Report Title:

Capital Investment; Hawaii Private Investment Fund

Description:

Creates the Hawaii Private Investment Fund to increase the availability of equity and debt capital. Establishes a tax credit for Hawaii business-research institutes. Changes the refundable research activities tax credit to nonrefundable. Clarifies the existing investment tax credit. Extends the technology infrastructure renovation tax credit and the research activities tax credit to taxable years beginning before January 1, 2011. (HB2396 HD2)

 

HOUSE OF REPRESENTATIVES

H.B. NO.

2396

TWENTY-SECOND LEGISLATURE, 2004

H.D. 2

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. Purpose. The legislature finds that the high technology business in Hawaii is quickly growing and maturing into a promising and competitive industry. The high tech industry, however, is growing and demanding more than the State can provide. The industry has reached a point where its financing needs are not being met by the local market and are greater than the benefits provided under Act 221, Session Laws of Hawaii 2001. Thus, in order to continue growing and, more importantly, to stay rooted in Hawaii, new financing opportunities that meet the needs of the industry must be developed and implemented.

This Act provides the next level of financing needed by the high tech industry to continue its growth and to remain at home. The Hawaii private investment fund, established under this Act, will provide the financing tools necessary to meet the continued needs and objectives of the high tech industry.

This Act also improves and enhances other tax incentives developed for the high tech industry. Primary among these is Act 221, Session Laws of Hawaii 2001. Although Act 221 is no longer needed by the more successful high tech companies looking for the next level of financing, Act 221 is still an essential financing mechanism that continues to serve the newer, fledgling companies in the State.

However, Act 221, Session Laws of Hawaii 2001, is amended in this Act to clarify that Act 221, although liberally construed, should not apply to investments that:

(1) Lack economic substance or a business purpose;

(2) Involve little or no "new money" invested; or

(3) Are more business restructuring or reorganizations rather than a legitimate investment.

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

211f- Definitions. As used in this part:

"Board" or "fund board" means the board of directors of the fund.

"Fund" means the Hawaii private investment fund, a public body corporate and politic and an instrumentality and agency of the State.

"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, limited liability company interests, and any other securities or rights that evidence ownership in private business.

"Guarantee" means each guaranty or agreement issued by the fund as authorized by this part.

"Investor group" means any person that is engaged or considered for engagement by the fund as an investor group pursuant to the provisions of this part.

"Near-equity capital" means capital invested in unsecured, undersecured, subordinated, or convertible loans or debt securities.

"Person" or "taxpayer" means any individual, corporation, limited liability company, partnership, or other lawfully organized entity that is subject to the tax imposed by chapter 235 or 241.

"Put option" means a right or privilege to sell an amount of tax credits during a time period ending on the expiration date of the option.

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

211F- Short title. This part shall be known and may be cited as the "Hawaii private investment fund."

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. A need exists to increase the availability of venture equity capital for emerging, expanding, relocating, and restructuring enterprises in the State. An increase in return-driven, venture capital investments will help to diversify the State's economic base. Accordingly, the purpose of this part is 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 to increase venture capital investment and promote venture capital investing within the State; and

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

211F- Mission of the fund. The mission of the fund is to mobilize equity and near-equity capital for investment in such a manner that will result in a significant potential to diversify and stabilize the economy of the State. Notwithstanding this chapter or any other law to the contrary, the fund shall have the power and authority to carry out the purposes, mission, and provisions of this part.

211F- Fund board of directors; composition. (a) The governing body of the fund shall be a board of directors consisting of nine members. Three members shall be appointed directly by the governor, three members shall be appointed by the governor from a list of nominees submitted by the president of the senate, and three members shall be appointed by the governor from a list of nominees submitted by the speaker of the house of representatives for staggered terms. One member from each appointing source shall be a senior bank executive, one member shall have extensive knowledge and experience as a fund manager or venture capitalist, and the third member shall be from the general public. All appointed members of the fund board shall continue in office until their respective successors have been appointed.

(b) A chairperson of the fund board shall be elected by the board from its membership. The fund board shall elect other officers as it deems necessary.

