NYS: Employees of Start-Up NY firms face loss of tax break due to working from home

The tax-exempt status of more than 300 technology startups across the state and their nearly 2,500 employees is imperiled by the pandemic, with some facing large tax bills next month unless a law change is passed, officials said.

The startups complied with last year’s order from Gov. Andrew M. Cuomo that all nonessential employers have their employees work from home to slow the coronavirus’ spread. But in doing so, the startups jeopardized their participation in Start-Up NY, the state economic development program that promises "no taxes for 10 years."

To qualify for the tax break, a startup’s employees must work in its physical location for "at least one-half of the taxable year," according to a notice from Empire State Development, which oversees Start-Up NY. Program participants are located at colleges, including Stony Brook University, Farmingdale State College and Long Island University.

ESD has told employees of Start-Up NY companies that they must pay state income tax — for the first time since the program started in 2014 — as a result of not working 180 days at the office or laboratory on campus last year.

"This is devastating for them," said Marc Alessi, CEO and co-founder of SynchroPET Inc., a Start-Up NY participant based at Stony Brook. "They were following [Cuomo’s COVID order] and now they’re going to be hit with an income tax bill of $4,000 or $5,000 that they weren’t planning for."

On Long Island, about 40 employees of 15 Start-Up NY participants could potentially be taxed on their 2020 wages, state records show.

"The benefit of being an employee of a Start-Up NY company is you don’t have to pay state income tax," Alessi said. "That’s how we’re able to attract young workers when the salaries are lower" because startups don’t have the revenue of older businesses, he said.

Alessi’s company has come up with a scanning device based on technology from Brookhaven National Lab that can be used to monitor the reaction of mice and rats to drugs under development. The firm has four employees but only one is covered by Start-Up NY, he said.

Alessi and other executives are calling on Cuomo and the State Legislature to add a COVID exception to the Start-Up NY law, so employees of program participants aren’t taxed on their 2020 wages. They want the exception included in the new state budget, which is due by April 1.

A remedy for 2020 and this year is included in bills unveiled last weekend by the Democratic majorities in the Senate and Assembly. The legislation, to be voted on this week, sets out each house's priorities for budget talks with Cuomo and each other.

"If this doesn’t get rectified, startups can be suspended or kicked out of Start-Up NY entirely," said Alessi, who also leads the Business Incubator Association of New York State and served in the state Assembly in 2005-10.

The Cuomo administration acknowledged the problem.

"We’re aware of the unique circumstance caused by the pandemic and we are proposing a fix that we hope the legislature will adopt" in the 2021-22 state budget, said ESD spokeswoman Kristin Devoe.

In addition, state Sen. Brian A. Benjamin (D-Harlem) introduced a bill last year to treat COVID-related remote work the same as office work for tax purposes. The legislation is co-sponsored by Sen. Anna M. Kaplan (D-Great Neck). A companion bill in the Assembly has yet to be filed.

"No one should be punished for complying with public health regulations during the pandemic," said Kaplan, who leads the Senate's small business committee. "But unfortunately, due to inflexibility in the way our current laws are written, workers ... are facing big financial penalties just because they worked from home," she said on Sunday.

StartUp-NY By The Numbers