Report Title:

State Private Investment Fund

Description:

Adopts new capital formation incentives; provide tax credits for qualifying research activities; technology infrastructure renovations; and high technology business investments; and appropriates funds from the Hawaii Strategic Development Corporation. (SD1)

THE SENATE

S.B. NO.

3024

TWENTY-SECOND LEGISLATURE, 2004

S.D. 1

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to capital formation.

 

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

SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"chapter   

State private investment fund

part i. general definitions

   -1 Definitions. As used in this chapter:

"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 pursuant to and governed by chapter 211F.

"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" shall mean each guaranty or agreement issued by the corporation as authorized by this chapter.

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

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

"Person" means any individual, corporation, limited liability company, partnership, or other lawfully organized entity.

"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.

"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 chapters 235 and 241.

   -2 Short title. This chapter shall be known and may be cited as the "State private investment fund."

   -3 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 the State. A need exists to increase the availability of venture equity capital for emerging, expanding, relocating, and restructuring enterprises in the State, and an increase in return-driven, venture capital investments in such enterprises in the State will help to diversify the State's economic base. Accordingly, this chapter 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 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.

   -4 Mission of the corporation. The mission of the corporation, pursuant to this chapter and in addition and supplemental to those set forth in chapter 211F, shall be 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 anything to the contrary in chapter 211F or otherwise, the corporation shall have the power and authority to carry out the purposes, mission, and provisions of this chapter.

PART II. IMPLEMENTATION

   -5 Business plan. In order to fulfill its mission as the mobilizer of equity and near-equity capital, the implementation of this chapter by the corporation shall be subject to the supervision of the board. The corporation shall develop an annual business plan for the implementation of this chapter. The business plan shall be submitted to the board for its approval and shall be included in its annual report, which shall be published as provided in section -8.

   -6 Tax credits. (a) The State hereby issues to the corporation tax credits that may be transferred or otherwise utilized to reduce the tax liability of any person pursuant to the provisions of chapter 235 and chapter 241. The total amount of tax credits that are hereby issued, and which may be transferred pursuant to this chapter by the corporation is $100,000,000. The credits shall be freely transferable by the corporation to transferees, and by transferees to subsequent transferees; however, the tax credits so transferred by the corporation shall not be exercisable before July 1, 2005, nor after July 1, 2030. The corporation shall not transfer tax credits except in conjunction with a legitimate call on a corporation guarantee or agreement. The corporation shall immediately notify the president of the senate of the State of Hawaii, the speaker of the house of representatives of the State of Hawaii, and the governor of the State of Hawaii in writing if any tax credit is transferred by the corporation in conjunction with a legitimate call on a corporation guarantee or agreement; provided, 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 the sale of such credits subject only to the limits imposed by this chapter. The corporation shall ensure that no more than $20,000,000 in tax credits has been transferred which may be claimed and used to reduce the tax otherwise imposed by chapter 235 and chapter 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 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 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 corporation may pay a fee and provide other consideration in connection with the purchase by the corporation of a put option or other agreement pursuant to which a transfer of tax credits authorized by this chapter may be made.

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

(f) If the tax credits under this section exceed the taxpayer's income tax liability under chapter 215 and chapter 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).

   -7 Investment of capital. (a) The corporation shall have the power to solicit investment plans from investor groups for the investment of capital in accordance with the requirements of this chapter. The corporation shall establish criteria for the selection of persons, firms, corporations, or other entities. Such 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 chapter, and such other investment criteria as may be used in professional portfolio management that the corporation deems appropriate. If the corporation 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 corporation 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 chapter.

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

(b) The corporation shall have the power to extend one or more guarantees and to secure the performance of such guarantees in the form of a put option as well as other arrangements selected by the corporation. Without limiting the foregoing:

(1) The corporation 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 from time to time in order to generate funds to deploy in a manner consistent with this chapter;

(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 from time to time, 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 from time to time.

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 risks associated with its guarantee. 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.

(c) 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 the management of assets adopted by the corporation.

(d) The corporation 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 corporation may employ such persons as may be required for the proper implementation of this chapter, the management of its assets, or the performance of any function authorized or required by this chapter necessary for the accomplishment of any such function. Such persons shall be selected by the corporation 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 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 securities under chapter 485.

(f) Funds raised or arranged by the corporation pursuant to this chapter shall be invested in seed capital and venture capital investments, as such terms are defined in chapter 211F, which shall, to the extent consistent with this chapter, be governed by applicable provisions of chapter 211F.

   -8 Annual reports - evaluation by the board. (a) The corporation shall publish a separate annual report in conjunction with its annual audit and present the report to the governor and legislature. The annual report shall review the mission of the board and programs implemented according to the objective measures set forth in the corporation's business plan. The corporation shall distribute this annual report by such means that will make it available to the financial community.

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

   -9 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.

   -10 Hawaii capital formation revolving fund. There is established a revolving fund for the corporation to be designated the Hawaii capital formation revolving fund. The fund shall be a continuing fund, not subject to fiscal year limitations, and shall consist of appropriated funds. All monies accruing to the credit of said fund are hereby appropriated and, as authorized by the corporation, shall be expended by the corporation to perform the duties imposed upon the corporation by law, and shall not be considered part of the general fund. The following moneys shall be deposited into the Hawaii capital formation revolving fund: all moneys appropriated by the legislature, received as repayment of loans, earned on instruments, received pursuant to a venture agreement, received as royalties, received as premiums or fees charged by the corporation, or otherwise received by the corporation.

   -11 Construction. Nothing contained herein is or shall be construed as a restriction or limitation upon any powers that the corporation 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. To the extent consistent with this chapter, in administering, implementing, and carrying out the mission of the corporation pursuant to this chapter, the corporation shall be governed by and have the powers and authorities set forth in chapter 211F. These provisions hereof do and shall be construed to provide a complete, additional, and alternative method for the doing of the things authorized and shall be regarded as supplemental and additional to powers conferred by any other laws.

   -12 Adoption of rules, policies, procedures and regulatory and administrative measures; enforceability of guarantees of corporation unaffected. (a) The corporation may adopt rules, policies, procedures, and regulatory and administrative measures necessary to administer the programs of the corporation or convenient for the organizational and internal management of the corporation's and board's responsibilities.

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

SECTION 2. There is appropriated out of the Hawaii strategic development corporation the sum of $20,000,000, or so much thereof as may be necessary for fiscal year 2004-2005, for carrying out the purposes of the state private investment fund. The sum appropriated shall be expended by the department of business, economic, development, and tourism for purposes of this Act.

SECTION 3. 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] ten 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.] 2007.

(i) 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 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, 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) 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, 2007."

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 shall 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 235-110.91, 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.

(e) 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)] (f) 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)] (g) 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)] (h) 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.]

For purposes of this section, taxpayer shall mean a "qualified high technology business" as defined in section 235-7.3.

(i) 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 qualified high technology business 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 qualified high technology business, before 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.

(j) 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 tax credit is 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 qualified high technology business 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 qualified high technology business 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 shall have the power to audit and adjust certification to conform to the facts."

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect on July 1, 2020; provided that:

(1) Section 3 shall take effect on January 1, 2006 amd shall not apply to taxable years beginning after December 31, 2007.

(2) Sections 4 and 5 shall not apply to taxable years beginning after December 31, 2010.