REPORT TITLE:
Information-based industries


DESCRIPTION:
Requires tourism market plans to target information industries
and be integrated with existing and potential communications and
information networks and services.  Provides tax incentives for a
technology-related job creation tax credit, for making increased
expenditures in certain technological and scientific research and
development, and investing in high technology businesses.
Establishes the Hawaii internet exchange.  Provides for high
speed access to the internet for the University of Hawaii and the
public schools.  Accelerates work force development programs to
create a pool of information technology professionals.  (HB377
HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        377
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO ECONOMIC DEVELOPMENT.



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

 1                              PART I
 
 2      SECTION 1.  The legislature finds that advances in
 
 3 telecommunications, information technology, and the explosive
 
 4 growth of the global internet have created a significant
 
 5 opportunity for the State to expand and diversify its economy
 
 6 through the development of an information industry designed to
 
 7 promote the exchange of electronic information.
 
 8      It has been predicted that within seven years, one half of
 
 9 business and consumer purchases will be made by computer, and
 
10 those conducting business, pursuing education, and finding
 
11 entertainment will all require access to internet connections.
 
12 Hawaii is in a position to take advantage of this growing market.
 
13 The State already possesses an impressive fiber optic and
 
14 satellite communication infrastructure for electronic information
 
15 transmission that connects Hawaii with the U.S. mainland and
 
16 Japan, and which may allow for reduced costs due to increased
 
17 transmission capacity.  In addition, Hawaii's mid-Pacific
 
18 physical location has been transformed by the new information and
 
19 communications technologies from a liability into an asset.
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 Hawaii's location between time zones gives the State an "edge" in
 
 2 U.S.-Asia/Pacific transactions.  This, combined with Hawaii's
 
 3 multilingual work force, gives the State the real potential to
 
 4 become a call center for U.S. companies expanding into Asia.
 
 5 Finally, Hawaii possesses unique and internationally-recognized
 
 6 information resources in areas such as astronomy, biotechnology,
 
 7 volcanology, seismology, and oceanography, as well as in the
 
 8 State's own native Hawaiian history and culture.
 
 9      The legislature finds that although Hawaii has substantial
 
10 potential as an information and telecommunications center, active
 
11 government involvement is needed if that potential is to be fully
 
12 realized.  Hawaii must build a work force educated and trained in
 
13 the area of information technology, that is sufficient for the
 
14 needs of, and to attract, new information and communications
 
15 technology businesses.  The State must also nurture a business
 
16 climate that is attractive to these businesses.  In addition,
 
17 Hawaii must more closely link itself to the communications web by
 
18 establishing a presence on the internet, upgrading the access of
 
19 University of Hawaii students and researchers to the internet,
 
20 and integrating and developing the objectives and marketing
 
21 strategies of its tourist industry in concert with the area of
 
22 telecommunications and information.
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      In addition, to take advantage of the technological growth
 
 2 opportunities, the State must pursue various economic incentives
 
 3 to diversify the economy and stimulate business activity,
 
 4 particularly in the technological sector.
 
 5      The purpose of this Act is to spur economic development and
 
 6 foster the growth of knowledge-based industries in Hawaii by:
 
 7      (1)  Requiring tourism market plans to target information
 
 8           industries and be integrated with existing and
 
 9           potential communications and information networks and
 
10           services;
 
11      (2)  Offering a tax incentive through a technology-related
 
12           job creation tax credit to offset the cost of
 
13           technology-related job creation costs;
 
14      (3)  Establishing the Hawaii internet exchange to serve as a
 
15           catalyst for the development of internet-focused
 
16           businesses;
 
17      (4)  Providing for high speed access to the internet for the
 
18           University of Hawaii and the public schools;
 
19      (5)  Accelerating work force development programs to create
 
20           a pool of information technology professionals;
 
21      (6)  Providing a tax incentive for making increased
 
22           expenditures in certain technological and scientific
 
23           research and development; and
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (7)  Providing a tax incentive for investing in high
 
 2           technology businesses.
 
 3                              PART II
 
 4      SECTION 2.  The purpose of this part is to foster the
 
 5 development of knowledge-based industries by integrating those
 
 6 industries with Hawaii's economy in a way that enhances and
 
 7 strengthens the tourism industry.
 
