REPORT TITLE:
Technology Omnibus


DESCRIPTION:
Consolidates high tech agencies under a special advisor for
technology development; creates tax credits for investment in
technology business; prohibits the imposition of discriminatory
taxes on Internet commerce; and provides other incentives for
Hawaii high tech companies. (CD1)

 
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THE SENATE                              S.B. NO.           S.D. 2
TWENTIETH LEGISLATURE, 1999                                H.D. 2
STATE OF HAWAII                                            C.D. 1
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO TECHNOLOGY.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1                              PART I
 
 2      SECTION 1.  The legislature finds that Hawaii is one of the
 
 3 most geographically isolated communities on earth, and for many
 
 4 years, our economic opportunities were limited by this isolation.
 
 5 Recent advances in telecommunications, information technology,
 
 6 and the explosive growth of the Internet, however, present
 
 7 significant new opportunities for the State to develop and
 
 8 diversify its economy, opening the global market to Hawaii
 
 9 businesses.
 
10      Fiber optic cables, connecting Hawaii with the mainland
 
11 United States and Asia, and new communications satellites have
 
12 dramatically increased both the volume of information sent and
 
13 the range of transmittal.  While transmission capacity increases,
 
14 costs continue to fall.  Today, Internet commerce represents a
 
15 small fraction of all business transacted, but industry watchers
 
16 estimate that within the next seven years, half of all business
 
17 and consumer purchases will be done by computer.  In this new
 
18 era, connection is everything.
 
19      The legislature further finds that Hawaii's opportunities
 

 
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 1 also represent new challenges.  Businesses -- particularly the
 
 2 small, start-ups associated with high technology -- no longer
 
 3 need to factor in Hawaii's geographic isolation, but must still
 
 4 consider the cost of doing business in the State.  They also face
 
 5 a confusing, often overlapping, group of state agencies that
 
 6 provide support for technology-related business.  Providing
 
 7 targeted assistance to these businesses, as well as a clear focus
 
 8 of responsibility within state government for aggressive
 
 9 development and support of high technology resources, will better
 
10 serve the burgeoning technology industry.
 
11      The legislature also finds that education will be forever
 
12 changed as businesses and workers alike demand new skills and
 
13 rapid-response delivery of these skills.  Our schools must move
 
14 beyond the traditional book and classroom delivery and embrace a
 
15 technologically-connected model for learning.  In 1998, the
 
16 legislature appropriated funds to provide high-speed Internet
 
17 access to the University of Hawaii and all state agencies,
 
18 including schools.  As a result, establishing schools and
 
19 libraries as community access points can be accelerated.
 
20      If Hawaii is to become a state known for leading its people
 
21 effectively into the twenty-first century, the legislature
 
22 believes progress and change must begin immediately.  The purpose
 
23 of this Act is to support the growth and development of high
 

 
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 1 technology industries in Hawaii by:
 
 2      (1)  Consolidating the State's high technology agencies,
 
 3           divisions, and offices under the coordination and
 
 4           direction of a special advisor for technology
 
 5           development and creating a governor's special advisory
 
 6           council for technology development to assist the
 
 7           advisor;
 
 8      (2)  Integrating technology with Hawaii's tourism and
 
 9           marketing industries;
 
10      (3)  Prohibiting the imposition of discriminatory taxes on
 
11           Internet commerce;
 
12      (4)  Focusing work force development programs to ensure a
 
13           pool of technology professionals;
 
14      (5)  Accelerating high speed access to the Internet for the
 
15           University of Hawaii and the public schools, and
 
16           establishing educational technology programs within
 
17           public schools;
 
18      (6)  Exempting stock options from qualified high technology
 
19           businesses from income taxation;
 
20      (7)  Exempting royalties from qualified high technology
 
21           businesses and other similar sources from gross income
 
22           for income tax purposes; and
 
23      (8)  Creating tax credits for investment in high technology
 

 
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 1           businesses and increasing research activities.
 
 2                              PART II
 
 3      SECTION 2.  Over the years, the legislature has created a
 
 4 number of state agencies charged with promoting the development
 
 5 of a variety of technological industries.  While these agencies
 
 6 provide valuable services, they lack focus, and in some cases,
 
 7 their original missions have changed considerably.  Consolidation
 
 8 of these agencies under a single entity to coordinate their
 
 9 activities will provide a more focused effort in attracting high
 
10 technology businesses to Hawaii.
 
11      SECTION 3.  The Hawaii Revised Statutes is amended by adding
 
12 two new sections to be appropriately designated and to read as
 
13 follows:
 
14      "   -     Special advisor for technology development.  (a)
 
15 There is established within the office of the governor a special
 
16 advisor for technology development to be appointed by the
 
17 governor as provided in section 26-34.
 
18      (b)  The duties of the special advisor shall include but not
 
19 be limited to:
 
20      (1)  Developing, coordinating, and implementing short- and
 
21           long-range state policies and directions to enhance the
 
22           development of high technology industries in Hawaii;
 
23      (2)  Coordinating all state high technology agencies while
 

 
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 1           developing a plan for reorganization or consolidation
 
 2           of these agencies in the interests of greater
 
 3           efficiency and cost effectiveness;
 
 4      (3)  Advising the private sector in the development of high
 
 5           technology activities and resources and providing
 
 6           technical or other assistance to private industry upon
 
 7           request;
 
 8      (4)  Creating, disseminating, and updating a listing of all
 
 9           high technology assistance programs in the State and
 
10           where they can be reached;
 
11      (5)  Pursuing appropriate public-private sector business
 
12           partnerships;
 
13      (6)  Coordinating the State's promotion and marketing of the
 
14           high technology industry, including a review of current
 
15           marketing efforts;
 
16      (7)  Arranging for the conduct of research through
 
17           contractual services with the University of Hawaii or
 
18           any agency or other qualified persons;
 
19      (8)  Encouraging the development of educational, training,
 
20           and career programs in high technology industries; and
 
21      (9)  Performing other necessary or desirable functions to
 
22           facilitate the intent of this section.
 
