Report Title:

Motion Picture, Film, Digital Media, and Sound Recording Production; Labor Expenditure and Income Tax Credits

Description:

Renames the Hawaii television and film development board and its special fund the Hawaii digital media industry development board and special fund and includes another source of income for this fund. Increases the membership on the digital media industry development board. Increases the tax credit for performing arts products, sound recordings, and digital media products produced in the State; provided that certain expenditure levels and below-the-line hiring requirements are met. (SD2)

HOUSE OF REPRESENTATIVES

H.B. NO.

2611

TWENTY-SECOND LEGISLATURE, 2004

H.D. 2

STATE OF HAWAII

S.D. 2


 

A BILL FOR AN ACT

 

relating to the entertainment industry.

 

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

PART I.

SECTION 1. Chapter 201, Hawaii Revised Statutes, is amended by adding a new section to part IX to be appropriately designated and to read as follows:

"§201- Findings and purpose. The legislature finds that the film production, digital media, and sound recording industries generate significant economic activity worldwide. As a result, several countries have taken steps to attract film production through financial incentives, and programs to promote the recording industry have been created to garner a greater share of the music recording industry. Music sales alone, according to the Recording Industry Association of America, exceeded $32,000,000,000 in worldwide sales in 2002.

In an increasingly competitive international market, the legislature finds that:

(1) Hawaii faces considerable competition from countries, such as Canada, that offer direct financial and tax incentives, labor credits, and aggressive marketing campaigns promoting the support of an industry that generates $4,000,000,000 annually;

(2) Since 2001, similar competitive economic initiatives have been adopted by several states. Oklahoma, New Mexico, and more recently, Louisiana offer fifteen per cent tax credits or rebates and other attractive incentives that are generating a tremendous amount of interest from the industry;

(3) In 2002, post September 11 safety concerns boosted motion picture and television production revenues in Hawaii to over $147,000,000, which has since dropped to $83,000,000 for 2003. The department of business, economic development, and tourism attributed the drop to very aggressive competition with financial incentives from other locales; and

(4) The video game market has now surpassed theatre box office receipts of $12,500,000,000 in 2002, generating almost double that amount with $25,000,000,000 in revenues that same year. Related spin-offs, such as wireless phone games and downloadable games, are one of the fastest growing segments of the digital industry.

The legislature also recognizes that Hawaii has a uniquely talented performing arts community that produces rich, unique, and diverse music forms. While Hawaiian and world music continue to enjoy increased popularity throughout the United States and elsewhere, the legislature finds that Hawaii's performing artists and music industry are an underutilized asset. Hawaii's Mountain Apple Company recording executives have pointed to the fact that over thirty-five of the one hundred most popular international downloads from Apple's I-Tunes site in 2003 were by Hawaiian musical recording artists. To increase economic activity in the State, increase the visibility of Hawaii's talented musicians, and preserve and protect Hawaii's cultural treasures, the legislature finds that the Hawaii recording industry should be included in all tax incentive packages for the performing arts industry.

In addition, the legislature acknowledges the highly evolving nature of the production aspects of the entertainment industry. New technologies, the rapid growth of the digital media sector -- particularly the gaming and animation components -- and the portability of the components of that production all contribute to an industry in rapid transition.

The purpose of this part is to diversify Hawaii's economy by expanding the State's existing motion picture, television, and film production incentives to include digital media and sound recording, to keep pace with national and international competition."

SECTION 2. The title to part IX of Chapter 201, Hawaii Revised Statutes, is amended to read as follows:

"[[]PART IX.[]] [HAWAII TELEVISION AND FILM DEVELOPMENT] HAWAII DIGITAL MEDIA INDUSTRY DEVELOPMENT"

SECTION 3. Section 201-111, Hawaii Revised Statutes, is amended as follows:

1. By amending the definitions of "board" and "eligible Hawaii project" to read:

""Board" means the Hawaii [television and film] digital media industry development board.

"Eligible Hawaii project" or "project" means [an entertainment project in which at least seventy-five per cent of the budget for the production costs, excluding salaries and costs for the producer, director, writer, screenplay, and actors in the project, is dedicated for the purchase or lease of goods or services from a vendor or supplier who is located and doing business in the State.] a digital media production, which is also identified as a performing arts product, as defined in section 235-7.3."