 8      SECTION 3.  Section 201-97, Hawaii Revised Statutes, is
 
 9 amended to read as follows:
 
10      "§201-97  Integration and development of the tourism
 
11 industry.  The office shall be responsible for planning for the
 
12 integrated and coordinated development and expansion of the
 
13 tourism industry of the State.  The office shall investigate and
 
14 recommend to appropriate governmental officers, agencies,
 
15 legislative committees, and private groups ways and means of
 
16 coordinating promotional activities on behalf of tourism with the
 
17 development of recreational and other facilities, and with
 
18 existing and potential information and communications technology
 
19 networks and services in the State, for improved tourism
 
20 development.  The office shall also review the expenditure of
 
21 governmental funds for tourism-related activities and shall
 
22 prepare an annual report on the expenditures, together with any
 
23 recommendations the office may have.  The annual report shall be
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 submitted to the legislature as part of the annual report
 
 2 required under section 201-98."
 
 3      SECTION 4.  Section 201B-6, Hawaii Revised Statutes, is
 
 4 amended by amending subsection (a) to read as follows:
 
 5      "(a)  The authority shall be responsible for developing a
 
 6 strategic tourism marketing plan, which shall be updated every
 
 7 three years[, that] and includes the following:
 
 8      (1)  Identification and evaluation of current and future
 
 9           tourism needs for the different regions of the State;
 
10      (2)  Goals and objectives in accordance with identified
 
11           needs;
 
12      (3)  Statewide promotional efforts and programs;
 
13      (4)  Targeted markets;
 
14      (5)  Efforts to enter into brand marketing projects that
 
15           make effective use of cooperative advertising programs;
 
16      (6)  Measures of effectiveness for the authority's
 
17           promotional programs; and
 
18      (7)  Coordination of marketing plans of all destination
 
19           marketing organizations receiving state funding prior
 
20           to finalization of the authority's marketing plan.
 
21      The authority shall develop and include in its marketing
 
22 plan goals and objectives for marketing the State to the
 
23 techno-tourism niche as well as for integrating marketing
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 objectives with existing and potential state telecommunications
 
 2 and information resources in the public and private sectors."
 
 3                             PART III
 
 4      SECTION 5.  The purpose of this part is to accelerate job
 
 5 creation through targeted assistance to technology start-ups.
 
 6      SECTION 6.  Chapter 235, Hawaii Revised Statutes, is amended
 
 7 by adding a new section to be appropriately designated and to
 
 8 read as follows:
 
 9      "§235-     Tax credit for technology-related job creation.
 
10 (a)  Each taxpayer in this State may claim a tax credit for
 
11 technology-related job creation under this section.  The credit
 
12 shall be for the cost of creating technology-related jobs.  The
 
13 credit shall be equal to the cost of creating those jobs but
 
14 shall not exceed $        .  The credit may be claimed against
 
15 the taxpayer's income tax liability for the taxable year.
 
16      (b)  The tax credits claimed by a resident taxpayer pursuant
 
17 to this section shall be deductible from the resident taxpayer's
 
18 individual income tax liability, if any, for the tax year in
 
19 which they are properly claimed.  If the tax credits claimed by a
 
20 resident taxpayer exceed the amount of income tax payment due
 
21 from the resident taxpayer, the excess of credits over payments
 
22 due shall be refunded to the resident taxpayer; provided that tax
 
23 credits properly claimed by a resident individual who has no
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 income tax liability shall be paid to the resident individual;
 
 2 and provided further that no refunds or payment on account of the
 
 3 credits allowed by this section shall be made for amounts less
 
 4 than $1.
 
 5      (c)  All claims for tax credits under this section,
 
 6 including any amended claims, must be filed on or before the end
 
 7 of the twelfth month following the close of the taxable year for
 
 8 which the credits may be claimed.  Failure to comply with the
 
 9 foregoing provision shall constitute a waiver of the right to
 
10 claim the credit.
 
11      (d)  As used in this section "technology-related" means
 
12 emerging industries that are technology-intensive, including but
 
13 not limited to electronics, biotechnology, or computer systems."
 
14                              PART IV
 
15      SECTION 7.  The purpose of this part is to establish an
 
16 internet exchange that will allow Hawaii's businesses to
 
17 establish a global presence.
 