23      (c)  In carrying out the duties of this section, the special
 

 
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 1 advisor for technology development may utilize the services of
 
 2 the State's high technology agencies, including those of the
 
 3 University of Hawaii, as appropriate.
 
 4      (d)  In carrying out the duties of this section, the special
 
 5 advisor for technology development shall seek and utilize any
 
 6 available funding sources, including grant moneys.
 
 7         -     Governor's special advisory council for technology
 
 8 development; establishment; appointment, number, and term of
 
 9 members; duties.  (a)  There is established within the office of
 
10 the governor, for administrative purposes, an advisory council to
 
11 be known as the governor's special advisory council for
 
12 technology development, that shall review and make
 
13 recommendations on matters relating to the marketing and
 
14 promotion of Hawaii as a location for high technology companies.
 
15 The council shall be composed of at least eleven but no more than
 
16 twenty-five members appointed in accordance with section 26-34,
 
17 and shall include representatives of the high technology
 
18 industry, business leaders, educators, government leaders, and
 
19 legislators.
 
20      (b)  The members shall be appointed by the governor for four
 
21 years, except that the terms of the members first appointed shall
 
22 be for two and four years, respectively, as designated by the
 
23 governor at the time of appointment.  The council shall elect a
 

 
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 1 chairperson from among its members.
 
 2      (c)  In appointing members, the governor shall select
 
 3 persons who have knowledge of the high technology industry, the
 
 4 educational needs of the industry, or in the marketing and
 
 5 promotion of high technology industries.  The members of the
 
 6 council shall serve without compensation but shall be reimbursed
 
 7 for expenses, including travel expenses, necessary for the
 
 8 performance of their duties.
 
 9      (d)  The council shall assist the special advisor for
 
10 technology development in developing and coordinating the
 
11 marketing and promotion of the high technology industry in
 
12 Hawaii.
 
13      (e)  In carrying out the duties of this section, the council
 
14 shall seek and utilize any available funding sources, including
 
15 grant moneys.
 
16      (e)  This section is repealed on December 31, 2005."
 
17      SECTION 4.  There is appropriated out of the general
 
18 revenues of the State of Hawaii the sum of $100,000, or so much
 
19 thereof as may be necessary for fiscal year 1999-2000, and the
 
20 same sum, or so much thereof as may be necessary for fiscal year
 
21 2000-2001, for the special advisor for technology development and
 
22 the governor's special advisory council for technology
 
23 development.  The sums appropriated shall be expended by the
 

 
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 1 office of the governor for the purposes of section 3.
 
 2                             PART III
 
 3      SECTION 5.  The purpose of this Part is to foster the
 
 4 development of knowledge-based industries by integrating those
 
 5 industries with Hawaii's economy in a way that enhances and
 
 6 strengthens the tourism industry.
 
 7      SECTION 6.  Section 201-97, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "[[]201-97[]]  Integration and development of the tourism
 
10 industry.  The office shall be responsible for planning for the
 
11 integrated and coordinated development and expansion of the
 
12 tourism industry of the State.  The office shall investigate and
 
13 recommend to appropriate governmental officers, agencies,
 
14 legislative committees, and private groups ways and means of
 
15 coordinating promotional activities on behalf of tourism with the
 
16 development of recreational and other facilities, and with
 
17 existing and potential information and communications technology
 
18 networks and services in the State, for improved tourism
 
19 development.  The office shall also review the expenditure of
 
20 governmental funds for tourism-related activities and shall
 
21 prepare an annual report on the expenditures, together with any
 
22 recommendations the office may have.  The annual report shall be
 
23 submitted to the legislature as part of the annual report
 

 
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 1 required under section 201-98."
 
 2      SECTION 7.  Section 201B-6, Hawaii Revised Statutes, is
 
 3 amended by amending subsection (a) to read as follows:
 
 4      "(a)  The authority shall be responsible for developing a
 
 5 strategic tourism marketing plan [which] that shall be updated
 
 6 every three years[, that] and includes the following:
 
 7      (1)  Identification and evaluation of current and future
 
 8           tourism needs for the different regions of the State;
 
 9      (2)  Goals and objectives in accordance with identified
 
10           needs;
 
11      (3)  Statewide promotional efforts and programs;
 
12      (4)  Targeted markets;
 
13      (5)  Efforts to enter into brand marketing projects that
 
14           make effective use of cooperative advertising programs;
 
15      (6)  Measures of effectiveness for the authority's
 
16           promotional programs; and
 
17      (7)  Coordination of marketing plans of all destination
 
18           marketing organizations receiving state funding prior
 
19           to finalization of the authority's marketing plan.
 
20      The authority shall also develop and include in its
 
21 marketing plan, goals and objectives for marketing the State to
 
22 the techno-tourism niche as well as for integrating marketing
 
23 objectives with existing and potential state telecommunications
 

 
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 1 and information resources in the public and private sectors.  The
 
 2 authority shall also coordinate the requirements for and
 
 3 availability of the State's existing and potential
 
 4 telecommunications and information resources with the department
 
 5 of accounting and general services."
 
