefits of the program.
We will continue to monitor developments in this area and keep you informed through updates that will be provided through this medium.