2. By repealing the definition of "venture capital investment":

[""Venture capital investment" means any of the following investments in a project:

(1) Common or preferred stock and equity securities without a repurchase requirement for at least five years;

(2) A right to purchase stock or equity securities;

(3) Any debenture, whether or not convertible or having stock purchase rights, which is subordinated, together with security interests against the assets of the borrower, by their terms to all borrowings of the borrower from other institutional lenders, and that is for a term of not less than three years, and that has no part amortized during the first three years; and

(4) General or limited partnership interests."]

SECTION 4. Section 201-112, Hawaii Revised Statutes, is amended by amending its title and subsections (a) and (b) to read as follows:

"[[]§201-112[]] Hawaii [television and film] digital media industry development board. (a) There is established the Hawaii [television and film] digital media industry development board. The board shall be attached to the department of business, economic development, and tourism for administrative purposes only. The board shall administer the grant [and venture capital investment programs] program and the Hawaii [television and film] digital media industry development special fund established under this part. The board shall also assess and consider the overall viability and development of [the] television and film, computer and video game development, computer animation and graphics, and music production industries and make recommendations to appropriate state or county agencies.

(b) The board shall be composed of [nine] members, [four] eight of whom shall be appointed by the governor pursuant to section 26-34, and all of whom shall serve four-year staggered terms. [One] Two of the governor's appointments shall be made from a list of nominees submitted by the president of the senate and [another appointment] two appointments shall be made from a list of nominees submitted by the speaker of the house of representatives. The [four] eight appointed members shall possess a current working knowledge of [the] film, television, computer and video game development, computer animation and graphics, music production or entertainment [industry.] industries. The director of business, economic development, and tourism, and the chairs of the four county film commissions or its equivalent, shall serve as ex officio voting members, who may be represented on the board by designees.

The chairperson and vice chairperson of the board shall be selected by the board by majority vote. [Five] members shall constitute a quorum, whose affirmative vote shall be necessary for all actions by the board. The members shall serve without compensation but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties."

SECTION 5. Section 201-113, Hawaii Revised Statutes, is amended to read as follows:

"[[]§201-113[]] Hawaii [television and film] digital media industry development special fund. (a) There is established in the state treasury the Hawaii [television and film] digital media industry development special fund into which shall be deposited:

(1) Appropriations by the legislature;

(2) Donations and contributions made by private individuals or organizations for deposit into the fund;

(3) Grants provided by governmental agencies or any other source; and

(4) [Any profits or other amounts received from venture capital investments.] Moneys deposited to satisfy the requirements of section 235-110.9(e)(2)(C).

(b) The fund shall be used by the board to assist in, and provide incentives for, the production of eligible Hawaii projects that are in compliance with criteria and standards established by the board in accordance with rules adopted by the board pursuant to chapter 91. [In particular, the board shall adopt rules to provide for the implementation of the following programs:

(1) A grant program. The board shall adopt rules pursuant to chapter 91 to provide conditions and qualifications for grants.]

(c) The board shall establish a grant program and provide conditions and qualifications for the grants. Applications for grants shall be made to the board and shall contain such information as the board shall require by rules adopted pursuant to chapter 91. At a minimum, the applicant shall agree to the following conditions:

[(A)] (1) The grant shall be used exclusively for eligible Hawaii projects;

[(B)] (2) The applicant shall have applied for or received all applicable licenses and permits;

[(C)] (3) The applicant shall comply with applicable federal and state laws prohibiting discrimination against any person on the basis of race, color, national origin, religion, creed, sex, age, or physical handicap;

[(D)] (4) The applicant shall comply with other requirements as the board may prescribe;

[(E)] (5) All activities undertaken with funds received shall comply with all applicable federal, state, and county statutes and ordinances;

[(F)] (6) The applicant shall indemnify and save harmless the State of Hawaii and its officers, agents, and employees from and against any and all claims arising out of or resulting from activities carried out or projects undertaken with funds provided hereunder, and procure sufficient insurance to provide this indemnification if requested to do so by the department;