(c) The members of the fund board shall serve without compensation, but may be reimbursed for expenses, including travel expenses, incurred in the performance of their duties.

(d) The fund board shall appoint a president of the fund who shall serve at the pleasure of the fund board and shall be exempt from chapter 76. The fund board shall set the salary and duties of the president.

(e) A fund board member shall not participate in any fund decision to invest in, purchase from, sell to, borrow from, loan to, contract with, or otherwise deal with any person with whom or entity in which the board member has a substantial financial interest.

(f) The fund board may delegate to its president, staff, or others, those functions and powers that the fund board deems necessary or appropriate, including but not limited to the oversight and supervision of employees of the fund.

(g) The fund and the fund board shall be a separate entity within the corporation that shall not be subject to the control of the board of directors of the corporation.

211F- Powers of the fund. (a) The fund shall have all of the powers necessary to carry out its duties, as provided by this part, including but not be limited to the following powers:

(1) Adopt rules pursuant to chapter 91 to carry out the purposes of this part;

(2) Adopt an official seal;

(3) Sue and be sued in its own name;

(4) Finance, conduct, or cooperate in financing or conducting technological, business, financial, or other investigations that are related to or likely to lead to business and economic development by making and entering into contracts and other appropriate arrangements;

(5) Solicit, study, and assist in the preparation of business plans and proposals;

(6) Coordinate the fund's programs with any education and training program;

(7) Prepare, publish, and distribute technical studies, reports, bulletins, and other materials as it deems appropriate;

(8) Organize, conduct, sponsor, or cooperate and assist in the conduct of conferences, demonstrations, and studies related to fulfilling the objectives and purposes of this part;

(9) Accept donations, grants, bequests, and devises of money, property, service, or other things of value that may be received from the United States or any agency thereof, any governmental agency, or any public or private institution, person, firm, or corporation, to be held, used, or applied for any or all of the purposes specified in this part. Receipt of each donation or grant shall be detailed in the annual report of the fund. The report shall include the identity of the donor or lender, the nature of the transaction, and any conditions attaching thereto;

(10) Invest any funds held in reserves or any funds not required for immediate disbursement, in such investments as may be lawful for fiduciaries in the State;

(11) Enter into agreements or other transactions with any federal, state, or county agency;

(12) Make contracts and execute all instruments necessary or convenient for the carrying on of its business;

(13) Appear in its own behalf before state, county, or federal agencies;

(14) Procure insurance as necessary; and

(15) Appoint officers, employees, consultants, agents, and advisors who shall not be subject to chapter 76, and prescribe their duties and fix their compensation within the limitations provided by law.

211F- Meetings of the fund board. (a) The meetings of the fund board shall be open to the public as provided in section 92-3; provided that when it is necessary for the fund board to receive information that is proprietary to a particular person, the disclosure of which might be harmful to the person's interests, the fund board may enter into an executive meeting that is closed to the public.

(b) The fund board shall be subject to the procedural requirements of section 92-4; provided that the authorization to hold closed meetings in accordance with subsection (a) shall be in addition to the exceptions listed in section 92-5, to enable the fund to respect the proprietary interests of persons with whom it has business dealings.

211F- Limitation on liability. Chapters 661 and 662 or any other law to the contrary notwithstanding, nothing in this part shall create an obligation, debt, claim, cause of action, claim for relief, charge, or any other liability of any kind whatsoever in favor of any person or entity, without regard to whether that person or entity receives any benefits under this part, against the State or its officers and employees. The State and its officers and employees shall not be liable for the results of action provided pursuant to this part. Nothing in this part shall be construed as authorizing any claim against the fund in excess of any indebtedness incurred by the fund or in excess of any insurance policy acquired for the fund or its employees.

211F- Business plan. The fund shall develop an annual business plan for the implementation of this part. The business plan shall be submitted to the fund board for its approval and shall be included in its annual report, which shall be published as provided in section 211F- .