18      SECTION 8.  Chapter 304, Hawaii Revised Statutes, is amended
 
19 by adding a new section to part II, subpart L, to be
 
20 appropriately designated and to read as follows:
 
21      "§304-      Hawaii internet exchange; established.  There is
 
22 established within the office of technology transfer and economic
 
23 development, an internet exchange that shall be known as the
 
24 Hawaii internet exchange.  The Hawaii internet exchange shall
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 serve as a switching and peering point for internet service
 
 2 providers."
 
 3      SECTION 9.  Section 226-103, Hawaii Revised Statutes, is
 
 4 amended by amending subsection (g) to read as follows:
 
 5      "(g)  Priority guidelines to promote the development of the
 
 6 information industry: 
 
 7      (1)  Establish an information network that will serve as the
 
 8           catalyst for establishing a viable information industry
 
 9           in Hawaii[.];
 
10      (2)  Encourage the development of services such as financial
 
11           data processing, a products and services exchange,
 
12           foreign language translations, telemarketing,
 
13           teleconferencing, a twenty-four-hour international
 
14           stock exchange, international banking, [and] a Pacific
 
15           Rim management center[.], and an internet exchange;
 
16      (3)  Encourage the development of small businesses in the
 
17           information field such as software development, the
 
18           development of new information systems and peripherals,
 
19           data conversion and data entry services, and home or
 
20           cottage services such as computer programming,
 
21           secretarial, and accounting services[.];
 

 
 
 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (4)  Encourage the development or expansion of educational
 
 2           and training opportunities for residents in the
 
 3           information and telecommunications fields[.];
 
 4      (5)  Encourage research activities, including legal research
 
 5           in the information and telecommunications fields[.];
 
 6           and
 
 7      (6)  Support promotional activities to market Hawaii's
 
 8           information industry services."
 
 9      SECTION 10.  There is appropriated out of the general
 
10 revenues of the State of Hawaii the sum of $            or so
 
11 much thereof as may be necessary for fiscal year 1999-2000 to
 
12 purchase the information technology equipment and support
 
13 services necessary for the establishment of the Hawaii internet
 
14 exchange within the University of Hawaii, office of technology
 
15 transfer and economic development.
 
16      The sum appropriated shall be expended by the University of
 
17 Hawaii for the purposes of this part.
 
18                              PART V
 
19      SECTION 11.  The legislature finds that Hawaii's students
 
20 will require high-speed access to the internet.  Hawaii, because
 
21 of its remote geographic location, pays a significant cost for
 
22 high-speed access.  A university on the continental United States
 
23 pays $20,000 per year for high speed access to the internet
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 whereas the same access would cost $2,500,000 per year for the
 
 2 University of Hawaii.  Hawaii's students must have equal access
 
 3 to the internet to ensure global competitiveness.
 
 4      The purpose of this part is to provide for high-speed access
 
 5 to the internet for the University of Hawaii and the public
 
 6 schools.
 
 7      SECTION 12.  Section 226-107, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "§226-107  Quality education.  Priority guidelines to
 
10 promote quality education:
 
11      (1)  Pursue effective programs which reflect the varied
 
12           district, school, and student needs to strengthen basic
 
13           skills achievement[.];
 
14      (2)  Continue emphasis on general education "core"
 
15           requirements to provide common background to students
 
16           and essential support to other university programs[.];
 
17      (3)  Initiate efforts to improve the quality of education by
 
18           improving the capabilities of the education work
 
19           force[.];
 
20      (4)  Promote increased opportunities for greater autonomy
 
21           and flexibility of educational institutions in their
 
22           decisionmaking responsibilities[.];
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (5)  Increase and improve the use of information technology
 
 2           in education [and encourage] by making available
 
 3           telecommunications equipment for:
 
 4           (A)  The electronic exchange of information;
 
 5           (B)  Statewide electronic mail; and
 
 6           (C)  Access to the internet;
 
 7      (6)  Encourage programs which increase the public's
 
 8           awareness and understanding of the impact of
 
 9           information technologies on our lives[.];
 
10     [(6)] (7)  Pursue the establishment of Hawaii's public and
 
11           private universities and colleges as research and
 
12           training centers of the Pacific[.];
 
13     [(7)] (8)  Develop resources and programs for early childhood
 
14           education[.];
 
15     [(8)] (9)  Explore alternatives for funding and delivery of
 
16           educational services to improve the overall quality of
 
17           education[.]; and
 
18     [(9)] (10)  Strengthen and expand educational programs and
 
19           services for students with special needs."
 
