Report Title:

Capital Investments

Description:

Proposes a 20% refundable tax credit for scientific research by qualified research and development companies. Clarifies the existing investment tax credit. Extends the technology infrastructure renovation tax credit. Proposes to establish a 20% business-research institute tax credit. Creates the Hawaii Private Investment Fund Program to increase the availability of equity and debt capital for the emerging, expanding, and restructuring enterprises. Appropriates $20 million from the Hawaii Strategic Development Corporation revolving fund for the operation of Program.

HOUSE OF REPRESENTATIVES

H.B. NO.

2396

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO CAPITAL INVESTMENTS.

 

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

SECTION 1. Hawaii has long strived for the diversification of our economic base. The legislature finds that the State's economic future depends increasingly on investment in emerging technology-based sectors. Such activities as scientific research and development, information technology, biotechnology, film production and digital media, dual use technology, ocean sciences, and others can help Hawaii compete effectively in the global markets of the future. Moreover, the development of such activity can provide new and well-paying jobs that will help give Hawaii's youth a bright future at home, rather than being forced to leave the State to find that future.

Act 221, Session Laws of Hawaii 2001, has helped to increase Hawaii's emerging technology industry. These legislative efforts have resulted in growing interest in Hawaii as a "New Economy" marketplace. Additionally, we must now look at setting Hawaii apart as a tech-friendly place to do business for both technology-intensive and less-technology-intensive businesses.

The legislature finds that the State needs to move beyond Act 221. Past efforts and investments have established a platform on which the State needs to sustain the development and growth of new technology-intensive businesses. The intention of this Act is to broaden the legislative tools to accomplish this. The legislature believes that it is also a priority to apply these tools to foster, support and lead the sustained growth of all businesses in the expanding and restructuring sectors of this State.

The general purposes of this Act are to: (i) encourage the discovery and commercialization of new innovations and products based on scientific and technical research conducted in Hawaii; (ii) support the establishment and sustained growth of new businesses in these emerging sectors of Hawaii's economy; (iii) create new, higher paying jobs in these emerging sectors; (iv) support existing small to medium sized businesses' access to financing; (v) encourage investment in Hawaii's emerging sectors by reasonably mitigating a portion of the risks; and (vi) facilitate interpretation and implementation hereof.

The legislature acknowledges that there is a critical shortage of seed, venture and other investment capital resources in the state and that shortage is impairing the growth of commerce in the State of Hawaii. The Hawaii strategic development corporation has laid the groundwork for the development of seed and early stage funding for Hawaii companies. Now Hawaii's high growth companies need the next stages of expansion capital, which is not currently available. The legislature finds that the innovative approach used successfully by Oklahoma and duplicated in other states can be used in Hawaii to provide the needed capital for continued diversification and expansion of Hawaii's economy.

It is also the purpose of this Act to create the Hawaii private investment fund program to increase the availability of equity and debt capital for the emerging, expanding, and restructuring enterprises in Hawaii. The legislature finds that this is necessary to keep Hawaii in the forefront of the global economy to nurture broader and more long-lasting investment in emerging economic activities to move them from their present fragility to strength and self-sufficiency.

The legislature further finds that in order to foster world-class research institutions in Hawaii and to promote partnerships between business and Hawaii post-secondary educational and research institutions, new funding for scientific research and development is critical to support such activity. The legislature notes that other jurisdictions have enacted tax credits for businesses, which provide tax incentives for expenditures made for qualified scientific research and experimental development.

Another purpose of this Act is to establish the Hawaii business research institute tax credit to promote the formation and funding of research partnerships between corporations and eligible research institutions, which will result in increased scientific research at our universities and the growth of new technology-based enterprises.

The legislature also finds that supporting research and development in start-up, emerging, or early-stage companies engaged in the effort to commercialize science- or technology-based innovations and products continues to be necessary in Hawaii. Act 221's refundable research and development tax credit represented a step forward in this regard. By defining a qualified research and development business, this Act clarifies and refines this incentive to target it to start-up, emerging, or early stage companies. This incentive is made available to support the development and commercialization of innovations and new products.