 6                              PART IV
 
 7      SECTION 8.  Economic development opportunities are changing.
 
 8 The playing field is now the world and not the next state or
 
 9 country.  The Internet is the catalyst, and the enabling
 
10 infrastructure is technology and telecommunications.  The
 
11 legislature finds that exempting Internet commerce from state
 
12 taxation will be a key element that allows Hawaii's businesses to
 
13 establish a global presence.
 
14      SECTION 9.  Chapter 231, Hawaii Revised Statutes, is amended
 
15 by adding a new section to be appropriately designated and to
 
16 read as follows:
 
17      "231-    Hawaii Internet Tax Freedom Act.  (a)  No
 
18 discriminatory tax shall be imposed under chapter 235 (relating
 
19 to income tax), chapter 237 (relating to the general excise tax),
 
20 or chapter 238 (relating to the use tax) on electronic commerce
 
21 or Internet access.
 
22      (b)  As used in this section "discriminatory tax" means:
 
23      (1)  Any tax imposed by the State or county on electronic
 

 
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 1           commerce that:
 
 2           (A)  Is not generally imposed and legally collectible
 
 3                by the State or county on transactions involving
 
 4                similar property, goods, services, or information
 
 5                accomplished through other means;
 
 6           (B)  Is not generally imposed and legally collectible
 
 7                at the same rate by such State or county on
 
 8                transactions involving similar property, goods,
 
 9                services, or information accomplished through
 
10                other means;
 
11           (C)  Imposes an obligation to collect or pay the tax on
 
12                a different person or entity than in the case of
 
13                transactions involving similar property, goods,
 
14                services, or information accomplished through
 
15                other means;
 
16           (D)  Establishes a classification of Internet access
 
17                service providers or online service providers for
 
18                purposes of establishing a higher tax rate to be
 
19                imposed on those providers than the tax rate
 
20                generally applied to providers of similar
 
21                information services delivered through other
 
22                means; or
 
23      (2)  Any tax imposed by the State or county if:
 

 
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 1           (A)  The sole ability to access a site on a remote
 
 2                seller's out-of-State computer server is
 
 3                considered a factor in determining a remote
 
 4                seller's tax collection obligation; or
 
 5           (B)  A provider of Internet access service or online
 
 6                services is deemed to be the agent of a remote
 
 7                seller for determining tax collection obligations
 
 8                solely as a result of:
 
 9                (i)  The display of a remote seller's information
 
10                     or content on the out-of-State computer
 
11                     server or a provider of Internet access
 
12                     service or online services; or
 
13                (ii) The processing of orders through the out-of-
 
14                     State computer server of a provider of
 
15                     Internet access service or online services.
 
16      (c)  As used in this section:
 
17      "Electronic commerce" means any transaction conducted over
 
18 the Internet or through Internet access, comprising the sale,
 
19 lease, license, offer, or delivery of property, goods, services,
 
20 or information, whether or not for consideration, and includes
 
21 the provision of Internet access.
 
22      "Internet" means collectively the myriad of computer and
 
23 telecommunications facilities, including equipment and operating
 

 
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 1 software that comprise the interconnected world-wide network of
 
 2 networks that employ the Transmission Control Protocol/Internet
 
 3 Protocol, or any predecessor or successor protocols to that
 
 4 protocol, to communicate information of all kinds by wire or
 
 5 radio.
 
 6      "Internet access" means a service or license that enables
 
 7 users to access content, information, electronic mail, or other
 
 8 services or licenses offered over the Internet, and may also
 
 9 include access to proprietary content, information, and other
 
10 services or licenses as part of a package of services or licenses
 
11 offered to users.  The term does not include telecommunications
 
12 service as defined in section 269-1.
 
13      (d)  This section shall not apply to taxable years beginning
 
14 after December 31, 2005."
 
15      SECTION 10.  Notwithstanding section 304-7.8, Hawaii Revised
 
16 Statutes, or any other law to the contrary, the University of
 
17 Hawaii office of technology transfer and economic development may
 
18 expend amounts up to $4,000,000 from the discoveries and
 
19 inventions revolving fund in section 304-8.92, Hawaii Revised
 
20 Statutes, for the purposes of that fund in fiscal year 1999-2000.
 
21                              PART V
 
22      SECTION 11.  The legislature finds that a training program
 
23 to improve the skills of new and existing workers for jobs in new
 

 
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 1 and emerging industries would help stimulate the State's economy.
 
 2 Industries such as biotechnology, health care, information
 
 3 technology, environmental science and technology, and
 
 4 telecommunications must often import their workers because the
 
 5 State's existing workforce lacks necessary skills.  A state-
 
 6 funded training program would lessen the need to import workers
 
 7 and increase the opportunities for Hawaii's residents to move
 
 8 upward in the job market by improving their skills.
 
 9      SECTION 12.  The Hawaii Revised Statutes is amended by
 
10 adding a new section to be appropriately designated and to read
 
11 as follows:
 
12      "   -     Millennium workforce development training
 
13 program.  (a)  There is established a millennium workforce
 
14 development training program, hereinafter referred to as the
 
15 program, that shall be placed with the department of labor and
 
16 industrial relations for administrative purposes.  The program
 
17 shall provide education and training at the post-high-school to
 
18 graduate levels, and shall include public, private, and for-
 
19 profit educational institutions.  In the design and delivery of
 
20 training, the program may cooperate or contract with other
 
21 public, private, and for-profit institutions.
 
22      (b)  The program shall seek and encourage partnerships with
 
23 private sector industries such as biotechnology, information
 

 
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 1 technology, environmental science and technology, and
 
 2 telecommunications, as may be appropriate, to provide
 
 3 pre-employment or employment training, or on-the-job training for
 
 4 employees and perspective employees.
 