211F- Tax credits. (a) The State hereby issues, to the fund, tax credits that may be transferred or otherwise utilized to reduce the tax liability of any person pursuant to the provisions of chapters 235 and 241. The total amount of tax credits that are issued, and which may be transferred pursuant to this part by the fund, is $       . The credits shall be freely transferable by the fund to transferees and by transferees to subsequent transferees; however, the tax credits transferred by the fund shall not be valid before July 1, 2005, nor after July 1, 2030. The fund shall not transfer tax credits except in conjunction with a legitimate call on a fund guarantee or agreement. The fund shall immediately notify the president of the senate, the speaker of the house of representatives, and the governor, in writing, if any tax credit is transferred by the fund in conjunction with a legitimate call on a fund guarantee or agreement; provided that the fund shall not be required to make the notification for transfers to subsequent transferees.

(b) The fund shall determine the amount of tax credits to be transferred pursuant to this part and may negotiate for the sale of tax credits subject only to the limits imposed by this part. The fund shall ensure that no more than $         in tax credits has been transferred that may be claimed and used to reduce the tax otherwise imposed by chapters 235 and 241 for 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 current fiscal year, as permitted in subsection (f)). The fund board shall clearly indicate on 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.

(c) The fund, in conjunction with the department of taxation, shall develop a system for registration of any tax credits issued or transferred pursuant to this part 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 part.

(d) The fund may pay a fee and provide other consideration in connection with the purchase by the fund of a put option or other agreement pursuant to which a transfer of tax credits authorized by this part may be made.

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

(f) If the tax credits under this part exceed the taxpayer's income tax liability under chapter 235 or 241 for any taxable year, or for any other reason is not claimed by a taxpayer in whole or in part in any taxable year, 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 until exhausted, subject to the deadline for the exercise of tax credits imposed in subsection (a).

211F- Investment of capital. (a) The fund shall have the power to solicit investment plans from investor groups for the investment of capital in accordance with the requirements of this part. The fund shall establish criteria for the selection of persons, firms, corporations, or other entities. The criteria shall include the applicant's level of experience, quality of management, investment philosophy and process, probability of success in fund-raising, plan for achieving the purposes of this part, and other investment criteria as may be used in professional portfolio management that the fund deems appropriate. If the fund decides to engage one or more investor groups to deploy or generate capital, it shall consider and select one or more investment plans and investor groups that the fund deems qualified to:

(1) Generate capital for investment with the most effective and efficient utilization of the guaranty;

(2) Invest the capital in private seed and venture capital entities in a manner mobilizing a wide variety of equity and near-equity investments in ventures promoting the economic development of the State; and

(3) Help build a significant, fiscally strong, and permanent resource to serve the objectives expressed in this part.

An investor group engaged by the fund shall have a manager who is experienced in design and implementation, as well as the management of seed and venture capital investment programs and in capital formation. The fund may remove and replace any investor group that has been engaged and may assign assets, liabilities, guarantees, and other contracts of this program to a new investor group, subject to the terms and conditions as may be set forth in the terms of engagement.

(b) The fund may extend one or more guarantees and secure the performance of the guarantees in the form of a put option as well as other arrangements selected by the fund, provided that:

(1) The fund may guarantee loans, lines of credit, and other indebtedness and equity investments and may arrange for, pledge, and assign put options as well as other agreements to purchase tax credits on such terms as the board may approve, in order to generate funds to deploy in a manner consistent with this part;

(2) The 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, a guarantee of a loan, lines of credit, or other indebtedness; and

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

Guarantees, in whatever form negotiated by the fund, may be made for any period of time, but no term shall expire prior to January 1, 2006. The fund may charge a reasonable fee for costs and the fair compensation of risks associated with its guarantee. The guarantees extended by the fund shall in no way be an obligation of the State and may be restricted to specific moneys or assets of the fund; provided that proceeds from the sale of any tax credits may be used to satisfy the contractual guarantee obligations of the fund. The fund shall have the right to contract freely to protect the interests of the State.

