Report Title:

High Technology Tax Incentives

Description:

Adopts amendments to the high technology tax incentives program.

THE SENATE

S.B. NO.

3166

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

relating to high technology tax incentives.

 

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

SECTION 1. Through Act 178, Session Laws of Hawaii 1999, Act 297, Session Laws of Hawaii 2000, and Act 221, Session Laws of Hawaii 2001, the legislature provided a platform to encourage the continued growth and development of high technology businesses and associated industries in Hawaii. The purpose of Act 221 and the high technology business investment credit was to stimulate investments in Hawaii's high technology businesses and certain performing arts businesses as well as expand the venture capital market financing for such businesses. Act 221 has been a significant catalyst to the formation of numerous high technology businesses that have created jobs, and more importantly, planted the seeds for future economic diversification and development in the State.

The purpose of this Act is to clarify the intent of Act 297 and Act 221 by:

(1) Limiting the amount of the investment tax credit that a taxpayer may realize from an investment to only two times the total investment amount;

(2) Permitting the transfers of tax credits subject to certain limitations;

(3) Permitting and allowing the creation and transfer of tax credits from grants awarded to qualified high technology businesses;

(4) Requiring a taxpayer to make an investment in an unrelated person in order to be eligible for an investment tax credit;

(5) Restricting the use of escrow and other means of controlling the amount of funds expended by a qualified high technology business by a taxpayer seeking the investment tax credit;

(6) Prohibiting a taxpayer who requires a qualified high technology business to purchase goods or services from that taxpayer or other person as a condition of the investment from being eligible for an investment tax credit;

(7) Limiting the twenty per cent refundable tax credits to qualified high technology businesses, deleting the requirement that the department of taxation shall liberally construe this tax incentives program; and

(8) Extending the sunset for the investment and research credit, which is set to expire in 2005, for five more years.

SECTION 2. Section 235-1, Hawaii Revised Statutes, is amended by amending the definition of "investment" to read as follows:

""Investment" means a nonrefundable investment, at risk, as that term is used in section 465 (with respect to deductions limited to amount at risk) of the Internal Revenue Code, in a qualified high technology business, of cash that is transferred to the qualified high technology business, the transfer of which is in connection with a transaction in exchange for stock, interests in partnerships, joint ventures, or other entities, licenses (exclusive or nonexclusive), rights to use technology, marketing rights, warrants, options, or any items similar to those included in this definition, including but not limited to options or rights to acquire any of the items included in this definition. The nonrefundable investment is entirely at risk of loss where repayment depends upon the success of the qualified high technology business. If the money invested is to be repaid to the taxpayer, no repayment except for dividends or interest shall be made for at least one year from the date the investment is made. The annual amount of any dividend and interest payment to the taxpayer shall not exceed twelve per cent of the amount of the investment. The term "investment" shall not include any investment after July 1, 2004 if:

(i) The qualified high technology business is a related person of the taxpayer, or will be a related person, immediately following the investment;

(ii) The use of the proceeds of the investment are restricted by the taxpayer; or

(iii) The investment or use of proceeds is conditioned on the entry into or consummation of any other transaction by the qualified high technology business directly or indirectly with the taxpayer."

SECTION 3. Section 235-1, Hawaii Revised Statutes, is amended by adding three new definitions to be appropriately inserted and to read as follows:

""Control," with respect to a corporation, means ownership, directly or indirectly, of stock possessing eighty per cent or more of the total combined voting power of all classes of the stock of the corporation entitled to vote; and "control," with respect to a trust, means ownership, directly or indirectly, of eighty per cent or more of the beneficial interest in the principle or income of the trust. The ownership of stock in a corporation, of a capital or profits interest in a partnership or association or of a beneficial interest in a trust shall be determined in accordance with the rules for constructive ownership of stock provided in subsection (c) of section 267 of the Internal Revenue Code of 1986, as amended, excluding paragraph (3) of that subsection.

"Controlled group" means one or more chains of entities under common control. With respect to a corporation, "controlled group" means one or more chains of corporations connected through stock ownership with a common parent corporation if stock possessing at least eighty per cent of the voting power of all classes of stock if each of the corporations is owned directly or indirectly by one or more of the corporations and the common parent owns directly stock possessing at least eighty per cent of the voting power of all classes of stock of at least one of the other corporations.

"Related person" means:

(1) A corporation, partnership, association, trust, or other entity directly or indirectly controlled by the taxpayer;

(2) An individual, corporation, partnership, association, trust, or other entity that is in the direct or indirect control of the taxpayer;

(3) A corporation, partnership, association, trust, or other entity controlled by an individual, corporation, partnership, association, trust, or other entity in the control of the taxpayer; or

(4) A member of the same controlled group as the taxpayer."