 5      (c)  The department of labor and industrial relations shall
 
 6 establish and lead a public and private partnership task group,
 
 7 that shall include representatives from the department of
 
 8 business, economic development, and tourism, the University of
 
 9 Hawaii at Manoa, the University of Hawaii community colleges, and
 
10 private sector representatives to advise on the program design,
 
11 industry, recruitment, and training delivery activities of
 
12 participating entities.
 
13      (d)  In carrying out the duties of this section, the
 
14 department of labor and industrial relations and the University
 
15 of Hawaii shall seek and utilize any available funding sources,
 
16 including grant moneys."
 
17      SECTION 13.  There is appropriated out of the general
 
18 revenues of the State of Hawaii the sum of $50,000, or so much
 
19 thereof as may be necessary for fiscal year 1999-2000, and the
 
20 same sum, or so much thereof as may be necessary for fiscal year
 
21 2000-2001, to provide funds to the department of labor and
 
22 industrial relations to establish a millennium workforce
 
23 development program.  The sums appropriated shall be expended by
 

 
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 1 the department of labor and industrial relations for the purposes
 
 2 of this Part.
 
 3      SECTION 14.  There is appropriated out of the general
 
 4 revenues of the State of Hawaii the sum of $436,200, or so much
 
 5 thereof as may be necessary for fiscal year 1999-2000, and the
 
 6 same sum, or so much thereof as may be necessary for fiscal year
 
 7 2000-2001, to provide funds to the University of Hawaii to
 
 8 implement programs pursuant to the millennium workforce
 
 9 development program.  The sums appropriated shall be expended by
 
10 the University of Hawaii for the purposes of this Part.
 
11                              PART VI
 
12      SECTION 15.  The legislature finds that students must be
 
13 afforded opportunities in new educational technologies, such as
 
14 the E Academy concept, that will provide relevant, challenging,
 
15 and meaningful course offerings for students interested in
 
16 pursuing a career in advanced technology fields.  The purpose of
 
17 this Part is to provide Hawaii's students with meaningful and
 
18 relevant preparation for immediate opportunities in entry level
 
19 technology positions and advanced studies in post secondary
 
20 information technology, science, engineering, and math.
 
21      SECTION 16.  Chapter 302A, Hawaii Revised Statutes, is
 
22 amended by adding a new section to be appropriately designated
 
23 and to read as follows:
 

 
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 1      "302A-     E-mail accounts for students.  (a)  The
 
 2 department of education, in conjunction and coordination with the
 
 3 University of Hawaii, shall provide e-mail accounts at no charge
 
 4 to any student who applies to the department for such an account.
 
 5      (b)  As used in this section, the term "student" means any
 
 6 person attending public school in ninth grade or above,
 
 7 including:
 
 8      (1)  Both degree and nondegree candidates;
 
 9      (2)  Individuals attending school on a full-time, part-time,
 
10           or occasional basis, including continuing education or
 
11           other nondegree courses;
 
12      (3)  Individuals in educational, technical, or vocational
 
13           programs; and
 
14      (4)  Individuals attending public undergraduate or
 
15           postgraduate college and university programs.
 
16      (c)  The department of education, in cooperation with the
 
17 University of Hawaii, shall adopt rules pursuant to chapter 91 as
 
18 may be necessary to implement this section."
 
19      SECTION 17.  (a)  The department of education shall
 
20 establish E Academies throughout the State with onsite locations
 
21 based at selected public high schools in each departmental school
 
22 district.  The department of education shall also develop new
 
23 challenging high school course offerings in math, science, and
 

 
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 1 technology content areas and include the new courses in the
 
 2 authorized course code and number guide, for the purposes of the
 
 3 E Academies.  The department of education shall provide an
 
 4 innovative training program for E Academy teachers, and conduct
 
 5 instructional assessment activities beginning in the 1999-2000
 
 6 school year.  In carrying out the duties of this section, the
 
 7 department of education shall seek and utilize any available
 
 8 funding sources, including grant moneys.
 
 9      (b)  As used in this section, "E Academy" means a virtual,
 
10 site-based school that provides students with industry and
 
11 academic standards-based instruction and assessments in 
 
12 technology, science, math, and engineering.
 
13      SECTION 18.  Section 226-107, Hawaii Revised Statutes, is
 
14 amended to read as follows:
 
15      "226-107  Quality education.  Priority guidelines to
 
16 promote quality education:
 
17      (1)  Pursue effective programs which reflect the varied
 
18           district, school, and student needs to strengthen basic
 
19           skills achievement[.];
 
20      (2)  Continue emphasis on general education "core"
 
21           requirements to provide common background to students
 
22           and essential support to other university programs[.];
 
23      (3)  Initiate efforts to improve the quality of education by
 

 
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 1           improving the capabilities of the education work
 
 2           force[.];
 
 3      (4)  Promote increased opportunities for greater autonomy
 
 4           and flexibility of educational institutions in their
 
 5           decisionmaking responsibilities[.];
 
 6      (5)  Increase and improve the use of information technology
 
 7           in education [and encourage] by the availability of
 
 8           telecommunications equipment for:
 
 9           (A)  The electronic exchange of information;
 
10           (B)  Statewide electronic mail; and
 
11           (C)  Access to the Internet.
 