The legislature also finds that extending the one hundred per cent investment tax credit provided by Act 221 is important to provide investment and venture capital to start-up companies in the emerging sectors of Hawaii's economy. However, the purposes of this Act are to clarify: (i) the rules of construction of this Act to eliminate ambiguities and to adapt to new realities, this clarification is intended to reduce uncertainty on the party of the investment community while easing the administration of this Act by the department of taxation; (ii) that the investment incentive is intended to encourage investors to invest in these emerging sectors by mitigating a reasonable amount of risk; (iii) that any expenditure of tax credits by the State should be in support of investment transaction that have a business purpose or economic substance.

SECTION 2. Chapter 211F, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"PART . HAWAII PRIVATE INVESTMENT FUND PROGRAM

211F- Definitions. As used in this part:

"Board" means the board of directors of the corporation;

"Corporation" means the Hawaii strategic development corporation, a public body corporate and politic and an instrumentality and agency of the State, established by section 211F-2.

"Director" means any person who is a member of the board.

"Equity capital" means capital invested in common or preferred stock, royalty rights, limited partnership interests, and any other securities or rights that evidence ownership in a business entity.

"Investor group" means any individual, corporation, partnership, or other legal business entity.

"Put option" means a right or privilege to sell an amount of a particular security or class of securities during a time period ending on the expiration date of the option.

"State" means the State of Hawaii.

"Tax credits" means tax credits issued or transferred pursuant to this chapter and available against liabilities imposed by chapter 235 and chapter 241.  

"Taxpayer" means a person subject to a tax imposed by chapter 235 or chapter 241.

211F- Short Title. This part shall be known and may be cited as the "Hawaii Private Investment Fund Program."

211F- Findings and purpose. A critical shortage of seed and venture capital resources exists in the State and that shortage is impairing the growth of commerce in this State. A need exists to increase the availability of venture equity capital for emerging, expanding and restructuring enterprises in the State. Increased return-driven venture capital investments in emerging, expanding and restructuring enterprises in the State will create new jobs in the State, and will help to diversify the State's economic base. Accordingly, this part is enacted to:

(1) Mobilize equity and near equity capital for investment in a broad variety of venture capital partnerships in diversified industries;

(2) Retain the private sector culture of focusing on rate of return in the investing process;

(3) Secure the services of high quality managers in the venture capital industry;

(4) Enhance the venture capital culture and infrastructure in the State so as to increase venture capital investment within the State and to promote venture capital investing within the state; and

(5) Accomplish the foregoing purposes in a return-driven manner with the goal of minimizing or even eliminating any adverse impact on state tax revenues.

211F- Tax credits. (a) The State hereby issues to the corporation tax credits that may be transferred or otherwise used to reduce the tax liability of an investor group, firm, or corporation imposed pursuant to the provisions of chapter 235 or chapter 241. The total amount of tax credits that are hereby issued, or are transferred pursuant to this section to the corporation, is $50,000,000. The credits shall be freely transferable by the corporation to transferees, and by transferees to subsequent transferees; however, no such tax credit shall be exercisable before July 1, 2005, nor after June 30, 2030. The corporation shall not transfer tax credits except in the event of default on any indebtedness by the corporation requiring the purchase and transfer of tax credits to a taxpayer in order to cure the loan default. The corporation shall immediately notify the president of the senate, the speaker of the house of representatives, and the governor of the State in writing if any tax credit is transferred by the corporation pursuant to the Hawaii private investment fund program; provided that the corporation shall not be required to make such notification for transfers to subsequent transferees.

(b) The corporation shall determine the amount of individual tax credits to be transferred pursuant to this chapter and may negotiate for sale of such credits subject only to the limits imposed by this chapter. The corporation shall ensure that no more than $10,000,000 in tax credits has been transferred which may be claimed and used to reduce the tax otherwise imposed by chapter 235 or chapter 241 for any one fiscal year (including any tax credits that are carried over by a taxpayer from a prior fiscal year and used to reduce taxes otherwise imposed in the then current fiscal year, as permitted in subsection (e)). The board shall clearly indicate upon the face of the certificate or other document transferring the tax credit the principal amount of the tax credit and the taxable year or years for which the credit may be claimed.

The corporation may implement a process of competitive bidding that is designed to result in the sale of tax credits at competitive prices in the context and under the applicable circumstances. Any original sale of tax credits by the corporation shall be by competitive bidding unless the sale is for full face value.

