REPORT TITLE:
Information-based industries

DESCRIPTION:
Spur economic development and foster the growth of knowledge-
based industries in Hawaii via tax incentives, special purpose
revenue bonds, and other incentives. (HB377 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        377
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO ECONOMIC DEVELOPMENT.



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

 1                              PART I
 
 2      SECTION 1.  The legislature finds that advances in
 
 3 telecommunications, information technology, and the explosive
 
 4 growth of the global internet have created a significant
 
 5 opportunity for the State to expand and diversify its economy
 
 6 through the development of an information industry designed to
 
 7 promote the exchange of electronic information.
 
 8      It has been predicted that within seven years, one half of
 
 9 business and consumer purchases will be made by computer and
 
10 those conducting business, pursuing education, and finding
 
11 entertainment will all require access to internet connections.
 
12 Hawaii is in a position to take advantage of this growing market.
 
13 The State already possesses an impressive fiber optic and
 
14 satellite communication infrastructure for electronic information
 
15 transmission that connects Hawaii with the U.S. mainland and
 
16 Japan, and that may allow for reduced costs due to increased
 
17 transmission capacity.  In addition, Hawaii's mid-Pacific
 
18 physical location has been transformed by the new information and
 
19 communications technologies from a liability into an asset.
 

 
Page 2                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 Hawaii's location between time zones gives the State an "edge" in
 
 2 U.S.-Asia/Pacific transactions.  This, combined with Hawaii's
 
 3 multilingual work force, gives the State the real potential to
 
 4 become a call center for U.S. companies expanding into Asia.
 
 5 Finally, Hawaii possesses unique and internationally-recognized
 
 6 information resources in areas such as astronomy, biotechnology,
 
 7 volcanology, seismology, and oceanography, as well as in the
 
 8 State's own native Hawaiian history and culture.
 
 9      The legislature finds that although Hawaii has substantial
 
10 potential as an information and telecommunications center, active
 
11 government involvement is needed if that potential is to be fully
 
12 realized.  Hawaii must build a work force educated and trained in
 
13 the area of information technology, to attract and fulfill the
 
14 needs of new information and communications technology
 
15 businesses.  The State must also nurture a business climate that
 
16 is attractive to these businesses.  In addition, Hawaii must more
 
17 closely link itself to the communications web by establishing a
 
18 presence on the internet, upgrading the access of University of
 
19 Hawaii students and researchers to the internet, and integrating
 
20 and developing the objectives and marketing strategies of its
 
21 tourist industry in concert with the area of telecommunications
 
22 and information.
 

 
 
 
Page 3                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      To take advantage of technological growth opportunities, the
 
 2 State must also pursue various economic incentives to diversify
 
 3 the economy and stimulate business activity, particularly in the
 
 4 technological sector.
 
 5      The purpose of this Act is to spur economic development and
 
 6 foster the growth of knowledge-based industries in Hawaii by:
 
 7      (1)  Providing a technology-related job creation tax credit
 
 8           to offset the cost of technology-related job creation
 
 9           costs;
 
10      (2)  Establishing the Hawaii internet exchange to serve as a
 
11           catalyst for the development of internet-focused
 
12           businesses;
 
13      (3)  Accelerating work force development programs to create
 
14           a pool of information technology professionals;
 
15      (4)  Providing a tax credit for making increased
 
16           expenditures in certain technological and scientific
 
17           research and development;
 
18      (5)  Providing a tax credit for investing in high technology
 
19           businesses; and
 
20      (6)  Authorizing the issuance of special purpose revenue
 
21           bonds for the development of an industrial park that
 
22           will provide training and certification for the high
 
23           technology industry.
 

 
Page 4                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                              PART II
 
 2      SECTION 2.  The purpose of this part is to accelerate job
 
 3 creation through targeted assistance to technology start-ups.
 
 4      SECTION 3.  Chapter 235, Hawaii Revised Statutes, is amended
 
 5 by adding to part VI a new section to be appropriately designated
 
 6 and to read as follows:
 
 7      "235-     Tax credit for technology-related job creation.
 