[(G)] (7) The applicant shall make available to the board all records the applicant may have relating to the project, to allow the board to monitor the applicant's compliance with the purpose of this chapter; and

[(H)] (8) The applicant, to the satisfaction of the board, shall establish that sufficient funds are available for the completion of the project for the purpose for which the grant is awarded[; and

(2) A venture capital program. The board shall adopt rules pursuant to chapter 91 to provide conditions and qualifications for venture capital investments in eligible Hawaii projects. The program may include a written agreement between the borrower and the board, as the representative of the State, that as consideration for the venture capital investment made under this part, the borrower shall share any royalties, licenses, titles, rights, or any other monetary benefits that may accrue to the borrower pursuant to terms and conditions established by the board by rule pursuant to chapter 91. Venture capital investments may be made on such terms and conditions as the board shall determine to be reasonable, appropriate, and consistent with the purposes and objectives of this part]."

PART II.

SECTION 6. Section 235-17, Hawaii Revised Statutes, is amended to read as follows:

"§235-17 [Motion picture and film production;] Performing arts productions; income tax credit. (a) There shall be allowed to each qualified 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. The amount of the credit shall be [up to four] fifteen per cent of the qualifying performing arts production costs incurred in [the State] any county of the State with a population over seven hundred thousand in the production of [motion picture or television films. The director of taxation shall specify by rule a schedule of allowable tax credits based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.] performing arts products; or twenty per cent of the qualified performing arts production costs incurred in any county of the State with a population of seven hundred thousand or less in the production of performing arts products; provided that:

(1) If the performing arts product is a motion picture or television production, at least seventy-five per cent of the below-the-line hires shall be Hawaii residents. If the performing arts product is a commercial or digital media production, at least fifty per cent of the below-the-line hires shall be Hawaii residents. If the performing arts product is a sound recording production, at least fifty per cent of all personnel hired to work on the sound recording shall be Hawaii residents. An exemption based on the shortage of labor availability may be issued from the department of business, economic development, and tourism, in consultation with the related industry organizations;

(2) Any wages attributable to the minimum cost thresholds shall have Hawaii income tax withheld; provided that the wage and tax information is subject to verification by the department of business, economic development, and tourism;

(3) Any performing arts products with acknowledgments and other credits shall acknowledge the support of the State in a manner determined through negotiations between the production and the department of business, economic development, and tourism, including, but not limited to, a single on-screen credit and acknowledgment in a printed program; and

(4) No taxpayer that has received financing by virtue of investments covered in section 235-110.9 shall be eligible for credits under this section.

(b) In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for production 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 by rule.

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code of 1986, as amended, no tax credit shall be allowed for those costs for which the deduction is taken.

The basis for eligible property for depreciation of accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed.

[(b) 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. The amount of the credit shall be up to 7.25 per cent effective January 1, 1999, of the costs incurred in the State in the production of motion picture or television films for actual expenditures for transient accommodations. The director of taxation shall specify by rule a schedule of allowable tax credits based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.

In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for production 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.]

(c) 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.

(d) If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of credits over liability shall be refunded to the taxpayer; provided that no refunds or payment on account of the tax credits allowed by this section shall be made for amounts less than $1. All claims, including any amended claims, for tax credits 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.

(e) 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 chapter 91.

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

(1) All qualified performing arts production costs, if any, incurred in the previous taxable year; and

(2) The amount of tax credit 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;

(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 the 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.

Any other law to the contrary notwithstanding, any certificate issued under this subsection shall be a public document.

(h) The aggregate amount of certified credits for all taxpayers for each taxable year shall not exceed $ per year. The aggregate amount of tax credits claimed pursuant to this section by all taxpayers for all taxable years shall not exceed $ .

(i) For purposes of this section:

"Below-the-line hires" means cast and crew including production, art construction, set dressing, props, camera, sound, stage and studio, electrical, grip, wardrobe, makeup, special effects, laboratory and film, food transportation, locations, editorial, and other hires based on industry standard practice.