The corporation may pay a fee in connection with the purchase by the corporation of an option or other agreement pursuant to which a transfer of tax credits authorized by this chapter may be made.

(c) The corporation shall, in conjunction with the department of taxation, develop a system for registration of any tax credits issued or transferred pursuant to this chapter and a system of certificates that permits verification that any tax credit claimed upon a tax return is validly issued, properly taken in the year of claim and that any transfers of the tax credit are made in accordance with the requirements of this chapter.

(d) The tax credits issued or transferred pursuant to this chapter, upon election by the taxpayer at utilization, will be treated as a payment or prepayment in lieu of tax imposed under chapter 235 or chapter 241. Tax credits utilized pursuant to this chapter shall be treated and may be claimed as a payment of tax or estimated tax for the purposes of chapter 235 or chapter 241.

(e) If the tax credits under this section exceed the taxpayer's income tax liability under chapter 235 and chapter 241 for any year or years, or for any other reason is not claimed by a taxpayer in whole or in part in any year or years, the excess of the tax credit over liability, or the amount of the unclaimed tax credit, as the case may be, may be carried over and used as a credit against the taxpayer's income tax liability in any subsequent year or years until exhausted.

211F- Investment of capital. (a) The corporation shall have the power to extend one or more guarantees in the form of a put option or such other methods as selected by the corporation. Without limiting the foregoing:

(1) The corporation may guarantee lines of credit and other indebtedness and equity investments on such terms as the board may approve from time to time, in order to generate funds to deploy in a manner consistent with this chapter;

(2) Guarantees of loans, lines of credit and other indebtedness may extend up to the principal amount plus interest over the term of the guarantee at a rate set by board resolution from time to time;

(3) Guarantees of equity capital may extend up to the amount of investment plus a rate or return set by board resolution from time to time.

(4) Guarantees in whatever form negotiated by the corporation may be made for any period of time, but no term shall expire prior to January 1, 2006. The corporation may charge a reasonable fee for costs and the fair compensation of risk associated with its guarantee; and

(5) The guarantees extended by the corporation shall in no way be an obligation of the State and may be restricted to specific funds or assets of the corporation; provided that proceeds from the sale of any tax credits may be used to satisfy the contractual guarantee obligations of the corporation. The corporation shall have the right to contract freely to protect the interests of the State.

(b) If the corporation purchases any security pursuant to an agreement with an investor group, the corporation shall acquire such securities and may invest, manage, transfer, or dispose of such securities in accordance with policies for management of assets adopted by the corporation.

(c) In carrying out the mission of the corporation as authorized in this chapter, neither the corporation nor its officers, directors, or employees shall be considered to be broker-dealers, agents, investment advisors, or investment adviser representatives under chapter 485. The tax credits issued or transferred pursuant to this chapter shall not be considered to be securities under chapter 485.

211F- Spending authority. Notwithstanding other provisions of law, the corporation or any entity designated by the corporation, shall have the authority to expend funds to administer and operate the programs of the corporation"

SECTION 3. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"235 Tax credit for business-research institutes. (a) There shall be allowed to each taxpayer who is a qualifying corporation, subject to the taxes imposed by this chapter, a nonrefundable business-research institute tax credit in the amount of twenty per cent of all qualified expenditures made during a taxable year in which the qualifying corporation is under contract with an eligible research institute, provided the qualifying corporation did not claim any tax credit for those expenditures claimed in this section. The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of the credit over liability may be carried forward until exhausted.

(b) If a corporation is a member of a partnership at the end of a fiscal period, and that partnership qualifies for the business-research institute tax credit under this section, then the corporation is deemed to be a qualifying corporation and can calculate the tax credit for the taxable year that may reasonably be considered to be the qualifying corporation's share of the qualified expenditures.

(c) The director of taxation shall prepare forms as may be necessary to claim a credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to section chapter 91.

Every qualified taxpayer, no later than March 31 of each year in which qualified costs were expended in the previous taxable year, shall submit a written, certified statement to the director of business, economic development, and tourism, identifying:

(1) Qualified costs, if any, expended in the previous taxable year; and

(2) The amount of tax credits claimed pursuant to this section, if any, in the previous taxable year.