 8 (a)  Each taxpayer in this State may claim a tax credit for
 
 9 technology-related job creation under this section.  The credit
 
10 shall be for the cost of creating technology-related jobs.  The
 
11 credit shall be equal to the cost of creating those jobs but
 
12 shall not exceed $        .  The credit may be claimed against
 
13 the taxpayer's income tax liability for the taxable year.
 
14      (b)  The tax credits claimed by a resident taxpayer pursuant
 
15 to this section shall be deductible from the resident taxpayer's
 
16 individual income tax liability, if any, for the tax year in
 
17 which they are properly claimed.  If the tax credits claimed by a
 
18 resident taxpayer exceed the amount of income tax payment due
 
19 from the resident taxpayer, the excess of credits over payments
 
20 due shall be refunded to the resident taxpayer; provided that tax
 
21 credits properly claimed by a resident individual who has no
 

 
 
 
 
 
Page 5                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 income tax liability shall be paid to the resident individual;
 
 2 and provided further that no refunds or payment on account of the
 
 3 credits allowed by this section shall be made for amounts less
 
 4 than $1.
 
 5      (c)  All claims for tax credits under this section,
 
 6 including any amended claims, must be filed on or before the end
 
 7 of the twelfth month following the close of the taxable year for
 
 8 which the credits may be claimed.  Failure to comply with the
 
 9 foregoing provision shall constitute a waiver of the right to
 
10 claim the credit.
 
11      (d)  As used in this section "technology-related" means
 
12 emerging industries that are technology-intensive, including but
 
13 not limited to electronics, biotechnology, or computer systems."
 
14                             PART III
 
15      SECTION 4.  The purpose of this part is to establish an
 
16 internet exchange that will allow Hawaii's businesses to
 
17 establish a global presence.
 
18      SECTION 5.  Chapter 304, Hawaii Revised Statutes, is amended
 
19 by adding a new section to part II, subpart L, to be
 
20 appropriately designated and to read as follows:
 
21      "304-      Hawaii internet exchange; established.  There is
 
22 established within the office of technology transfer and economic
 

 
 
 
Page 6                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 development, an internet exchange that shall be known as the
 
 2 Hawaii internet exchange.  The Hawaii internet exchange shall
 
 3 serve as a switching and peering point for internet service
 
 4 providers."
 
 5      SECTION 6.  Section 226-103, Hawaii Revised Statutes, is
 
 6 amended by amending subsection (g) to read as follows:
 
 7      "(g)  Priority guidelines to promote the development of the
 
 8 information industry: 
 
 9      (1)  Establish an information network that will serve as the
 
10           catalyst for establishing a viable information industry
 
11           in Hawaii[.];
 
12      (2)  Encourage the development of services such as financial
 
13           data processing, a products and services exchange,
 
14           foreign language translations, telemarketing,
 
15           teleconferencing, a twenty-four-hour international
 
16           stock exchange, international banking, [and] a Pacific
 
17           Rim management center[.], and an internet exchange;
 
18      (3)  Encourage the development of small businesses in the
 
19           information field such as software development, the
 
20           development of new information systems and peripherals,
 
21           data conversion and data entry services, and home or
 
22           cottage services such as computer programming,
 
23           secretarial, and accounting services[.];
 

 
Page 7                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (4)  Encourage the development or expansion of educational
 
 2           and training opportunities for residents in the
 
 3           information and telecommunications fields[.];
 
 4      (5)  Encourage research activities, including legal research
 
 5           in the information and telecommunications fields[.];
 
 6           and
 
 7      (6)  Support promotional activities to market Hawaii's
 
 8           information industry services."
 
 9      SECTION 7.  There is appropriated out of the general
 
10 revenues of the State of Hawaii the sum of $            or so
 
11 much thereof as may be necessary for fiscal year 1999-2000 to
 
12 purchase the information technology equipment and support
 
13 services necessary for the establishment of the Hawaii internet
 
14 exchange within the University of Hawaii, office of technology
 
15 transfer and economic development.
 