12           Encourage programs [which] that increase the public's
 
13           awareness and understanding of the impact of
 
14           information technologies on our lives[.];
 
15      (6)  Pursue the establishment of Hawaii's public and private
 
16           universities and colleges as research and training
 
17           centers of the Pacific[.];
 
18      (7)  Develop resources and programs for early childhood
 
19           education[.];
 
20      (8)  Explore alternatives for funding and delivery of
 
21           educational services to improve the overall quality of
 
22           education[.]; and
 
23      (9)  Strengthen and expand educational programs and services
 

 
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 1           for students with special needs."
 
 2      SECTION 19.  There is appropriated out of the general
 
 3 revenues of the State of Hawaii the sum of $163,800, or so much
 
 4 thereof as may be necessary for fiscal year 1999-2000, and the
 
 5 same sum, or so much thereof as may be necessary for fiscal year
 
 6 2000-2001, to provide funds for the establishment of E Academies
 
 7 statewide at selected schools in each of the departmental school
 
 8 districts.  The sums appropriated shall be expended by the
 
 9 department of education for the purposes of section 17.
 
10                             PART VII
 
11      SECTION 20.  Chapter 235, Hawaii Revised Statutes, is
 
12 amended by adding a new section to be appropriately designated
 
13 and to read as follows:
 
14      "235-A  Stock options from qualified high technology
 
15 businesses exempt from taxation.  (a)  Notwithstanding any law to
 
16 the contrary, all income received from stock options from a
 
17 qualified high technology business by an employee that would
 
18 otherwise be taxed as ordinary income or as capital gains to
 
19 those employees is exempt from taxation under this chapter.
 
20      (b)  For the purposes of this section:
 
21      "Computer software" means a set of computer programs,
 
22 procedures, or associated documentation concerned with the
 
23 operation and function of a computer system, and includes both
 

 
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 1 systems and application programs and subdivisions, such as
 
 2 assemblers, compilers, routines, generators, and utility
 
 3 programs.
 
 4      "Qualified high technology business" means a business
 
 5 performing qualified research.  The term "qualified high
 
 6 technology business" does not include:
 
 7      (1)  Any trade or business involving the performance of
 
 8           services in the field of law, architecture, accounting,
 
 9           actuarial science, performing arts, consulting,
 
10           athletics, financial services, or brokerage services;
 
11      (2)  Any banking, insurance, financing, leasing, rental,
 
12           investing, or similar business; any farming business,
 
13           including the business of raising or harvesting trees;
 
14           any business involving the production or extraction of
 
15           products of a character with respect to which a
 
16           deduction is allowable under section 611 (with respect
 
17           to allowance of deduction for depletion), 613 (with
 
18           respect to basis for percentage depletion), or 613A
 
19           (with respect to limitation on percentage depleting in
 
20           cases of oil and gas wells) of the Internal Revenue
 
21           Code;
 
22      (3)  Any business operating a hotel, motel, restaurant, or
 
23           similar business; and
 

 
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 1      (4)  Any trade or business involving a hospital, a private
 
 2           office of a licensed health care professional, a group
 
 3           practice of licensed health care professionals, or a
 
 4           nursing home.
 
 5      "Qualified research" means:
 
 6      (1)  The same as in section 41(d) of the Internal Revenue
 
 7           Code; or
 
 8      (2)  Developing, designing, modifying, programming, and
 
 9           licensing computer software."
 
10                             PART VIII
 
11      SECTION 21.  The legislature finds that there is a need to
 
12 encourage the creative community in Hawaii in order to support
 
13 Hawaii's growth in the high technology business sector.  The
 
14 legislature further finds that exempting both individuals and
 
15 high technology businesses from taxes on royalties received from
 
16 copyrights and patents will help to encourage this creative
 
17 community, which in turn will help produce its own synergy to
 
18 foster electronic commerce in Hawaii.  The purpose of this part
 
19 is therefore to exempt individuals and qualified high technology
 
20 businesses in Hawaii from taxation on royalties owned by those
 
21 individuals or businesses and developed or arising out of those
 
22 businesses.
 
23      SECTION 22.  Chapter 235, Hawaii Revised Statutes, is
 

 
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 1 amended by adding a new section to be appropriately designated
 
 2 and to read as follows:
 
 3      "235-B  Royalties and other income from high technology
 
 4 business excluded from gross income.  (a)  In addition to the
 
 5 exclusions in section 235-7, there shall be excluded from gross
 
 6 income, adjusted gross income, and taxable income, amounts
 
 7 received by an individual or a qualified high technology business
 
 8 as royalties and other income derived from patents and
 
 9 copyrights:
 
10      (1)  Owned by the individual or qualified high technology
 
11           business; and
 
12      (2)  Developed and arising out of a qualified high
 
13           technology business.
 
14      (b)  For the purposes of this section:
 
15      "Computer software" means a set of computer programs,
 
16 procedures, or associated documentation concerned with the
 
17 operation and function of a computer system, and includes both
 
18 systems and application programs and subdivisions, such as
 
19 assemblers, compilers, routines, generators, and utility
 
20 programs.
 
21      "Qualified high technology business" means a business
 
22 performing qualified research.  The term "qualified high
 
23 technology business" does not include:
 

 
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 1      (1)  Any trade or business involving the performance of
 
 2           services in the field of law, architecture, accounting,
 
 3           actuarial science, performing arts, consulting,
 
 4           athletics, financial services, or brokerage services;
 
 5      (2)  Any banking, insurance, financing, leasing, rental,
 
 6           investing, or similar business; any farming business,
 
 7           including the business of raising or harvesting trees;
 
 8           any business involving the production or extraction of
 
 9           products of a character with respect to which a
 
10           deduction is allowable under section 611 (with respect
 
11           to allowance of deduction for depletion), 613 (with
 
12           respect to basis for percentage depletion), or 613A
 
13           (with respect to limitation on percentage depleting in
 
14           cases of oil and gas wells) of the Internal Revenue
 
15           Code;
 
16      (3)  Any business operating a hotel, motel, restaurant, or
 
17           similar business; and
 
18      (4)  Any trade or business involving a hospital, a private
 
19           office of a licensed health care professional, a group
 
20           practice of licensed health care professionals, or a
 
21           nursing home.
 