(d) The department of business, economic development, and tourism shall:

(1) Maintain records of the names of the taxpayers claiming the credits in subsection (a);

(2) Obtain the amount of the qualifying costs or expenditures;

(3) Total all qualifying and cumulative costs or expenditures that the department of business, economic development, and tourism certifies; and

(4) Certify the amount of the tax credit for each taxable year and cumulative amount of the tax credit.

Upon each determination, the department of business, economic development, and tourism shall issue a certificate to the taxpayer verifying the qualifying costs or expenditure amounts, the credit amount certified for each taxable year, and the cumulative amount of the tax credit during the credit period. The taxpayer shall file the certificate with the taxpayer's tax return with the department of taxation. Notwithstanding the department of business, economic development, and tourism's certification authority under this section, the director of taxation may audit and adjust certification to conform to the facts.

(e) The total of all qualified expenditures made by a corporation under an eligible contract shall be reduced by any contribution that the corporation, any shareholder of the corporation, any partnership of which the corporation is a member, any partner in that partnership or any person not dealing at arm's length with the corporation or a shareholder of the corporation has received, is entitled to receive or can reasonably be expected to receive from the eligible research institute that entered into the eligible contract, a person who performs scientific research and experimental development that is to be carried out under the contract or a person who does not deal at arm's length with either eligible research institute or the person who performs scientific research and experimental development.

(f) Notwithstanding subsection (e), if under the terms of an eligible contract between an eligible research institute and a corporation or partnership, the eligible research institute directly funds part of the cost of performing the scientific research and experimental development that is to be carried out under the contract, the expenditures made by the institute in performing the scientific research and experimental development shall not be considered to be a contribution if:

(1) The financial obligations of the corporation or partnership under the contract are not reduced by the amount of any expenditures made by the eligible research institute;

(2) The expenditures made by the eligible research institute are not payments made to or at the direction of the corporation or partnership; and

(3) There is an agreement in writing between the eligible research institute and all other persons who are parties to the eligible contract that provides the terms and conditions under which the eligible research institute would be entitled to recover the amount of its expenditures.

(g) Subsection (e) does not apply in respect of the provision of goods and services in the ordinary course of a business carried on by the corporation or partnership if:

(1) In the case where the corporation or partnership, or another person who does not deal at arm's length with the corporation or partnership, acquires the goods or services, the price paid by the corporation, partnership or person for the goods or services is not less than their fair market value; and

(2) In the case where the corporation or partnership, or another person who does not deal at arm's length with the corporation or partnership, is providing the goods or services:

(A) The price for the goods or services is not greater than their fair market value, and

(B) The expenditures made to acquire the goods or services do not form part of the expenditures made by the eligible research institute for scientific research and experimental development under the eligible contract.

(h) An eligible research institute is deemed for the purposes of this section, to carry out scientific research and experimental development, if that scientific research and experimental development is carried out by a wholly-owned and controlled non-profit subsidiary of the eligible research institute, and if the scientific research and experimental development activities are required to be carried out under an eligible contract entered into by the eligible research institute.

(i) If an eligible research institute that has entered into an eligible contract with a corporation enters into a contract with another institute that is an eligible research institute or a specified person and under that second contract the other institute performs part of the scientific research and experimental development that is to be carried out under the eligible contract or the specified person carries out part of the work required to be carried out under the contract, the scientific research and experimental development carried out directly by the other institute or the work carried out by the specified person is deemed to be carried out directly by the eligible research institute under the eligible contract.

(j) As used in this section:

"Contribution" means in respect of an eligible contract, an amount that is subtracted from an eligible contract and is:

(1) A payment in money, a transfer of ownership of a property, an assignment of the use of property or of a right to use a property or any other benefit or advantage in any other form or manner, other than a property resulting from scientific research and experimental development undertaken under the eligible contract

(2) A former, present or future right in the proceeds of disposition of part of or all of the intellectual property arising from the scientific research and experimental development undertaken under the eligible contract;

(3) A reimbursement, compensation or guarantee; or

(4) A loan or loan guarantee.

"Corporation" means a legal business entity including but not limited to, corporations, limited liability companies, and partnerships.