16      The sum appropriated shall be expended by the University of
 
17 Hawaii for the purposes of this part.
 
18                              PART IV
 
19      SECTION 8.  The purpose of this part is to accelerate work
 
20 force development programs to create a pool of information
 
21 technology professionals.
 

 
 
 
 
 
Page 8                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      SECTION 9.  Chapter 304, Hawaii Revised Statutes, is amended
 
 2 by adding a new section to part II, subpart L, to be
 
 3 appropriately designated and to read as follows:
 
 4      "304-      Information industry work force development
 
 5 program.  (a)  There is established an information and
 
 6 telecommunications work force training program hereinafter
 
 7 referred to as the "training program."  The training program
 
 8 shall be placed within the University of Hawaii for
 
 9 administrative purposes only.  The training program shall provide
 
10 accelerated information technology education and training on the
 
11 post-high school to graduate levels and shall include public,
 
12 private, and for-profit educational institutions.  In the design
 
13 and delivery of programs, the training program may cooperate or
 
14 contract with other public, private, and for-profit institutions.
 
15      (b)  The administrator of the training program shall seek
 
16 and encourage partnerships between members of the private
 
17 information technology industry and the training program."
 
18      SECTION 10.  There is appropriated out of the general
 
19 revenues of the State of Hawaii the sum of $            or so
 
20 much thereof as may be necessary for fiscal year 1999-2000 to
 
21 provide funds to educational institutions to establish an
 
22 information and telecommunications work force training program.  
 

 
 
 
Page 9                                                     377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      The sum appropriated shall be expended by the University of
 
 2 Hawaii for the purposes of this part.
 
 3                              PART V
 
 4      SECTION 11.  The purpose of this part is to provide a tax
 
 5 incentive for making increased expenditures in certain
 
 6 technological and scientific research and development.
 
 7      SECTION 12.  Chapter 235, Hawaii Revised Statutes, is
 
 8 amended by adding to part VI a new section to be appropriately
 
 9 designated     and to read as follows:
 
10      "235-     Tax credit for increasing research activities.
 
11 (a)  Section 41 (with respect to the credit for increasing
 
12 research activities) and section 280C(c) (with respect to certain
 
13 expenses for which the credit for increasing research activities
 
14 are allowable) of the Internal Revenue Code shall be operative
 
15 for the purposes of this chapter as provided in this section.
 
16      (b)  All references to Internal Revenue Code sections within
 
17 section 41 and section 280C(c) of the Internal Revenue Code shall
 
18 be operative for purposes of this section.
 
19      (c)  There shall be allowed to each taxpayer subject to the
 
20 tax imposed by this chapter, an income tax credit for increased
 
21 research activities that shall be deductible from the taxpayer's
 
22 net income tax liability, if any, imposed by this chapter for the
 
23 taxable year in which the credit is properly claimed.
 

 
Page 10                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (d)  The tax credit for increased research activities shall
 
 2 be equal to the sum of:
 
 3      (1)  2.5 per cent of the excess (if any) of:
 
 4           (A)  The qualified research expenses for the taxable
 
 5                year; over
 
 6           (B)  The base amount;
 
 7           and
 
 8      (2)  2.5 per cent of the basic research payments determined
 
 9           under section 41(e)(1)(A) of the Internal Revenue Code.
 
10      (e)  For purposes of this section:
 
11      (1)  The alternative incremental credit in section 41(c)(4)
 
12           of the Internal Revenue Code shall be equal to the sum
 
13           of 12.5 per cent of:
 
14           (A)  1.65 per cent of so much of the qualified research
 
15                expenses for the taxable year as exceeds one per
 
16                cent of the average described in section
 
17                41(c)(1)(B) but does not exceed 1.5 per cent of
 
18                such average;
 
19           (B)  2.2 per cent of so much of such expenses as
 
20                exceeds 1.5 per cent of such average but does not
 
21                exceed two per cent of such average; and
 
22           (C)  2.75 per cent of so much of such expenses as
 
23                exceeds two per cent of such average;
 

 
Page 11                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (2)  The term "qualified research" under paragraph (1) of
 
 2           the Internal Revenue Code shall not include research
 
 3           conducted outside of the State; and
 
 4      (3)  The term "basic research" under section 41(e) of the
 
 5           Internal Revenue Code shall not include research
 
 6           conducted outside of the State.
 
