Is a new subsidiary a "new business" eligible for the refundable Empire Zone wage credit and QEZE benefits when it is wholly owned by an existing New York taxpayer but does different work?

Plain-English summary

Definity Health (a Delaware corporation owned by individuals, not more than 50% by any Article 9-A/9/32/33 taxpayer) sold consumer-driven healthcare benefit programs in New York from 2001-2003 through two salespeople; it did no processing -- that was bought from unrelated third-party administrators. It planned to form Newco, a wholly owned subsidiary, to do healthcare-claims processing in leased space in Amherst, New York. The question: is Newco a "new business" for the refundable EZ wage tax credit (section 210.12(j)/210.19(e)) and for the QEZE employment test (section 14(j))?

The Department held yes on both:

• EZ wage credit refundability (section 210.12(j)/210.19(e)). Newco will be a new business for those years it meets section 210.12(j)'s requirements.
• QEZE (section 14(j)). Newco is a new business if it is not substantially similar in ownership and operation to a business already taxable in New York. Although Newco is wholly owned by Definity (an existing New York taxpayer), it is not similar in operation -- Definity sells programs; Newco will process claims. So Newco also qualifies as a new business under section 14(j) for QEZE purposes.

The opinion expressly does not decide whether Newco will actually qualify for the EZ wage credit or to be a QEZE -- only the new-business question.

What this means for you

A new subsidiary can be a "new business" even under an existing parent

Forming a subsidiary under an existing New York taxpayer does not automatically disqualify it from new-business status. The test for QEZE (section 14(j)) is whether it is substantially similar in ownership AND operation to a business already taxable in New York. Different operations can make the subsidiary a new business despite common ownership.

Operations, not just ownership, drive the analysis

Here the parent sells healthcare programs and the subsidiary will process claims -- genuinely different functions. That operational difference is what made Newco a new business. If the subsidiary merely continued the same business, the answer would likely differ.

New-business status unlocks refundability and the QEZE test

New-business status under section 210.12(j)/210.19(e) makes the EZ wage tax credit refundable, and under section 14(j) lets the entity meet the QEZE employment test. But qualifying as a new business is only the first step -- you must still independently satisfy each credit's and QEZE's substantive requirements.

Common questions

Q: Can a subsidiary of an existing New York taxpayer be a "new business"?
A: Yes, if it is not substantially similar in ownership and operation to a business already taxable in New York. Different operations can make it a new business despite common ownership.

Q: What made Newco a new business here?
A: Its operations differ from its parent's -- the parent sells healthcare programs while Newco will process claims -- so it is not substantially similar in operation.

Q: Does this opinion confirm Newco gets the credit and QEZE benefits?
A: No. It decides only the new-business question; whether Newco actually qualifies for the EZ wage credit or to be a QEZE is left open.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 210.12(j) (new business; refundable investment-related credits)
- Tax Law section 210.19 (Empire zone wage tax credit; section 210.19(e) new business)
- Tax Law section 14(j) (QEZE new business definition)
- Tax Law section 14(b) (QEZE employment test)
- Definity Health (Newco), TSB-A-04(13)C (July 22, 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a04_13c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(13)C
Corporation Tax
July 22, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C040319A

On March 19, 2004, a Petition for Advisory Opinion was received from Definity Health,
Attn. Timothy Godzich, 1600 Utica Avenue Ste 900, St Louis Park, Minnesota 55416.
The issue raised by Petitioner, Definity Health, is whether its subsidiary, Newco, will be a
new business under section 210.12(j) of the Tax Law for purposes of claiming a refund of the empire
zone (EZ) wage tax credit under section 210.19 of the Tax Law, and a new business under
section 14(j) of the Tax Law for purposes of meeting the employment test under section 14(b) of the
Tax Law to become eligible for the qualified empire zone enterprise (QEZE) benefits.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner was incorporated in Delaware in 1998, and is headquartered in St. Louis Park,
Minnesota. Petitioner is owned by individuals and is not owned over 50 percent, directly or
indirectly, by a taxpayer subject to tax under Article 9-A; sections 183, 184, 185 or 186 of Article
9; Article 32 or Article 33 of the Tax Law.
Petitioner began doing business in New York in 2001. The sole business activity of
Petitioner in New York, for years 2001 through 2003, was the sale of consumer-driven healthcare
benefit programs. Sales in New York are solicited by two salespersons. Petitioner’s business
activities in New York, and otherwise, are limited to sales of the healthcare benefit programs. That
is, Petitioner does not do any processing of the healthcare benefit programs that it sells. Processing
operations have been purchased by Petitioner from unrelated third-party administrators. For tax
years ending December 31, 2001, through December 31, 2003, Petitioner was subject to tax under
Article 9-A of the Tax Law.
Newco will be organized in 2004, and will be a wholly owned subsidiary of Petitioner.
Newco’s primary business activities will be unrelated to the activities conducted by Petitioner in
New York. The primary activities of Newco will consist of processing operations related to
healthcare claims. Newco will initially lease approximately 30,000 square feet of space in Amherst,
New York on a temporary basis during 2004. Newco plans to construct a new 50,000 square foot
facility in the Tonawanda, New York EZ by February 5, 2005, and expand employment at this
facility to 600 jobs within 3 years.
It is anticipated that Petitioner will no longer be subject to New York franchise tax after
creation of Newco during 2004. The two salesperson employees of Petitioner employed in
New York in the solicitation of sales of the healthcare benefits programs will become employees
of Newco as of its first day of existence in 2004. Therefore, upon the creation of Newco sometime