22      "Qualified research" means:
 
23      (1)  The same as in section 41(d) of the Internal Revenue
 

 
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 1           Code; or
 
 2      (2)  Developing, designing, modifying, programming, and
 
 3           licensing computer software."
 
 4                              PART IX
 
 5      SECTION 23.  While the advantages of Hawaii's proximity to
 
 6 Pacific and Asian markets are a lure for technology business in
 
 7 Hawaii, the costs of doing business are high.  The purpose of
 
 8 this Part is to assist in the creation of opportunities for high
 
 9 technology companies through the creation of tax credits for
 
10 investing in high technology businesses and for increasing
 
11 research activities.
 
12      SECTION 24.  Chapter 235, Hawaii Revised Statutes, is
 
13 amended by adding to part VI a new section to be appropriately
 
14 designated and to read as follows:
 
15      "235-C  High-technology business investment tax credit.
 
16 (a)  There shall be allowed to each taxpayer, subject to the
 
17 taxes imposed by this chapter, a high technology investment tax
 
18 credit that shall be deductible from the taxpayer's net income
 
19 tax liability, if any, imposed by this chapter for the taxable
 
20 year in which the credit is properly claimed.  The tax credit
 
21 shall be an amount equal to ten per cent of the investment made
 
22 by the taxpayer in each qualified high technology business, up to
 
23 a maximum allowed credit of $500,000 for the taxable year for the
 

 
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 1 investment made by the taxpayer in a qualified high technology
 
 2 business.
 
 3      (b)  The credit allowed under this section shall be claimed
 
 4 against the net income tax liability for the taxable year.  For
 
 5 the purpose of this section, "net income tax liability" means net
 
 6 income tax liability reduced by all other credits allowed under
 
 7 this chapter.
 
 8      (c)  If the tax credit under this section exceeds the
 
 9 taxpayer's income tax liability, the excess of the tax credit
 
10 over liability may be used as a credit against the taxpayer's
 
11 income tax liability in subsequent years until exhausted.  All
 
12 claims, including any amended claims, for tax credits under this
 
13 section shall be filed on or before the end of the twelfth month
 
14 following the close of the taxable year for which the credit may
 
15 be claimed.  Failure to comply with the foregoing provision shall
 
16 constitute a waiver of the right to claim the credit.
 
17      (d)  As used in this section:
 
18      "Computer software" means a set of computer programs,
 
19 procedures, or associated documentation concerned with the
 
20 operation and function of a computer system, and includes both
 
21 systems and application programs and subdivisions, such as
 
22 assemblers, compilers, routines, generators, and utility
 
23 programs.
 

 
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 1      "Investment" means a nonrefundable investment, at risk, as
 
 2 that term is used in section 465 (with respect to deductions
 
 3 limited to amount at risk) of the Internal Revenue Code, in a
 
 4 qualified high technology business, of cash that is transferred
 
 5 to the qualified high technology business, the transfer of which
 
 6 is in connection with a transaction in exchange for stock,
 
 7 interests in partnerships, joint ventures, or other entities,
 
 8 licenses (exclusive or nonexclusive), rights to use technology,
 
 9 marketing rights, warrants, options, or any items similar to
 
10 those included herein, including but not limited to options or
 
11 rights to acquire any of the items included herein.  The
 
12 nonrefundable investment is entirely at risk of loss where
 
13 repayment depends upon the success of the qualified high
 
14 technology business.  If the money invested is to be repaid to
 
15 the taxpayer, no repayment except for dividends or interest shall
 
16 be made for at least three years from the date the investment is
 
17 made.  The annual amount of any dividend and interest payment to
 
18 the taxpayer shall not exceed twelve per cent of the amount of
 
19 the investment.
 
20      (b)  For the purposes of this section:
 
21      "Qualified high technology business" means:
 
22      (1)  A business, employing or owning capital or property, or
 
23           maintaining an office, in this State; and which
 

 
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 1      (2)  (A)  Conducts one hundred per cent of its activities in
 
 2                performing qualified research in this State; or
 
 3           (B)  Receives one hundred per cent of its gross income
 
 4                derived from qualified research; provided that the
 
 5                income is received from products sold from,
 
 6                manufactured, or produced in the State; or
 
 7                services performed in this State.
 
 8      The term "qualified high technology business" does not
 
 9 include:
 
10      (1)  Any trade or business involving the performance of
 
11           services in the field of law, architecture, accounting,
 
12           actuarial science, performing arts, consulting,
 
13           athletics, financial services, or brokerage services;
 
14      (2)  Any banking, insurance, financing, leasing, rental,
 
15           investing, or similar business; any farming business,
 
16           including the business of raising or harvesting trees;
 
17           any business involving the production or extraction of
 
18           products of a character with respect to which a
 
19           deduction is allowable under section 611 (with respect
 
20           to allowance of deduction for depletion), 613 (with
 
21           respect to basis for percentage depletion), or 613A
 
22           (with respect to limitation on percentage depleting in
 
23           cases of oil and gas wells) of the Internal Revenue
 

 
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 1           Code;
 
 2      (3)  Any business operating a hotel, motel, restaurant, or
 
 3           similar business; and
 
 4      (4)  Any trade or business involving a hospital, a private
 
 5           office of a licensed health care professional, a group
 
 6           practice of licensed health care professionals, or a
 
 7           nursing home.
 