20      SECTION 13.  The director of finance is authorized to issue
 
21 general obligation bonds in the sum of $            or so much
 
22 thereof as may be necessary and the same sum or so much thereof
 
23 as may be necessary for fiscal year 1999-2000 is appropriated for
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 fiscal year 2000-2001 to procure information technology equipment
 
 2 and the support services necessary to establish fiber optic
 
 3 connections to the internet for the University of Hawaii and the
 
 4 department of education; provided that the University of Hawaii
 
 5 shall seek to obtain matching federal funds.
 
 6      SECTION 14.  The appropriation made for section 13 shall not
 
 7 lapse at the end of the fiscal biennium for which the
 
 8 appropriation is made; provided that all appropriations that are
 
 9 unencumbered as of June 30, 2002, shall lapse as of that date.
 
10      SECTION 15.  The sum appropriated shall be expended by the
 
11 University of Hawaii for the purposes of this part.
 
12                              PART VI
 
13      SECTION 16.  The purpose of this part is to accelerate work
 
14 force development programs to create a pool of information
 
15 technology professionals.
 
16      SECTION 17.  Chapter 304, Hawaii Revised Statutes, is
 
17 amended by adding a new section to part II, subpart L, to be
 
18 appropriately designated and to read as follows:
 
19      "§304-      Information industry work force development
 
20 program.  (a)  There is established an information and
 
21 telecommunications work force training program hereinafter
 
22 referred to as the "training program."  The training program
 
23 shall be placed within the University of Hawaii for
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1 administrative purposes only.  The training program shall provide
 
 2 accelerated information technology education and training on the
 
 3 post-high school to graduate levels and shall include public,
 
 4 private, and for-profit educational institutions. In the design
 
 5 and delivery of programs, the training program may cooperate or
 
 6 contract with other public, private, and for-profit institutions.
 
 7      (b)  The administrator of the training program shall seek
 
 8 and encourage partnerships between members of the private
 
 9 information technology industry and the training program."
 
10      SECTION 18.  There is appropriated out of the general
 
11 revenues of the State of Hawaii the sum of $            or so
 
12 much thereof as may be necessary for fiscal year 1999-2000 to
 
13 provide funds to educational institutions to establish an
 
14 information and telecommunications work force training program.  
 
15      The sum appropriated shall be expended by the University of
 
16 Hawaii for the purposes of this part.
 
17                             PART VII
 
18      SECTION 19.  The purpose of this part is to provide a tax
 
19 incentive for making increased expenditures in certain
 
20 technological and scientific research and development.
 
21      SECTION 20.  Chapter 235, Hawaii Revised Statutes, is
 
22 amended by adding a new section to be appropriately designated
 
23 and to read as follows:
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      "§235-     Tax credit for increasing research activities.
 
 2 (a)  Section 41 (with respect to the credit for increasing
 
 3 research activities) and section 280C(c) (with respect to certain
 
 4 expenses for which the credit for increasing research activities
 
 5 are allowable) of the Internal Revenue Code shall be operative
 
 6 for the purposes of this chapter as provided in this section.
 
 7      (b)  All references to Internal Revenue Code sections within
 
 8 section 41 and section 280C(c) of the Internal Revenue Code shall
 
 9 be operative for purposes of this section.
 
10      (c)  There shall be allowed to each taxpayer subject to the
 
11 tax imposed by this chapter, an income tax credit for increasing
 
12 research activities that shall be deductible from the taxpayer's
 
13 net income tax liability, if any, imposed by this chapter for the
 
14 taxable year in which the credit is properly claimed.
 