 7      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
 8 of the Internal Revenue Code shall be equal to the excess of:
 
 9      (1)  The amount of credit determined under section 41(a) (as
 
10           provided for in this section) (without regard to this
 
11           paragraph); over
 
12      (2)  The product of:
 
13           (A)  The amount described in section f(1); and
 
14           (B)  12.5 per cent of the maximum rate of tax under
 
15                section 11(b)(1) of the Internal Revenue Code.
 
16      (g)  If the tax credit for increased research activities
 
17 claimed by a taxpayer exceeds the amount of income tax payment
 
18 due from the taxpayer, the excess of the tax credit over payments
 
19 due may be used as a credit against the taxpayer's income tax
 
20 liability in subsequent years until exhausted.
 
21      (h)  All claims for a tax credit under this section must be
 
22 filed on or before the end of the twelfth month following the
 

 
 
 
Page 12                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 close of the taxable year for which the credit may be claimed.
 
 2 Failure to properly claim the credit shall constitute a waiver of
 
 3 the right to claim the credit.
 
 4      (i)  The director of taxation may adopt any rules under
 
 5 chapter 91 and forms necessary to carry out this section."
 
 6      SECTION 13.  Section 235-2.3, Hawaii Revised Statutes, is
 
 7 amended by amending subsection (b) to read as follows:
 
 8      "(b)  The following Internal Revenue Code subchapters, parts
 
 9 of subchapters, sections, subsections, and parts of subsections
 
10 shall not be operative for the purposes of this chapter, unless
 
11 otherwise provided:
 
12      (1)  Subchapter A (sections 1 to 59A) (with respect to
 
13           determination of tax liability), except section 1(h)(3)
 
14           (relating to net capital gain reduced by the amount
 
15           taken into account as investment income), except
 
16           section 41 (with respect to tax credit for increasing
 
17           research activities), section 42 (with respect to low-
 
18           income housing credit), and except sections 47 and 48,
 
19           as amended, as of December 31, 1984 (with respect to
 
20           certain depreciable tangible personal property).  For
 
21           treatment, see sections 235-   , 235-110.7, and
 
22           235-110.8;
 

 
 
 
Page 13                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
 
 
 
 
Page 14                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1     (10)  Section 196 (with respect to deduction for certain
 
 2           unused investment credits);
 
 3     (11)  Sections 241 to 247 (with respect to special deductions
 
 4           for corporations).  For treatment, see section
 
 5           235-7(c);
 
 6     (12)  Section 280C (with respect to certain expenses for
 
 7           which credits are allowable)[;], except section 280C(c)
 
 8           (with respect to certain expenses for which credit for
 
 9           increasing research activities is allowable).  For
 
10           treatment, see section 235-   ;
 
11     (13)  Section 291 (with respect to special rules relating to
 
12           corporate preference items);
 
13     (14)  Section 367 (with respect to foreign corporations);
 
14     (15)  Section 501(c)(12), (15), and (16) (with respect to
 
15           exempt organizations);
 
16     (16)  Section 515 (with respect to taxes of foreign countries
 
17           and possessions of the United States);
 
18     (17)  Subchapter G (sections 531 to 565) (with respect to
 
19           corporations used to avoid income tax on shareholders);
 
20     (18)  Subchapter H (sections 581 to 597) (with respect to
 
21           banking institutions), except section 584 (with respect
 
22           to common trust funds).  For treatment, see chapter
 
23           241;
 

 
Page 15                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1     (19)  Section 642(a) and (b) (with respect to special rules
 
 2           for credits and deductions applicable to trusts).  For
 
 3           treatment, see sections 235-54(b) and 235-55;
 