SECTION 4. Section 235-2.45, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

"(e) Section 704 of the Internal Revenue Code (with respect to a partner's distributive share) shall be operative for purposes of this chapter; except that section 704(b)(2) shall not apply to:

(1) Allocations of the high technology business investment tax credit allowed by section 235-110.9[;] provided that after July 1, 2004, the amount of tax credits that may be allocated to a taxpayer shall be subject to section 235-110.9(g);

(2) Allocations of net operating loss pursuant to section 235-111.5; or

(3) Allocations of the attractions and educational facilities tax credit allowed by section 235-110.46."

SECTION 5. 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)[]] This section shall not apply to taxable years beginning after December 31, [2005.] 2010.

(g) A taxpayer shall not be entitled to claim or receive tax credits (including any allocation of tax credits directly or indirectly through a partnership, limited liability, or other manner) that is in excess of twice the amount of the investment by the taxpayer in a qualified high technology business for any taxable year. For purposes of this subsection, the term "taxpayer" includes a related person of a taxpayer, as defined in section 235-1. The amount of the tax credit shall include all present and future tax credits assuming no recapture under subsection (d) or otherwise. Any excess tax credits not claimed by a taxpayer may be transferred pursuant to subsection (d), but shall not be carried over by the taxpayer under subsection (c).

(h) Tax credits resulting from an investment in a qualified high technology business under this section are transferable by the person making the investment to any taxpayer, provided that:

(1) The transferee of the tax credit has made an investment in the qualified high technology business in the taxable year in which the tax credit is transferred;

(2) The tax credit is transferred in the same taxable year in which it was generated; and

(3) The amount of the tax credits that may be claimed is subject to the limitations of subsection (g).

(i) A qualified high technology business shall receive tax credits equal to the total amount of funds it receives during a taxable year from grants. The qualified high technology business may transfer tax credits it receives during a taxable year to any taxpayer who makes an investment in the qualified high technology business during the same taxable year, subject to the limitations of subsection (g). For purposes of this subsection, the term "grant" shall mean any grant received by a qualified high technology business from a federal, state, or other governmental authority or agency or from any other entity, a majority of which is applied to the cost of qualified research by or for the qualified high technology business (and as to which the qualified high technology retains substantial rights). These tax credits may be transferred by the qualified high technology business pursuant to subsection (h) but shall not be used by the qualified high technology business to reduce its tax liability. A tax credited generated under this subsection that is not transferred during the taxable year in which it is generated shall lapse."

SECTION 6. Section 235-110.91, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) There shall be allowed to each taxpayer that is a qualified high technology business, as defined in section 235-110.9(e), 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."

SECTION 7. Section 235-110.91, Hawaii Revised Statutes, is amended by amending subsection (h) to read as follows:

"(h) This section shall apply to taxable years beginning after December 31, 2000, but not to taxable years beginning after December 31, [2005.] 2010."

SECTION 8. Section 235-111.5, Hawaii Revised Statutes, is amended by amending subsection (d) to read as follows:

"(d) This section shall only apply to sales of net operating loss carryovers after December 31, 2000, [and before January 1, 2004.] but not for sales after December 31, 2010."

SECTION 9. Act 297, Session Laws of Hawaii 2000, is amended by amending section 10 to read as follows:

"SECTION 10. It is the intention of the legislature in making amendments in this Part to sections 235-7.3, 235-9.5, 235-110.9, and 235-110.91, Hawaii Revised Statutes, that the amendments [be liberally construed, and in this regard, the] in this Act encourage investments in high growth technology and performing arts businesses, which will ultimately lead to diversification of the economy and jobs created in the State. The department of taxation is given latitude to interpret those amendments [in light of current industry standards] consistent with those objectives. The amendments made in this Part to section 235-7.3, 235.9.5, 235-110.9, and 235-110.91, Hawaii Revised Statutes shall not be construed to disqualify any taxpayer who has received a favorable written determination from the department of taxation under the original provisions of those sections enacted by Act 178, Session Laws of Hawaii, 1999."

SECTION 10. 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.] encourage investments in high growth technology and performing arts businesses, which will lead to diversification of the economy and jobs created in the State. The department of taxation is [further] given latitude to interpret these amendments [in light of industry developments.] consistent with such objectives. The legislature does not intend by the amendments in this Act to opine on the interpretation taken by any taxpayer or the department of taxation on any issue arising under prior law."

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

SECTION 12. This Act shall take effect upon its approval; provided that section 7 shall apply to qualified research expenses incurred after June 30, 2002, and sections 2, 3, 4, and 6 shall apply to investments made in qualified high technology businesses after June 30, 2004.

INTRODUCED BY:

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