15      (d)  The tax credit for increased research activities shall
 
16 be equal to the sum of:
 
17      (1)  2.5 per cent of the excess (if any) of:
 
18           (A)  The qualified research expenses for the taxable
 
19                year; over
 
20           (B)  The base amount;
 
21           and
 
22      (2)  2.5 per cent of the basic research payments determined
 
23           under section 41(e)(1)(A) of the Internal Revenue Code.
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (e)  For purposes of this section:
 
 2      (1)  The alternative incremental credit in section 41(c)(4)
 
 3           of the Internal Revenue Code shall be equal to the sum
 
 4           of 12.5 per cent of:
 
 5           (A)  1.65 per cent of so much of the qualified research
 
 6                expenses for the taxable year as exceeds 1 per
 
 7                cent of the average described in section
 
 8                41(c)(1)(B) but does not exceed 1.5 per cent of
 
 9                such average;
 
10           (B)  2.2 per cent of so much of such expenses as
 
11                exceeds 1.5 per cent of such average but does not
 
12                exceed 2 per cent of such average; and
 
13           (C)  2.75 per cent of so much of such expenses as
 
14                exceeds 2 per cent of such average;
 
15      (2)  The term "qualified research" under section 41(d) of
 
16           the Internal Revenue Code shall not include research
 
17           conducted outside of the State;
 
18      (3)  The term "basic research" under section 41(e) of the
 
19           Internal Revenue Code shall not include research
 
20           conducted outside of the State; and
 
21      (4)  Notwithstanding section 41(h) of the Internal Revenue
 
22           Code, the tax credit provided in this section shall
 
23           expire on December 31, 2005.
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
 2 of the Internal Revenue Code shall be equal to the excess of:
 
 3      (1)  The amount of credit determined under section 41(a) (as
 
 4           provided for in this section) (without regard to this
 
 5           paragraph); over
 
 6      (2)  The product of:
 
 7           (A)  The amount described in section f(1); and
 
 8           (B)  12.5 per cent of the maximum rate of tax under
 
 9                section 11(b)(1) of the Internal Revenue Code.
 
10      (g)  If the tax credit for increased research activities
 
11 claimed by a taxpayer exceeds the amount of income tax payment
 
12 due from the taxpayer, the excess of the tax credit over payments
 
13 due may be used as a credit against the taxpayer's income tax
 
14 liability in subsequent years until exhausted.
 
15      (h)  All claims for a tax credit under this section must be
 
16 filed on or before the end of the twelfth month following the
 
17 close of the taxable year for which the credit may be claimed.
 
18 Failure to properly claim the credit shall constitute a waiver of
 
19 the right to claim the credit.
 
20      (i)  The director of taxation may adopt any rules under
 
21 chapter 91 and forms necessary to carry out this section."
 
22      SECTION 21.  Section 235-2.3, Hawaii Revised Statutes, is
 
23 amended by amending subsection (b) to read as follows:
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1      "(b)  The following Internal Revenue Code subchapters, parts
 
 2 of subchapters, sections, subsections, and parts of subsections
 
 3 shall not be operative for the purposes of this chapter, unless
 
 4 otherwise provided:
 
 5      (1)  Subchapter A (sections 1 to 59A) (with respect to
 
 6           determination of tax liability), except section 1(h)(3)
 
 7           (relating to net capital gain reduced by the amount
 
 8           taken into account as investment income), except
 
 9           section 41 (with respect to tax credit for increasing
 
10           research activities), section 42 (with respect to low-
 
11           income housing credit), and except sections 47 and 48,
 
12           as amended, as of December 31, 1984 (with respect to
 
13           certain depreciable tangible personal property).  For
 
14           treatment, see sections 235-   , 235-110.7, and
 
15           235-110.8;
 
16      (2)  Section 78 (with respect to dividends received from
 
17           certain foreign corporations by domestic corporations
 
18           choosing foreign tax credit);
 
19      (3)  Section 86 (with respect to social security and tier 1
 
20           railroad retirement benefits);
 
21      (4)  Section 103 (with respect to interest on state and
 
22           local bonds).  For treatment, see section 235-7(b);
 

 
 
 
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 1      (5)  Section 120 (with respect to amounts received under
 
 2           qualified group legal services plans).  For treatment,
 
 3           see section 235-7(a)(9) to (11);
 
 4      (6)  Section 122 (with respect to certain reduced uniformed
 
 5           services retirement pay).  For treatment, see section
 
 6           235-7(a)(3);
 
 7      (7)  Section 135 (with respect to income from United States
 
 8           savings bonds used to pay higher education tuition and
 
 9           fees).  For treatment, see section 235-7(a)(1);
 