 4     (20)  Section 668 (with respect to interest charge on
 
 5           accumulation distributions from foreign trusts);
 
 6     (21)  Subchapter L (sections 801 to 848) (with respect to
 
 7           insurance companies).  For treatment, see sections
 
 8           431:7-202 and 431:7-204;
 
 9     (22)  Section 853 (with respect to foreign tax credit allowed
 
10           to shareholders).  For treatment, see section 235-55;
 
11     (23)  Subchapter N (sections 861 to 999) (with respect to tax
 
12           based on income from sources within or without the
 
13           United States), except sections 985 to 989 (with
 
14           respect to foreign currency transactions).  For
 
15           treatment, see sections 235-4, 235-5, [and] 235-7(b),
 
16           and 235-55;
 
17     (24)  Section 1042(g) (with respect to sales of stock in
 
18           agricultural refiners and processors to eligible farm
 
19           cooperatives);
 
20     (25)  Section 1055 (with respect to redeemable ground rents);
 
21     (26)  Section 1057 (with respect to election to treat
 
22           transfer to foreign trust, etc., as taxable exchange);
 

 
 
 
Page 16                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1     (27)  Sections 1291 to 1298 (with respect to treatment of
 
 2           passive foreign investment companies);
 
 3     (28)  Subchapter Q (sections 1311 to 1351) (with respect to
 
 4           readjustment of tax between years and special
 
 5           limitations); and
 
 6     (29)  Subchapter U (sections 1391 to 1397F) (with respect to
 
 7           designation and treatment of empowerment zones,
 
 8           enterprise communities, and rural development
 
 9           investment areas).  For treatment, see chapter 209E."
 
10                              PART VI
 
11      SECTION 14.  The purpose of this part is to provide a tax
 
12 incentive for investing in high technology businesses.
 
13      SECTION 15.  Chapter 235, Hawaii Revised Statutes, is
 
14 amended by adding to part VI a new section to be appropriately
 
15 designated and to read as follows:
 
16      "235-    High-technology business investment tax credit.
 
17 (a)  There shall be allowed to each taxpayer subject to the taxes
 
18 imposed by this chapter, a high technology investment tax credit
 
19 which shall be deductible from the taxpayer's net income tax
 
20 liability, if any, imposed by this chapter for the taxable year
 
21 in which the credit is properly claimed.  The tax credit shall be
 
22 an amount equal to ten per cent of the investment made by the
 

 
 
 
Page 17                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 taxpayer in each of the three consecutive tax years beginning on
 
 2 or after January 1 following the effective date of this section,
 
 3 in a qualified high technology business, up to a maximum allowed
 
 4 credit of $500,000 for the tax year for each investment made by
 
 5 the taxpayer.
 
 6      (b)  The credit allowed under this section shall be claimed
 
 7 against the net income tax liability for the taxable year.  For
 
 8 the purpose of this section, "net income tax liability" means net
 
 9 income tax liability reduced by all other credits allowed under
 
10 this chapter.
 
11      (c)  If the tax credit under this section exceeds the
 
12 taxpayer's income tax liability, the excess of the tax credit
 
13 over liability may be used as a credit against the taxpayer's
 
14 income tax liability in subsequent years until exhausted.  All
 
15 claims, including any amended claims, for tax credits under this
 
16 section shall be filed on or before the end of the twelfth month
 
17 following the close of the taxable year for which the credit may
 
18 be claimed.  Failure to comply with the foregoing provision shall
 
19 constitute a waiver of the right to claim the credit.
 
20      (d)  As used in this section:
 
21      "Investment" means a nonrefundable investment, at risk (as
 
22 that term is used in Internal Revenue Code section 465) in a
 

 
 
 
Page 18                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

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

 
 
 
Page 19                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                received from products sold from, manufactured, or
 
 2                produced in the State; or services performed in
 
 3                this State.
 