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

(d) The fund shall have the power to make any contract, execute any document, charge reasonable fees for services rendered, perform any act, or enter into any financial or other transaction necessary in order to carry out its mission. The fund may employ necessary staff as may be required for the proper implementation of this part, the management of its assets, or the performance of any function authorized or required by this part. Staff shall be selected by the fund based upon outstanding knowledge and leadership in the field for which the person performs services for the board.

(e) In carrying out the mission of the fund, as authorized in this part, neither the fund 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 part shall not be considered securities under chapter 485.

(f) Moneys raised or arranged by the fund pursuant to this part shall be invested in seed capital and venture capital investments, as those terms are defined in section 211F-1, that shall be governed, to the extent consistent with this part, by applicable provisions of this chapter.

211F- Report; evaluation by the fund board. (a) The fund shall publish a separate annual report and present the report to the governor and legislature. The annual report shall review the mission of the fund and programs implemented according to the objective measures set forth in the fund's business plan.

The report shall also include the following information with respect to persons receiving tax credits under this part:

(1) Type of business entity;

(2) Amount of the tax credit;

(3) Type of tax credit; and

(4) Nature of the project benefiting from the tax credit.

The report shall not contain any confidential or proprietary information that would place a person in legal or financial risk. The fund shall also distribute this annual report to the financial community.

(b) Seven years after the fund has begun operations under this part, the fund board shall review, analyze, and evaluate the extent to which the fund has achieved its statutory mission. The evaluation shall include, but not be limited to, an examination of quantified results of the fund's programs and plans.

211F- Audit; state auditor. The books and records of the fund shall be audited every five years by the state auditor.

211F- Spending authority. Notwithstanding any other law to the contrary, the fund or any entity designated by the fund shall have the authority to expend moneys to administer and operate the programs of the fund.

211F- Hawaii private investment revolving fund. There is established a private investment revolving fund to be administered by the fund board. The revolving fund shall be a continuing fund, not subject to fiscal year limitations, and shall consist of appropriated funds. All moneys accruing to the credit of the revolving fund are appropriated and, as authorized by the fund board, shall be expended by the fund board to perform the duties imposed upon the fund board by law and shall not be considered part of the general fund. The following shall be deposited into the Hawaii private investment revolving fund, all moneys:

(1) Appropriated by the legislature;

(2) Received as repayment of loans;

(3) Earned on instruments;

(4) Received pursuant to a venture agreement;

(5) Received as royalties;

(6) Received as premiums or fees charged by the fund; or

(7) Otherwise received by the fund.

211F- Construction. Nothing contained in this part is or shall be construed as a restriction or limitation upon any powers that the fund might otherwise have under any other law of the State heretofore or hereafter enacted, and the provisions of this part are cumulative to those powers. These provisions in this part do and shall be construed to provide a complete method for doing the things authorized and shall be regarded as supplemental and additional to powers conferred by any other laws.

211F- Adoption of rules, policies, procedures, and regulatory and administrative measures; enforceability of guarantees of fund unaffected. (a) The fund may adopt rules, policies, procedures, and regulatory and administrative measures necessary to administer the programs of the fund or convenient for the organizational and internal management of the fund's and the fund board's responsibilities.

(b) The level, timing, or degree of success of the fund in mobilizing or ensuring investment in Hawaii businesses or projects shall not compromise, diminish, invalidate, or affect the enforceability of any guarantee of the fund."

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 Hawaii 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         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 otherwise 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 of taxation 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; provided that the taxpayer shall not be required to disclose the taxpayer's confidential or proprietary information.

(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 the 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:

(1) The scientific research and experimental development is carried out by a wholly-owned and controlled nonprofit subsidiary of the eligible research institute; and

(2) 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 a corporation, limited liability company, and partnership.

"Corporation connected to an eligible research institute" means, with respect to a corporation and an eligible research institute during the term of the eligible contract or during the twenty-four months before the contract was entered into, that:

(1) The eligible research institute owned, directly or indirectly in any manner whatsoever, 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 chapter 485, 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 pursuant to chapter 485.