"Commercials" means advertising messages that are created by traditional or new media, including, but not limited to film, tape, or digital means. A commercial is also a series of advertising messages; provided that all parts are produced at the same time and comply with the minimum production costs to qualify a taxpayer as a qualified taxpayer under this section.

"Performing arts products" means:

(1) Audio files, video files, audiovideo files, computer animation, and other entertainment products perceived by or through the operation of a computer;

(2) Commercial television and film products for sale or license, and reuse or residual fee payments from these products;

(3) Commercials; and

(4) Sound recordings.

"Post production" means services for film, video, or digital media that includes, but is not limited to, editing, film and video transfers, duplication, transcoding, dubbing, subtitling, credits, close captioning, audio production, special effects (visual and sound), graphics, or animation.

"Production" means activities directly related to the creation of imagery and content to be delivered via film, videotape, audio tape, digital media, print media, and other delivery systems including scripting, casting, set design, and construction, shooting, sound recording, editing, and other activities based on industry standard practices.

"Qualified performing arts production costs" means the costs incurred by a qualified taxpayer in the production of performing arts products within a county of the State in the taxable year for which the credit is being claimed.

"Qualified taxpayer" means a taxpayer that has incurred qualified performing arts production costs; provided that if the production for which the costs were incurred is:

(1) A motion picture or television production, the taxpayer shall have incurred at least $200,000 in qualified performing arts production costs; provided that productions that are produced and staffed with one hundred per cent Hawaii residents shall have incurred at least $100,000 in qualified performing arts production costs;

(2) A commercial or digital media production, the taxpayer shall have incurred at least $100,000 in qualified performing arts production costs; provided that productions that are produced and staffed with one hundred per cent Hawaii residents shall have incurred at least $50,000 in qualified performing arts production costs; or

(3) A sound recording production, the taxpayer shall have incurred at least $20,000 in qualified performing arts production costs; provided that productions that are produced and staffed with one hundred per cent Hawaii residents shall have incurred at least $10,000 in qualified performing arts production costs.

"Sound recording" means a commercially and technically satisfactory master recording that results from the fixation of a series of musical, spoken, or other sounds, but not including the sounds accompanying a motion picture or other audio visual work, regardless of the nature of the material objects, such as disks, tapes, or other phonorecords, in which they are embodied."

SECTION 7. 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) To qualify for the investment tax credit, a business producing performing arts products, as defined in section 235-7.3, shall meet the following criteria:

(1) Any performing arts products shall acknowledge the support of the State in a manner determined through negotiations between the production and the department of business, economic development, and tourism, including, but not limited to, a single line on-screen credit or acknowledgment in a printed program; and

(2) The business shall create two full-time Hawaii-based jobs for at least one year that pay a salary commensurate to film industry standards, or sound recording industry standards in the case of a sound recording production, for every $1,000,000 in tax credit issued; provided that, if the production is unable to meet this job requirement, the business shall meet one of the following requirements:

(A) At least twenty-five per cent of the performing arts product's post production shall be conducted in the State as measured by the total post production budget;

(B) At least twenty-five per cent of the performing arts product's digital effects shall be conducted in the State as measured by the project's total digital effects budget; or

(C) An amount equal to per cent of the project's total budget shall be deposited in the Hawaii digital media industry development special fund established under section 201-113.

[(e)] (f) 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)]] (g) This section shall not apply to taxable years beginning after December 31, [2005.] 2010."

SECTION 8. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 9. This Act shall take effect on July 1, 2050; provided that:

(1) Section 6 of this Act shall apply to qualified performing arts production costs incurred in taxable years beginning after December 31, 2004, and before January 1, 2011;

(2) The amendments made by to section 235-110.9, Hawaii Revised Statutes, by section 7 of this Act shall apply to investments made in taxable years beginning after December 31, 2004, and before January 1, 2011; and

(3) The amendments made to section 235-17, Hawaii Revised Statutes, by section 6 of this Act and to section 235-110.9, Hawaii Revised Statutes, by section 7 of this Act shall be repealed on January 1, 2011, and sections 235-17 and 235-110.9, Hawaii Revised Statutes, shall be reenacted in the form in which they read on the day before the effective date of this Act.