 4 The term "qualified high technology business" does not include:
 
 5      (1)  Any trade or business involving the performance of
 
 6           services in the field of law, engineering,
 
 7           architecture, accounting, actuarial science, performing
 
 8           arts, consulting, athletics, financial services, or
 
 9           brokerage services;
 
10      (2)  Any trade or business where the principal asset of the
 
11           trade or business is the reputation or skill of one or
 
12           more of its employees;
 
13      (3)  Any banking, insurance, financing, leasing, rental,
 
14           investing, or similar business;
 
15      (4)  Any farming business, including the business of raising
 
16           or harvesting trees;
 
17      (5)  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, 613, or 613A
 
20           of the Internal Revenue Code;
 
21      (6)  Any business operating a hotel, motel, restaurant, or
 
22           similar business; or
 

 
 
 
Page 20                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      (7)  Any trade or business involving a hospital, a private
 
 2           office of a licensed health care professional, a group
 
 3           practice of license health care professionals, or
 
 4           nursing home.
 
 5      (e)  For the purpose of this section "qualified research
 
 6 expenses" means:
 
 7      (1)  Research:
 
 8           (A)  With respect to which expenditures may be treated
 
 9                as expenses under Internal Revenue Code section
 
10                174;
 
11           (B)  Which is undertaken for the purpose of discovering
 
12                information:
 
13                (i)  Which is technological in nature; and
 
14               (ii)  The application of which is intended to be
 
15                     useful in the development of a new or
 
16                     improved business component of the taxpayer;
 
17                and
 
18           (C)  Substantially all of the activities of which
 
19                constitute elements of a process of
 
20                experimentation for a purpose described in
 
21                paragraph (3);
 

 
 
 
 
 
Page 21                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           Such term does not include any activity described in
 
 2           paragraph (4);
 
 3      (2)  Tests to be applied separately to each business
 
 4           component:
 
 5           (A)  Paragraph (1) shall be applied separately with
 
 6                respect to each business component of the
 
 7                taxpayer.  The term "business component" means any
 
 8                product, process, computer software, technique,
 
 9                formula, or invention which is to be:
 
10                (i)  Held for sale, lease, or license; or
 
11               (ii)  Used by the taxpayer in a trade or business
 
12                     of the taxpayer;
 
13                and
 
14           (B)  Special rule for production processes.  Any plant
 
15                process, machinery, or technique for commercial
 
16                production of a business component shall be
 
17                treated as a separate business component (and not
 
18                as part of the business component being produced);
 
19      (3)  Purposes for which research may qualify for credit. For
 
20           purposes of paragraph (1)(C):
 
21           (A)  Research shall be treated as conducted for a
 
22                purpose described in this paragraph if it relates
 
23                to:
 

 
Page 22                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                (i)  A new or improved function;
 
 2               (ii)  Performance; or
 
 3              (iii)  Reliability or quality;
 
 4                and
 
 5           (B)  Certain purposes not qualified.  Research shall in
 
 6                no event be treated as conducted for a purpose
 
 7                described in this paragraph if it relates to
 
 8                style, taste, cosmetic, or seasonal design
 
 9                factors;
 
10           and
 
11      (4)  Activities for which credit not allowed.  "Qualified
 
12           research expenses" shall not include the following:
 
13           (A)  Any research conducted after the beginning of
 
14                commercial production of the business component;
 
15           (B)  Any research related to the adaptation of an
 
16                existing business component to a particular
 
17                customer's requirement or need;
 
18           (C)  Any research related to the reproduction of an
 
19                existing business component (in whole or in part)
 
20                from a physical examination of the business
 
21                component itself or from plans, blueprints,
 
22                detailed specifications, or publicly available
 
23                information with respect to such business
 
24                component;
 

 
Page 23                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1           (D)  Any efficiency survey, activity relating to
 
 2                management function or technique, market research,
 
 3                testing, or development (including advertising or
 
 4                promotions), routine data collection, or routine
 
 5                or ordinary testing or inspection for quality
 
 6                control;
 
 7           (E)  Any research with respect to computer software
 
 8                which is developed by (or for the benefit of) the
 
 9                taxpayer primarily for internal use by the
 
10                taxpayer, other than for use in:
 
11                (i)  An activity which constitutes qualified
 
12                     research (determined with regard to this
 
13                     subparagraph); or
 
14               (ii)  A production process with respect to which
 
15                     the requirements of paragraph (1) are met;
 
16           (F)  Any research conducted outside the State;
 
17           (G)  Any research in the social sciences, arts, or
 
18                humanities; and
 
19           (H)  Any research to the extent funded by any grant,
 
20                contract, or otherwise by another person (or
 
21                governmental entity)."
 