"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 Hawaii nonprofit corporation for scientific research and experimental development; or

(3) A hospital research institute that:

(A) Is a Hawaii hospital; or

(B) Is a nonprofit 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 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 chapter 485, of the corporation; or

(2) 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.

"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, in the taxable year, a corporation connected to an eligible research institute that entered into the eligible contract or connected 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 is an eligible research institute; 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 beginning after December 31, 2010. Credits authorized under the Hawaii business-research institute tax credit shall be limited to a total of $        per taxable year. The maximum tax credit a corporation or an associated group of corporations can claim is $       .

In the event that total claims exceed $          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. If a corporation does 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 $          ."

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 recaptured shall apply only to the investment in the particular qualified high technology business that meets the requirements of paragraph (1), (2), or (3). The recapture provisions of this subsection shall not apply to a tax credit claimed for a qualified high technology business that does not fall within the provisions 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; provided 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 all investments. 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 2.0 or less of credit for every dollar invested.

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

[[(f)]] (g) This section shall [not] apply to investments made after June 30, 2005 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:

"[[]235-110.51[]] 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 properly 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 a 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 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 properly 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.]

(i)] (h) As used in this 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] high speed telecommunications systems that provide [Internet] 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, and 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)] (i) No taxpayer that claims a credit under this section shall claim any other credit under this chapter.

(j) 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:

"235-110.91 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         per cent nonrefundable 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.

[(e)] (b) If the tax credit for qualified research 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.] may be carried forward until exhausted.

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

(e) The director of taxation shall prepare any forms that may be necessary to claim a credit under this section. The director of taxation may also require the taxpayer to furnish information to ascertain the validity of the claims for credits made under this section.

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.

(f) 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.

(g) As used in this section:

"Qualified research and development company" shall have the same meaning as "qualified high technology business" as that term is defined under section 235-110.9(e).

"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:

(A) Produce new or substantially improved materials, devices, products, or services;

(B) Install new processes or systems prior to the commencement of commercial production or commercial applications; or

(C) Improve substantially those already produced or installed; or

(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.

(1) Permitted activities include:

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

(B) Searching for applications of that knowledge;

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

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

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

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

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

(2) Excluded activities include:

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

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

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

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

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

(F) 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; or

(G) Market research.

[[](h)[]] This section shall apply to expenditures made after June 30, 2005, and shall not apply [taxable years beginning after December 31, 2000, but not] to taxable years beginning after December 31, [2005.] 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, 2005;

(2) Sections 9, 10, 11, 12, 13, 14, 15, and 16 shall take effect on June 30, 2005: and

(3) [Sections] Section 7 [and 8] shall take effect on July 1, 2005; 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[. The]; provided that the department of taxation is [further] given latitude to interpret these amendments [in light of industry developments.] to stimulate investment in Hawaii technology businesses and expand venture capital market financing. The legislature [does not intend by the amendments in] intends that this Act [to opine on the interpretation taken by any taxpayer of the department of taxation on any issue arising under prior law.] should not apply to investments that:

(1) Lack economic substance or a business purpose;

(2) Involve little or no "new money" invested; or

(3) Are more business restructuring or reorganizing rather than a legitimate investment."

SECTION 10. Beginning on July 1, 2005, and every July 1 thereafter, there is appropriated from the Hawaii strategic development corporation revolving fund and deposited into the Hawaii private investment revolving fund a sum equal to the net profits from investments made by the Hawaii strategic development corporation. The amount transferred shall be used for fiscal year 2005-2006 for the operating expenses of the Hawaii private investment revolving fund; provided that the funds appropriated or transferred shall not jeopardize any moneys that are pledged, receivable, or otherwise required by the Hawaii strategic development corporation to service current accounts of the corporation.

The amount transferred shall be reported in the Hawaii private investment fund's annual report under section 211F- .

The sum appropriated shall be expended by the Hawaii private investment fund's board of directors.

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, 2010; 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; and

(4) Section 9 shall apply to taxable years beginning after December 31, 2004, and shall not apply to taxable years after December 31, 2010.