 8      "Qualified research" means:
 
 9      (1)  The same as in section 41(d) of the Internal Revenue
 
10           Code; or
 
11      (2)  Developing, designing, modifying, programming, and
 
12           licensing computer software;
 
13 except that it shall not include research conducted outside the
 
14 State.
 
15      (e)  This section shall not apply to taxable years beginning
 
16 after December 31, 2005."
 
17      SECTION 25.  Chapter 235, Hawaii Revised Statutes, is
 
18 amended by adding to part VI a new section to be appropriately
 
19 designated and to read as follows:
 
20      "235-D  Tax credit for increasing research activities.  (a)
 
21 Section 41 (with respect to the credit for increasing research
 
22 activities) and section 280C(c) (with respect to certain expenses
 
23 for which the credit for increasing research activities are
 

 
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 1 allowable) of the Internal Revenue Code shall be operative for
 
 2 the purposes of this chapter as provided in this section.
 
 3      (b)  All references to Internal Revenue Code sections within
 
 4 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
 5 operative for purposes of this section.
 
 6      (c)  There shall be allowed to each taxpayer, subject to the
 
 7 tax imposed by this chapter, an income tax credit for increased
 
 8 research activities that shall be deductible from the taxpayer's
 
 9 net income tax liability, if any, imposed by this chapter for the
 
10 taxable year in which the credit is properly claimed.
 
11      (d)  The tax credit for increased research activities shall
 
12 be equal to the sum of:
 
13      (1)  2.5 per cent of the excess (if any) of:
 
14           (A)  The qualified research expenses for the taxable
 
15                year; over
 
16           (B)  The base amount;
 
17           and
 
18      (2)  2.5 per cent of the basic research payments determined
 
19           under section 41(e)(1)(A) of the Internal Revenue Code.
 
20      (e)  For purposes of this section:
 
21      (1)  The alternative incremental credit in section 41(c)(4)
 
22           of the Internal Revenue Code shall be equal to the sum
 
23           of 12.5 per cent of:
 

 
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 1           (A)  1.65 per cent of so much of the qualified research
 
 2                expenses for the taxable year as exceeds one per
 
 3                cent of the average described in section
 
 4                41(c)(1)(B) but does not exceed 1.5 per cent of
 
 5                such average;
 
 6           (B)  2.2 per cent of so much of those expenses as
 
 7                exceeds 1.5 per cent of the average but does not
 
 8                exceed two per cent of the average; and
 
 9           (C)  2.75 per cent of so much of those expenses as
 
10                exceeds two per cent of the average;
 
11      (2)  The term "qualified research" under section 41(d)(1) of
 
12           the Internal Revenue Code shall not include research
 
13           conducted outside of the State; and
 
14      (3)  The term "basic research" under section 41(e) of the
 
15           Internal Revenue Code shall not include research
 
16           conducted outside of the State.
 
17      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
18 of the Internal Revenue Code shall be equal to the excess of:
 
19      (1)  The amount of credit determined under section 41(a) (as
 
20           provided for in this section) (without regard to this
 
21           paragraph); over
 
22      (2)  The product of:
 
23           (A)  The amount described in subsection (f)(1); and
 

 
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 1           (B)  12.5 per cent of the maximum rate of tax under
 
 2                section 11(b)(1) of the Internal Revenue Code.
 
 3      (g)  If the tax credit for increased research activities
 
 4 claimed by a taxpayer exceeds the amount of income tax payment
 
 5 due from the taxpayer, the excess of the tax credit over payments
 
 6 due may be used as a credit against the taxpayer's income tax
 
 7 liability in subsequent years until exhausted.
 
 8      (h)  All claims for a tax credit under this section must be
 
 9 filed on or before the end of the twelfth month following the
 
10 close of the taxable year for which the credit may be claimed.
 
11 Failure to properly claim the credit shall constitute a waiver of
 
12 the right to claim the credit.
 
13      (i)  The director of taxation may adopt any rules under
 
14 chapter 91 and forms necessary to carry out this section.
 
15      (j)  This section shall not apply to taxable years beginning
 
16 after December 31, 2005."
 
17      SECTION 26.  Chapter 241, Hawaii Revised Statutes, is
 
18 amended by adding a new section to be appropriately designated
 
19 and to read as follows:
 
20      "241-    High-technology business investment tax credit.
 
21 The high-technology business investment tax credit provided under
 
22 section 235-C shall be operative for this chapter on the
 
23 effective date of this Act."
 

 
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 1      SECTION 27.  Chapter 431, article 7, part II, Hawaii Revised
 
 2 Statutes, is amended by adding a new section to be appropriately
 
 3 designated and to read as follows:
 
 4      "431:7-    High-technology business investment tax credit.
 
 5 The high-technology business investment tax credit provided under
 
 6 section 235-C shall be operative for this chapter on the
 
 7 effective date of this Act."
 