"Corporation connected to an eligible research institute" means a corporation and eligible research institute at any time during the term of the eligible contract or during the twenty for months before the contract was entered into,

(1) The eligible research institute owned, directly or indirectly in any manner whatever, shares of the capital stock of the corporation that:

(A) Carry more than ten per cent of the voting rights attached to voting securities, within the meaning of the Securities Act, of the corporation, or

(B) Have a fair market value of more than ten per cent of the fair market value of all of the issued shares of the capital stock of the corporation;

(2) The eligible research institute and the corporation were members of the same partnership, except as limited partners in an investment partnership, or did not deal at arm's length;

(3) A partnership of which the eligible research institute is a member owned, directly or indirectly in any manner whatever, any of the shares of the corporation; or

(4) The corporation and the eligible research institute are connected under rules prescribed by the regulations.

"Eligible contract" means:

(1) A contract entered into by a qualifying corporation with an eligible research institute, if under the terms of the contract, the eligible research institute agrees to directly perform in Hawaii scientific research and experimental development related to a business carried on in Hawaii by the qualifying corporation; and

(2) The corporation or partnership is entitled to exploit the results of the research and development carried out under the agreement.

"Eligible research institute" means:

(1) A Hawaii university or Hawaii college of applied arts and technology;

(2) A nonprofit corporation for scientific research and experimental development; or

(3) A hospital research institute that:

(A) is a Hawaii hospital or;

(B) is a non-profit corporation for scientific research and experimental development that is affiliated with a Hawaii hospital with which it has entered into an agreement so that the teaching staff from the hospital and students in the health professions may actively participate in and receive educational benefits from the research activities.

"Employee connected to corporation" means an employee of the eligible research institute that at any time during the term of the eligible contract or during the twenty-four months before the corporation entered into the eligible contract and the employee or a person who does not deal at arm's length with the employee owned, directly or indirectly in any manner whatever, shares of the capital stock of the corporation that

(1) Carry more than ten per cent of the voting rights attached to voting securities, within the meaning of the Securities Act, of the corporation, or

(2) Have a fair market value of more than 10 per cent of the fair market value of all of the issued shares of the capital stock of the corporation;

"Qualifying corporation" means a corporation or partnership that:

(1) Conducts business in Hawaii in the taxable year through a permanent establishment in Hawaii;

(2) Is under contract with an eligible research institution during the taxable year in which the tax credit is claimed;

(3) Is not connected in the taxable year to the eligible research institute that entered into the eligible contract or to any other eligible research institute that carries out the scientific research and experimental development that is to be performed under the eligible contract; and

(4) Is not controlled directly or indirectly during the twenty-four month period prior to the eligible contract, by:

(A) A trust, if any of the capital or income beneficiaries of the trust in an eligible research institute referred to in subsection (b)(3), or

(B) A corporation carrying on a personal services business.

"Qualified expenditure" means:

(1) An expenditure made under an eligible contract;

(2) A payment of money made by the qualified corporation to the eligible research institute under the terms of the contract; and

(3) An expenditure incurred by the qualified corporation in respect of scientific research and experimental development carried on in Hawaii directly by the eligible research institute.

(k) This section shall apply to taxable years beginning after December 31, 2004, and shall not apply to taxable years after December 31, 2010. Credits authorized under the Hawaii business-research institute tax credit will be limited to a total of $2,000,000 million per taxable year. The maximum tax credit a corporation or an associated group of corporations can claim is $500,000.

In the event that total claims exceed $2,000,000 for any one calendar year, the department of business, economic development, and tourism will provide certification for credits on a pro rata basis for all claims submitted for that taxable year. Should a corporation not receive the full amount of credits for which it is eligible for a given taxable year, it may file a claim for the balance of credits in subsequent years, no later than 2012. The total credits claimed under this Act, shall not exceed $10,000,000."

SECTION 4. Section 235-110.9, Hawaii Revised Statutes, is amended to read as follows:

"235-110.9 High technology business investment tax credit.(a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter a high technology business investment tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the investment was made and the following four years provided the credit is properly claimed. The tax credit shall be as follows:

(1) In the year the investment was made, thirty-five per cent;

(2) In the first year following the year in which the investment was made, twenty-five per cent;

(3) In the second year following the investment, twenty per cent

(4) In the third year following the investment, ten per cent; and

(5) In the fourth year following the investment, ten per cent;

of the investment made by the taxpayer in each qualified high technology business, up to a maximum allowed credit in the year the investment was made, $700,000; in the first year following the year in which the investment was made, $500,000; in the second year following the year in which the investment was made, $400,000; in the third year following the year in which the investment was made, $200,000; and in the fourth year following the year in which the investment was made, $200,000.

