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From Site Selection magazine, November 2014
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A Tax-Free State of Mind

No state income tax is a big lure for a high-tech company sourcing talent in Rochester.

NEW YORK
Datto technology center
Photo courtesy of Datto

by MARK AREND
S

tart-ups and expanding companies looking for locations in which to operate tax free for the next 10 years (and which aren't?) will find just that on the properties of more than 50 colleges and universities around the Empire State. These schools are the physical infrastructure that is the basis of the START-UP NY program introduced in October 2013 to jumpstart economic development Upstate and throughout the Empire State by eliminating income, business, corporate, sales and property taxes and franchise fees for 10 years for qualifying enterprises. See the November 2013 Site Selection report, "No Taxes Means No Taxes," and www.startup-ny.com for more details on the program.

The trick is to find the right higher-ed institution - one where the academic mission meshes with the company's objectives - with the right space for the new or expanding enterprise. Much of the available space is on State University of New York (SUNY) campuses, of which there are 12, but lots more can be found at the City University of New York's four branches and at community colleges and private colleges and universities from Buffalo to Plattsburgh to Long Island.

One of the first companies to launch operations in the program is Datto, a Norwalk, Conn.-based provider of backup, disaster recovery and business continuity solutions and one of Connecticut's fastest-growing technology companies. In June, Datto opened 12,000 sq. ft. (1,115 sq. m.) of space in downtown Rochester, N.Y., owned by the Rochester Institute of Technology (RIT), from which CEO Austin McChord was graduated in 2009 with a degree in bioinformatics.

MichelleMcComb

Datto CFO Michelle McComb

"It feels great to not only expand Datto to new areas, but also to give back to a city I love," said McChord at the grand opening of the space, which will house technical support personnel and others. "It's a dream come true to bring jobs to Rochester." McChord plans to staff the space in the historic Rochester Savings Bank building with about 70 employees over the next few years. "Our goal is to be the best employer in the Rochester area," he added. "There is an unlimited, untapped technical talent in the area, and I hope we start a wave of other companies moving to Rochester, driving the economy and taking advantage of the vast talent pool in the region."

Added RIT President Bill Destler: "This is a textbook win-win-win - for the state, the community and for RIT's students and graduates. And it's a win we're striving to replicate in future collaborations with other successful alumni, our Venture Creations incubator graduates and other industry partners." RIT approached Datto about occupying the space, it should be noted, not the other way around.

New Career Options in Rochester

In October, Datto CFO Michelle McComb told Site Selection the RIT Space accomplishes multiple goals, the primary one being to source new talent.

"We bring on a large number of RIT co-ops or interns, and we wanted a location that encourages them to have a relationship with Datto so that when they make a career decision, if they want to stay in Rochester they have an option there, as well as options in Norwalk and outside the New York and Connecticut areas," she explains.

"We can attract talent not just from the school but from surrounding businesses," adds McComb. "In Rochester, there aren't a lot of options in terms of emerging technology companies, so by being there we attract a lot of good talent. Right now we have tech support [in the RIT space], and we've hired for QA and for engineering and development. We're not limited in what we will hire for in Rochester. If we like the talent we're finding, we're happy to add it. The company is more than 300 people, and we're happy to find whatever location makes sense based on the talent we find." Datto also has offices in Toronto, London and Sydney.

" I hope we start a wave of other companies moving to Rochester, driving the economy and taking advantage of the vast talent pool in the region."

- Austin McChord, CEO, Datto

How it Works

START-UP NY invested about $700,000 for RIT to spend on leasehold improvements and renovations to the space now occupied by Datto. McComb says the other benefit is employees not having to pay state income tax for 10 years, which is a significant incentive to work for Datto in Rochester. "New York State income tax is not cheap," says McComb. "It's really more about being a great benefit for our employees, and a way for us to better attract talent. That's a major consideration of why you would look at New York. Connecticut does not have great tax incentives."