 8      SECTION 28.  Section 235-2.3, Hawaii Revised Statutes, is
 
 9 amended by amending subsection (b) to read as follows:
 
10      "(b)  The following Internal Revenue Code subchapters, parts
 
11 of subchapters, sections, subsections, and parts of subsections
 
12 shall not be operative for the purposes of this chapter, unless
 
13 otherwise provided:
 
14      (1)  Subchapter A (sections 1 to 59A) (with respect to
 
15           determination of tax liability), except section 1(h)(3)
 
16           (relating to net capital gain reduced by the amount
 
17           taken into account as investment income), except
 
18           section 41 (with respect to the credit for increasing
 
19           research activities), except section 42 (with respect
 
20           to low-income housing credit), and except sections 47
 
21           and 48, as amended, as of December 31, 1984 (with
 
22           respect to certain depreciable tangible personal
 
23           property).  For treatment, see sections 235-D,
 

 
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 1           235-110.7, and 235-110.8;
 
 2      (2)  Section 78 (with respect to dividends received from
 
 3           certain foreign corporations by domestic corporations
 
 4           choosing foreign tax credit);
 
 5      (3)  Section 86 (with respect to social security and tier 1
 
 6           railroad retirement benefits);
 
 7      (4)  Section 103 (with respect to interest on state and
 
 8           local bonds).  For treatment, see section 235-7(b);
 
 9      (5)  Section 120 (with respect to amounts received under
 
10           qualified group legal services plans).  For treatment,
 
11           see section 235-7(a)(9) to (11);
 
12      (6)  Section 122 (with respect to certain reduced uniformed
 
13           services retirement pay).  For treatment, see section
 
14           235-7(a)(3);
 
15      (7)  Section 135 (with respect to income from United States
 
16           savings bonds used to pay higher education tuition and
 
17           fees).  For treatment, see section 235-7(a)(1);
 
18      (8)  Subchapter B (sections 141 to 150) (with respect to tax
 
19           exemption requirements for state and local bonds);
 
20      (9)  Section 151 (with respect to allowance of deductions
 
21           for personal exemptions).  For treatment, see section
 
22           235-54;
 
23     (10)  Section 196 (with respect to deduction for certain
 

 
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 1           unused investment credits);
 
 2     (11)  Sections 241 to 247 (with respect to special deductions
 
 3           for corporations).  For treatment, see section
 
 4           235-7(c);
 
 5     (12)  Section 280C (with respect to certain expenses for
 
 6           which credits are allowable)[;].  For treatment see,
 
 7           section 235-D;
 
 8     (13)  Section 291 (with respect to special rules relating to
 
 9           corporate preference items);
 
10     (14)  Section 367 (with respect to foreign corporations);
 
11     (15)  Section 501(c)(12), (15), (16) (with respect to exempt
 
12           organizations);
 
13     (16)  Section 515 (with respect to taxes of foreign countries
 
14           and possessions of the United States);
 
15     (17)  Subchapter G (sections 531 to 565) (with respect to
 
16           corporations used to avoid income tax on shareholders);
 
17     (18)  Subchapter H (sections 581 to 597) (with respect to
 
18           banking institutions), except section 584 (with respect
 
19           to common trust funds).  For treatment, see chapter
 
20           241;
 
21     (19)  Section 642(a) and (b) (with respect to special rules
 
22           for credits and deductions applicable to trusts).  For
 
23           treatment, see sections 235-54(b) and 235-55;
 

 
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 1     (20)  Section 668 (with respect to interest charge on
 
 2           accumulation distributions from foreign trusts);
 
 3     (21)  Subchapter L (sections 801 to 848) (with respect to
 
 4           insurance companies).  For treatment, see sections
 
 5           431:7-202 and 431:7-204;
 
 6     (22)  Section 853 (with respect to foreign tax credit allowed
 
 7           to shareholders).  For treatment, see section 235-55;
 
 8     (23)  Subchapter N (sections 861 to 999) (with respect to tax
 
 9           based on income from sources within or without the
 
10           United States), except sections 985 to 989 (with
 
11           respect to foreign currency transactions).  For
12                                                    1
13           treatment, see sections 235-4, 235-5, and  235-7(b),
 
14           and 235-55;
 
15     (24)  Section 1042(g) (with respect to sales of stock in
 
16           agricultural refiners and processors to eligible farm
 
17           cooperatives);
 
18     (25)  Section 1055 (with respect to redeemable ground rents);
 
19     (26)  Section 1057 (with respect to election to treat
 
20           transfer to foreign trust, etc., as taxable exchange);
 
21     (27)  Sections 1291 to 1298 (with respect to treatment of
 
22           passive foreign investment companies);
 
23     (28)  Subchapter Q (sections 1311 to 1351) (with respect to
 
24           readjustment of tax between years and special
 

 
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 1           limitations); and
 
 2     (29)  Subchapter U (sections 1391 to 1397F) (with respect to
 
 3           designation and treatment of empowerment zones,
 
 4           enterprise communities, and rural development
 
 5           investment areas).  For treatment, see chapter 209E."
 
 6                              PART X
 
 7      SECTION 29.  In codifying the new sections added by this
 
 8 Act, the revisor of statutes shall substitute the appropriate
 
 9 section numbers for the letters used in designating the new
 
10 sections in this Act.
 
11      SECTION 30.  Statutory material to be repealed is bracketed.
 
12 New statutory material is underscored.
 
13      SECTION 31.  This Act shall take effect upon its approval;
 
14 provided that:
 
15      (1)  Sections 4, 10, 13, 14, and 19 of this Act shall take
 
16           effect on July 1, 1999; 
 
17      (2)  Sections 9, 20, 22, 25, and 28 of this Act shall apply
 
18           to taxable years beginning after December 31, 1999; and
 
19      (3)  Section 24 of this Act shall apply to taxable years
 
20           beginning after December 31, 1998, for investments made
 
21           pursuant to section 235-C, Hawaii Revised Statutes, on
 
22           or after the effective date of this Act.
 

 
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