(b) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. For the purpose of this section, "net income tax liability" means net income tax liability reduced by all other credits allowed under this chapter.

(c) If the tax credit under this section exceeds the taxpayer's income tax liability for any of the five years that the credit is taken, the excess of the tax credit over liability may be used as a credit against the taxpayer's income tax liability in subsequent years until exhausted. Every claim, including amended claims, for a tax credit under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) If at the close of any taxable year in the five-year period in subsection (a):

(1) The business no longer qualifies as a qualified high technology business;

(2) The business or an interest in the business has been sold by the taxpayer investing in the qualified high technology business; or

(3) The taxpayer has withdrawn the taxpayer's investment wholly or partially from the qualified high technology business;

the credit claimed under this section shall be recaptured. The recapture shall be equal to ten per cent of the amount of the total tax credit claimed under this section in the preceding two taxable years. The amount of the credit recapture shall apply only to the investment in the particular qualified high technology business that meets the requirements of paragraph (1), (2), or (3). The amount of the recaptured tax credit determined under this subsection shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs under this subsection.

(e) As used in this section:

"Qualified high technology business" means a business, employing or owning capital or property, or maintaining an office, in this State; providing that:

(1) More than fifty per cent of its total business activities are qualified research; and provided further that the business conducts more than seventy-five per cent of its qualified research in this State; or

(2) More than seventy-five per cent of its gross income is derived from qualified research; and provided further that this income is received from:

(A) Products sold from, manufactured in, or produced in this State; or

(B) Services performed in this State.

"Qualified research" means the same as defined in section 235-7.3.

(f) Common law principles, including the doctrine of economic substance and business purpose, apply to any investment. There exists a presumption that a transaction satisfies the doctrine of economic substance and business purpose to the extent that the special allocation of the high technology business tax credit has an investment tax credit ratio of 1.5 or less of credit for every dollar invested.

Transactions claiming an investment tax credit ratio greater than 1.5 but not more than to 2.0 of credit for every dollar invested may be reviewed by the department of taxation for applicable doctrines of economic substance and business purpose.

Transactions claiming an investment tax credit ratio greater than 2.0 of credit for every dollar invested shall be required to substantiate economic merit and business purpose consistent with this section.

[(f)] (g) This section shall [not] apply to investments made after June 30, 2004 and shall not apply to taxable years beginning after December 31, [2005.] 2010."

SECTION 5. Section 235-110.51, Hawaii Revised Statutes, is amended to read as follows:

"235110.51 Technology infrastructure renovation tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter, an income tax credit which shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is claimed.

(b) The amount of the credit shall be four per cent of the renovation costs incurred during the taxable year for each commercial building located in Hawaii.

(c) In the case of a partnership, S corporation, estate, trust, or any developer of a commercial building, the tax credit allowable is for renovation costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

(d) If the deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the renovation cost for which the deduction is taken.

(e) The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of the credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is property recognized under the method of accounting used to compute taxable income.

(f) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year.

(g) If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of credit over liability may be carried forward until exhausted.

(h) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2000, and shall not be available for taxable years beginning after December 31, [2005.]2010.

(i) As used in the section:

"Net income tax liability" means income tax liability reduced by all other credits allowed under this chapter.

"Renovation costs" means costs incurred after December 31, 2000, to plan, design, install, construct, and purchase technology-enabled infrastructure equipment to provide a commercial building with technology-enabled infrastructure.

"Technology-enabled infrastructure" means:

(1) High speed telecommunications systems that provide Internet access, direct satellite communications access, and videoconferencing facilities[;].

[(2) Physical security systems that identify and verify valid entry to secure spaces, detect invalid entry or entry attempts, an monitor activity in these spaces;

(3) Environmental systems to include heating, ventilation, air conditioning, fire detection and suppression, and other life safety systems; and

(4) Backup and emergency electric power systems.]