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during 2004, Petitioner will not have any employees conducting business operations on its behalf
in New York, and will not have any other operations in New York. The two salespersons employed
in New York by Newco will be soliciting business for Newco’s healthcare claims processing
operations that will be conducted in New York, and will not be soliciting business for Petitioner for
the sale of the healthcare benefits programs.
Applicable law
Section 14 of the Tax Law contains the provisions for the QEZE program and provides, in
part:
(a) Qualified empire zone enterprise. A business enterprise which is certified under
article eighteen-B of the general municipal law prior to July first, two thousand five shall be
a “qualified empire zone enterprise”:
(1) for purposes of articles nine-A ... of this chapter, for each of the taxable years
within the “business tax benefit period,” which period shall consist of ... (B) in the case of
a business enterprise with a test date occurring on or after January first, two thousand two,
the fifteen taxable years next following the business enterprise’s test year, but only with
respect to each of such fifteen years for which the employment test is met, and
(2) for purposes of articles twenty-eight and twenty-nine of this chapter, during the
“sales and use tax benefit period.” Such period shall consist of one hundred twenty
consecutive months beginning on the later of (A) March first, two thousand one, or (B) the
first day of the month next following the date of issuance of a qualified empire zone
enterprise certification by the commissioner under subdivision (h) of this section. Provided
however, such period shall not include any month falling within a taxable year immediately
preceded by a taxable year with respect to which the business enterprise did not meet the
employment test.
(b) Employment test. (1) General. The employment test shall be met with respect
to a taxable year if the business enterprise’s employment number in empire zones for such
taxable year equals or exceeds its employment number in such zones for the base period, and
its employment number in the state outside of such zones for such taxable year equals or
exceeds its employment number in the state outside of such zones for the base period. If the
base period is zero years and the enterprise has an employment number in such zone of
greater than zero with respect to a taxable year, then the employment test will be met only
if the enterprise qualifies as a new business under subdivision (j) of this section.
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(c) Base period. The term “base period” means the five taxable years immediately
preceding the test year. If the business enterprise has fewer than five such years, then the
term “base period” means such smaller set of years.
*

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(f) Taxable year. The term “taxable year” means the taxable year of the business
enterprise under ... article nine-A ... of this chapter....
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(j) New business. (1) A new business shall include any corporation, except a
corporation which is substantially similar in operation and in ownership to a business entity
(or entities) taxable, or previously taxable, under ... article nine-A ... of this chapter ....
Section 210.19 of the Tax Law provides for an EZ wage tax credit, in part, as follows:
(a) A taxpayer shall be allowed a credit, to be computed as hereinafter provided,
against the tax imposed by this article where the taxpayer has been certified pursuant to
article eighteen-B of the general municipal law. The amount of such credit shall be as
prescribed by paragraph (d) hereof.
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*

(c) The credit provided for herein shall be allowed only where the average number
of individuals, excluding general executive officers, employed full-time by the taxpayer in
(A) the state and (B) the empire zone or area previously constituting such zone or zone
equivalent area, during the taxable year exceeds the average number of such individuals
employed full-time by the taxpayer in (A) the state and (B) such zone or area subsequently
or previously constituting such zone or such zone equivalent area, respectively, during the
four years immediately preceding the first taxable year in which the credit is claimed with
respect to such zone or area....
The credit shall be allowed only with respect to the first taxable year during which
payments of empire zone wages are made and the conditions set forth in this paragraph are
satisfied, and with respect to each of the four taxable years next following (but only, with
respect to each of such years, if such conditions are satisfied), in accordance with paragraph
(d) of this subdivision....
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(e) The credit and carryovers of such credit allowed under this subdivision for any
taxable year shall not, in the aggregate, reduce the tax due for such year to less than the
higher of the amounts prescribed in paragraphs (c) and (d) of subdivision one of this section.
However, if the amount of credit or carryovers of such credit, or both, allowed under this
subdivision for any taxable year reduces the tax to such amount, or if any part of the credit
or carryovers of such credit may not be deducted from the tax otherwise due by reason of
the final sentence of paragraph (d) hereof, any amount of credit or carryovers of such credit
thus not deductible in such taxable year may be carried over to the following year or years
and may be deducted from the tax for such year or years. In lieu of such carryover, any such
taxpayer which qualifies as a new business under paragraph (j) of subdivision twelve of this
section may elect, on its report for its taxable year with respect to which such credit is
allowed, to treat fifty percent of the amount of such carryover as an overpayment of tax to
be credited or refunded in accordance with the provisions of section ten hundred eighty-six
of this chapter. Provided, however, the provisions of subsection (c) of section ten hundred
eighty-eight of this chapter notwithstanding, no interest shall be paid thereon.
Section 210.12(j) of the Tax Law provides, in part:
a new business shall include any corporation, except a corporation which:
(1) over fifty percent of the number of shares of stock entitling the holders thereof
to vote for the election of directors or trustees is owned or controlled, either directly or
indirectly, by a taxpayer subject to tax under this article; ... or
(2) is substantially similar in operation and in ownership to a business entity (or
entities) taxable, or previously taxable, under this article; ... or
(3) has been subject to tax under this article for more than five taxable years
(excluding short taxable years).
Opinion
Petitioner began doing business in New York State in 2001 when two employees of
Petitioner began soliciting the sale of the healthcare benefit programs in New York. However,
Petitioner did not do any processing of the healthcare benefit programs it sold. Such processing
operations were conducted by unrelated third-party administrators that were retained by Petitioner.
Petitioner states that its owners are individuals, and that it is not owned over 50 percent, directly or
indirectly, by a taxpayer subject to tax under section 183, 184, 185 or 186 of Article 9, or
Article 9-A, 32 or 33 of the Tax Law.
During 2004, Petitioner will form Newco as a wholly owned subsidiary, and Newco’s
activities in New York will consist of healthcare claims processing operations. Newco will hire, on