 
 
 
 
 
Page 24                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1                             PART VII
 
 2      SECTION 16.  The legislature finds and declares that the
 
 3 high technology industry is a growing sector of the nation's
 
 4 economy and that the State is lacking in training and educational
 
 5 facilities which support the high technology industry.  The
 
 6 legislature further finds and declares that support for the
 
 7 development of such facilities will promote the economic growth
 
 8 of the State by making the State a more attractive location for
 
 9 the high technology industry and provide support for the State's
 
10 existing high technology industry, and that the high technology
 
11 industry, and the development of training and educational
 
12 facilities for the high technology industry constitutes an
 
13 industrial enterprise within the meaning of section 12, article
 
14 VII of the state constitution, and that it is in the public
 
15 interest to promote the development of a high technology industry
 
16 in the State by authorizing the issuance of special purpose
 
17 revenue bonds for the development of an industrial park which
 
18 will provide training and certification for professionals and
 
19 other individuals who will serve the high technology industry.
 
20      SECTION 17.  The department of budget and finance, with the
 
21 approval of the governor, is authorized to issue special purpose
 
22 revenue bonds in a total amount not to exceed $100,000,000 in one
 

 
 
 
Page 25                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1 or more series for the purpose of assisting Ohana Foundation
 
 2 and/or one or more of its not-for-profit affiliates in financing
 
 3 or refinancing costs related to the development of a high
 
 4 technology park in Kakaako.  The legislature finds and determines
 
 5 that the activities and facilities of Ohana Foundation and its
 
 6 affiliates constitutes an industrial enterprise as defined in
 
 7 part V, chapter 39A, Hawaii Revised Statutes, and that the
 
 8 financing thereof constitutes assistance to an industrial
 
 9 enterprise within the meaning of part V, chapter 39A, Hawaii
 
10 Revised Statutes, and section 12, article VII of the state
 
11 constitution.
 
12      SECTION 18.  The special purpose revenue bonds issued under
 
13 the part shall be issued pursuant to part V, chapter 39A, Hawaii
 
14 Revised Statutes.
 
15      SECTION 19.  The department of budget and finance is further
 
16 authorized to issue from time to time refunding special purpose
 
17 revenue bonds authorized in such principal amounts as the
 
18 department shall determine to be necessary to refund the special
 
19 purpose revenue bonds authorized in this part.  Such refunding
 
20 special purpose revenue bonds issued under this part shall be
 
21 issued pursuant to part V, chapter 39A, Hawaii Revised Statutes.
 

 
 
 
 
 
Page 26                                                    377
                                     H.B. NO.           H.D. 2
                                                        
                                                        

 
 1      SECTION 20.  The authorization to issue special purpose
 
 2 revenue bonds under this part shall lapse on June 30, 2003.
 
 3                             PART VIII
 
 4      SECTION 21.  Statutory material to be repealed is bracketed.
 
 5 New statutory material is underscored.
 
 6      SECTION 22.  This Act shall take effect upon its approval;
 
 7 provided that:
 
 8      (1)  Sections 7 and 10 shall take effect on July 1, 1999;
 
 9      (2)  Part II shall apply to taxable years beginning after
 
10           December 31, 1998;
 
11      (3)  Part V shall apply to taxable years beginning after
 
12           December 31, 1999; and
 
13      (4)  Part VI shall apply to taxable years beginning after
 
14           December 31, 1999 and before January 1, 2003.