(j) No taxpayer that claims a credit under this section shall claim any other credit under this chapter.

(k) This section shall take effect on January 1, 2006, and shall not apply to taxable years beginning after December 31, 2010."

SECTION 6. Section 235-110.91 Hawaii Revised Statutes, is amended to read as follows:

"235110.91 Tax credit for research activities. (a) [Section 41 (with respect to the credit for increasing research activities) and section 280C(c) (with respect to certain expenses for which the credit for increasing research activities are allowable) of the Internal Revenue Code shall be operative for the purposes of this chapter as provided in this section; except that references to the base amount shall not apply and credit for all qualified research expenses may be taken without regard to the amount of expenses for previous years. If section 41 of the Internal Revenue Code is repealed or terminated prior to January 1, 2006, its provisions shall remain in effect for purposes of the income tax law of the State as modified by this section, as provided for in subsection (h).

(b) All references to Internal Revenue Code sections within sections 41 and 280C(c) of the Internal Revenue Code shall be operative for purposes of this section.

(c) There shall be allowed to each taxpayer, subject to the tax imposed by this chapter, an income tax credit for qualified research activities equal to the credit for research activities provided by section 41 of the Internal Revenue Code and as modified by this section. The credit shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(d) As used in this section:

"Basic research" under section 41(e) of the Internal Revenue Code shall not include research conducted outside of the State.

"Qualified research" under section 41(d)(1) of the Internal Revenue Code shall not include research conducted outside of the State.] There shall be allowed to qualified research and development companies a twenty per cent refundable tax credit for qualified research and development activity expenditures incurred in Hawaii. The credit shall be deductible from the taxpayer's net income liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(b) There is an annual maximum tax credit a corporation or an associated group or consolidated group of corporations can claim of $4,000,000.

[(e)] (c) If the tax credit for qualified research and development activities claimed by a taxpayer exceeds the amount of income tax payment due from the taxpayer, the excess of the tax credit over payments due shall be refunded to the taxpayer; provided that no refund on account of the tax credit allowed by this section shall be made for amounts less than $1.

[(f)] (d) All claims for a tax credit under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to properly claim the credit shall constitute a waiver of the right to claim the credit.

[(g)] (e) The director of taxation may adopt any rules under chapter 91 and forms necessary to carry out this section.

(h) This section shall apply to taxable years beginning after December 31, 2000, but not to taxable years beginning after December 31, 2005

(f) The director of taxation shall prepare any forms that may be necessary to claim a credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claims for credits made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91.

Every taxpayer, no later than March 31 of each year in which qualified research and development activity was expended in the previous taxable year, shall submit a written, certified statement to the director of business, economic development, and tourism, identifying;

(1) Qualified expenditures, if any, expended in the previous taxable year; and

(2) The amount of tax credits claimed pursuant to this section, if any, in the previous taxable year.

(g) The department of business, economic development, and tourism shall:

(1) Maintain records of the names of the taxpayers claiming the credits under this section and the total amount of the qualified research and development activity costs upon which the credit claims are based;

(2) Verify the nature and amount of the qualifying costs or expenditures;

(3) Total all qualifying and cumulative costs or expenditures that the department of business, economic development, and tourism certifies; and

(4) Certify the amount of the tax credit for each taxable year and cumulative amount of the tax credit.

Upon each determination, the department of business, economic development, and tourism shall issue a certificate to the taxpayer verifying the qualifying costs or expenditure amounts, the credit amount certified for each taxable year, and the cumulative amount of the tax credit during the credit period. The taxpayer shall file the certificate with the taxpayer's tax return with the department of taxation. Notwithstanding the department of business, economic development and tourism's certification authority under this section, the director of taxation has the power to audit and adjust certification to conform to the facts.

(h) As used in this section:

"Qualified research and development company" means a business, employing or owning capital or property, or maintaining an office, in this State; provided that:

(1) More than fifty per cent of its total business activities are qualified research and development activities; and provided further that the business conducts more than seventy-five per cent of its qualified research and development activities in this State; or

(2) More than seventy-five per cent of its gross income is derived from qualified research and development activities; and provided further that this income is received from products sold from, manufactured in, or produced in this State; or services performed in this State.