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the day that it is organized, Petitioner’s two salespersons who are working in New York. As
employees of Newco, the two salespersons will solicit business for Newco’s healthcare claims
processing operations. These employees will no longer solicit the sale of the healthcare benefit
programs. Newco will initially lease approximately 30,000 square feet of space in Amherst,
New York on a temporary basis during 2004. Newco will construct a new 50,000 square foot
facility in the Tonawanda, New York EZ by February 5, 2005, for its healthcare claims processing
operations. Newco anticipates that its employment at the new facility will expand to 600 jobs within
3 years.
With respect to the question of whether Newco would be considered to be a new business
under section 210.12(j) of the Tax Law for purposes of being eligible for a refund, in lieu of a
carryover, of an EZ wage tax credit under section 210.19 (e) of the Tax Law, Newco will be a new
business if it does not meet any of the three exceptions contained in section 210.12(j) of the Tax
Law, which defines a new business.
First, Newco must not be a corporation in which over 50 percent of the number of shares of
stock entitling their holders to vote for the election of directors or trustees is owned or controlled,
either directly or indirectly, by a taxpayer subject to tax under Article 9-A of the Tax Law. Newco
will be a wholly owned subsidiary of Petitioner which is currently subject to tax under Article 9-A
of the Tax Law. However, Petitioner anticipates that the day that Newco is organized, Newco will
hire Petitioner’s two New York salespersons, and Petitioner will cease to be a New York taxpayer.
Assuming that Petitioner, in fact, ceases to be a New York taxpayer, Newco will not be owned or
controlled by a taxpayer under Article 9-A of the Tax Law.
Second, Newco must not be a corporation that is substantially similar in operation and in
ownership to a business entity or entities taxable, or previously taxable, under Article 9-A of the Tax
Law. Newco and Petitioner will not be substantially similar in operation. Petitioner’s only activity
in New York is the solicitation of the sale of healthcare benefit programs in New York State through
two salespersons, but it does not perform claims processing for the benefit programs that it sells.
Petitioner is headquartered in Minnesota, and the claims processing operations are purchased from
unrelated third-party administrators. Newco will perform a healthcare claims processing operation
in New York State and plans to construct a new 50,000 quare foot facility in the Tonawanda EZ, and
expand employment at the facility to 600 jobs in 3 years. In addition, Newco will have two
salespersons soliciting business in New York for such operations, but will not solicit sales of the
healthcare benefit programs.
Third, Newco must not be a corporation that has been subject to tax under Article 9-A of the
Tax Law for more than five taxable years (excluding short taxable years) before each tax year during
which the taxpayer becomes eligible for the empire zone wage tax credit. Newco will be a newly
created entity in 2004.
Accordingly, Newco will not meet any of the three exceptions contained in section 210.12(j)
of the Tax Law that would exclude it from being a new business. Therefore, under the facts

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described in this Advisory Opinion, Newco will be considered a new business pursuant to sections
210.12(j) and 210.19(e) of the Tax Law, for purposes of the refundable EZ wage tax credit, for those
taxable years that it meets the requirements of section 210.12(j) of the Tax Law.
With respect to the question of whether Newco would be considered to be a new business
under section 14(j) of the Tax Law, Newco would be a new business if it is not substantially similar
in ownership and operation to a business entity taxable or previously taxable in New York. This
condition is similar to the condition contained in section 210.12(j)(2) of the Tax Law. As
determined above, Newco would not be similar in operation to its parent (Petitioner), a business
entity that operated in New York prior to the organization of Newco. Accordingly, Newco would
also qualify as a new business, as defined in section 14(j) of the Tax Law, for purposes of qualifying
for QEZE benefits.
Note that this Advisory Opinion does not address the issue of whether Newco will, in fact,
qualify for the EZ wage tax credit under section 210.19 of the Tax Law, or qualify to be a QEZE
under section 14 of the Tax Law.

DATED: July 22, 2004

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.