McComb says there is no corporate income tax benefit to Datto from START-UP NY, just the RIT space improvements and employee income tax abatement. "Our CEO cares a lot about our employees, so to him that was a big win - their not having to pay income tax," she notes.

What's the process like, some high-tech companies eyeing START-UP NY may wonder?

Program Helps N.Y. Businesses Go Global

Gov. Andrew M. Cuomo launched a set of "GLOBAL NY" initiatives October 7th, which includes a $35-million Global NY Development Fund and trade missions to Mexico, Canada, Italy, China and Israel. The goal is to create new jobs and attract additional international business investment to New York. The Global NY initiatives include:

  • A $35-million Global NY Development Fund that will help small- and medium-sized New York companies tap into global markets to grow their exports and create new jobs. The Fund includes the following, which will help spur additional private investment above the state resources dedicated: (1) $25 million Lending Program. Empire State Development will dedicate $25 million and work in partnership with more than 20 private lenders in the state to leverage at least $50 million of additional overall small business lending. The program is targeted to small businesses that have had difficulty accessing credit markets and will provide loans to help companies develop capacity to enter new markets. (2) $10 million grant fund to provide up to $25,000 to small- and medium-sized firms to develop export capacity, including export marketing plans, website translation, product adaptation and market certification. (3) Partnership with the Federal Export/Import (Ex-Im) Bank. New York will partner with the Federal Ex-Im Bank to connect creditworthy small businesses to export financing. The program will provide short-term loans of up to $500,000.
  • Global NY Trade/Investment Missions. New York State will participate in five new trade missions to help connect New York businesses to export and international investment opportunities. These include trade missions to Mexico, Canada, Italy, China and Israel.
  • Global NY One-Stop Shop Website (global.ny.gov). Foreign and local businesses will now have one address to find out more about business opportunities in New York and abroad that can help grow jobs in New York. At www.global.ny.gov, businesses can connect to START-UP NY and other New York State incentive programs, learn about Regional Economic Development Councils and their assets and industry specialties and connect with New York State's trade offices all over the world.
  • New Taste NY Shop at Javits Convention Center. New York-made food and beverages will be available to consumers at the Javits Convention Center, helping to raise the profiles and sales of the state's food and beverage makers.

"It's definitely worth doing," says McComb. "But it is a government [program], so you have to be patient. You have to be willing to work the process. It took a long time - it wasn't as easy as flipping a switch and signing on the dotted line. There was back and forth. It's more ironed out now that we have broken the tape, shall we say. It's probably taken about a year, including early discussions, before the program was officially launched."

Datto was also in incentives discussions with Connecticut, where it is based, at the time, McComb relates. So the new negotiations with RIT helped move that process forward. The company has a similar arrangement with Connecticut, minus the income tax provision.

"The economy is starting to pick up, and a program like START-UP NY just incentivizes us to want to plant roots in the state and keep our business strong."

— Michelle McComb, CFO, Datto

"Connecticut gives us a loan with which to build out our new headquarters here in Norwalk," McComb explains. "Half of it is forgivable if we meet certain hiring benchmarks, like hiring 100 people within the first 12 months and keeping them 24 to 36 months. We've already passed the first milestone in that program. Then for every employee we hire and retain in that time we get a $5,000 training funding grant."

That's about the extent of the financial benefit of being based in Connecticut, McComb intimates.

"Connecticut will tax you even if you have a net operating loss, which a lot of states won't - Connecticut has a capital tax," she points out. "It's not attractive. If the CEO made the location choice purely on tax benefits, he probably wouldn't be here in Connecticut, but this is where he was born and raised. If the state really wants to attract good companies, like Boston and New York do, they need to look at their tax structure. With START-UP NY and giving employees the opportunity to not pay state income tax, that's very attractive to us."

Besides which, she adds, "Our biggest client base is in New York. It's an attractive place for businesses. The economy is starting to pick up, and a program like START-UP NY just incentivizes us to want to plant roots in the state and keep our business strong."


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