"Qualified Research and development activities" means the following activities:

(1) Pure (or basic) research: experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge for its own sake rather than directed towards any specific aim or application;

(2) Applied research: original or critical investigation undertaken in order to gain a new scientific or technical knowledge and directed towards a specific practical aim or objective;

(3) Development: use of scientific or technical knowledge in order to produce new or substantially improved materials, devices, products, or services, to install new processes or systems prior to the commencement of commercial production or commercial applications, or to improving substantially those already produced or installed;

(4) Commercial development, including pre-production development and product development.

Qualified research and development activities undertaken by a company must include an appreciable element of innovation. If the activity departs from routine and breaks new ground it should normally be included; if it follows an established pattern it should normally be excluded. Permitted activities include:

(1) Experimental, theoretical, or other work aimed at the discovery of new knowledge, or the advancement of existing knowledge;

(2) Searching for applications of that knowledge;

(3) Formulation and design of possible applications for such work;

(4) Testing in search for, or evaluation of, product, service, or process alternatives;

(5) Design, construction, and testing of pre-production prototypes and models and development batches;

(6) Design of products, processes, services, or systems involving new technology or substantially improving those already produced or installed;

(7) Construction and operation of prototypes and pilot plants.

Excluded activities include:

(1) Testing analysis either of equipment or product for the purposes of quality or quantity control;

(2) Periodic alterations to existing products, services or processes even though these may represent some improvement;

(3) Operational research not tied to specific research and development activity;

(4) Cost of corrective action in connection with break-downs during commercial production;

(5) Legal and administrative work in connection with patent applications, records, and litigation and the sale of licensing of patents;

(6) Activity, including design and construction engineering, relating to the construction, relocation, rearrangement, or start-up of facilities or equipment other than facilities or equipment whose sole use is for a particular research and development project;

(7) Market research."

(i) This section shall apply to expenditures made after June 30, 2004, and shall not apply to taxable years beginning after December 31, 2010."

SECTION 7. Act 178, Session Laws of Hawaii 2003, is amended by amending section 66 to read as follows:

"SECTION 66. This section shall take effect on July 1, 2003, provided that:

(1) Sections 1, 2, 3, 4, 5, and 6 shall take effect on

June 29, 2003;

(2) Sections 9, 10, 11, 12, 13, 14, 15, and 16 shall take effect on June 30, 2003: and

(3) [Sections] Section 7 [and 8] shall take effect on July 1, 2004; provided further that any remaining balances in the Hawaii capital loan revolving fund [and the Hawaii strategic development corporation revolving fund] shall lapse to the general fund."

SECTION 8. Act 178, Session Laws of Hawaii, 2003 is amended by repealing section 8.

["Section 8. Section 211F-5, Hawaii Revised Statutes, is repealed."]

SECTION 9. Act 221, Session Laws of Hawaii 2001, is amended by amending section 13 to read as follows:

"SECTION 13. It is the intention of the legislature that the amendments in this Act be [liberally] construed [.] in a manner consistent with the intent of the Act. The department of taxation is further given latitude to interpret these amendments in light of industry developments. The legislature does not intend by the amendments in this Act to opine on the interpretation taken by any taxpayer of the department of taxation on any issue arising under prior law."

SECTION 10. There is appropriated out of the Hawaii strategic development corporation revolving fund the sum of $20,000,000, or so much thereof as may be necessary for fiscal year 2004-2005, for the operating expenses of this fund, and to carry out the purposes of the Hawaii strategic development corporation as described in Chapter 211F, Hawaii Revised Statutes. The sum appropriated shall be expended by the Hawaii strategic development corporation.

SECTION 11. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 12. This Act shall take effect on July 1, 2004; provided that:

(1) Section 3 shall apply to taxable years beginning after December 31, 2004, and shall not apply to taxable years after December 31, 2010;

(2) Sections 4 and 6 shall not apply to taxable years beginning after December 31, 2010;

(3) Section 5 shall take effect on January 1, 2006, and shall not apply to taxable years beginning after December 31, 2010.

(4) Section 9 shall apply to taxable years beginning after December 31, 2003 and shall not apply to taxable years after December 31, 2010;

(5) Section 10 shall take effect on June 29, 2004;

INTRODUCED BY:

_____________________________

BY REQUEST