10      (8)  Subchapter B (sections 141 to 150) (with respect to tax
 
11           exemption requirements for state and local bonds);
 
12      (9)  Section 151 (with respect to allowance of deductions
 
13           for personal exemptions).  For treatment, see section
 
14           235-54;
 
15     (10)  Section 196 (with respect to deduction for certain
 
16           unused investment credits);
 
17     (11)  Sections 241 to 247 (with respect to special deductions
 
18           for corporations).  For treatment, see section
 
19           235-7(c);
 
20     (12)  Section 280C (with respect to certain expenses for
 
21           which credits are allowable)[;], except section 280C(c)
 
22           (with respect to certain expenses for which credit for
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1           increasing research activities is allowable).  For
 
 2           treatment, see section 235-   ;
 
 3     (13)  Section 291 (with respect to special rules relating to
 
 4           corporate preference items);
 
 5     (14)  Section 367 (with respect to foreign corporations);
 
 6     (15)  Section 501(c)(12), (15), and (16) (with respect to
 
 7           exempt organizations);
 
 8     (16)  Section 515 (with respect to taxes of foreign countries
 
 9           and possessions of the United States);
 
10     (17)  Subchapter G (sections 531 to 565) (with respect to
 
11           corporations used to avoid income tax on shareholders);
 
12     (18)  Subchapter H (sections 581 to 597) (with respect to
 
13           banking institutions), except section 584 (with respect
 
14           to common trust funds).  For treatment, see chapter
 
15           241;
 
16     (19)  Section 642(a) and (b) (with respect to special rules
 
17           for credits and deductions applicable to trusts).  For
 
18           treatment, see sections 235-54(b) and 235-55;
 
19     (20)  Section 668 (with respect to interest charge on
 
20           accumulation distributions from foreign trusts);
 
21     (21)  Subchapter L (sections 801 to 848) (with respect to
 
22           insurance companies).  For treatment, see sections
 
23           431:7-202 and 431:7-204;
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1     (22)  Section 853 (with respect to foreign tax credit allowed
 
 2           to shareholders).  For treatment, see section 235-55;
 
 3     (23)  Subchapter N (sections 861 to 999) (with respect to tax
 
 4           based on income from sources within or without the
 
 5           United States), except sections 985 to 989 (with
 
 6           respect to foreign currency transactions).  For
 
 7           treatment, see sections 235-4, 235-5, [and] 235-7(b),
 
 8           and 235-55;
 
 9     (24)  Section 1042(g) (with respect to sales of stock in
 
10           agricultural refiners and processors to eligible farm
 
11           cooperatives);
 
12     (25)  Section 1055 (with respect to redeemable ground rents);
 
13     (26)  Section 1057 (with respect to election to treat
 
14           transfer to foreign trust, etc., as taxable exchange);
 
15     (27)  Sections 1291 to 1298 (with respect to treatment of
 
16           passive foreign investment companies);
 
17     (28)  Subchapter Q (sections 1311 to 1351) (with respect to
 
18           readjustment of tax between years and special
 
19           limitations); and
 
20     (29)  Subchapter U (sections 1391 to 1397F) (with respect to
 
21           designation and treatment of empowerment zones,
 
22           enterprise communities, and rural development
 
23           investment areas).  For treatment, see chapter 209E."
 

 
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 1                             PART VIII
 
 2      SECTION 22.  The purpose of this part is to provide a tax
 
 3 incentive for investing in high technology businesses.
 
 4      SECTION 23.  Chapter 235, Hawaii Revised Statutes, is
 
 5 amended by adding to part VI a new section to be appropriately
 
 6 designated and to read as follows:
 
 7      "§235-    High-technology business investment tax credit.
 
 8 (a)  There shall be allowed to each taxpayer subject to the taxes
 
 9 imposed by this chapter, a high technology investment tax credit
 
10 which shall be deductible from the taxpayer's net income tax
 
11 liability, if any, imposed by this chapter for the taxable year
 
12 in which the credit is properly claimed.  The tax credit shall be
 
13 an amount equal to ten per cent of the investment made by the
 
14 taxpayer in each of the three consecutive tax years beginning on
 
15 or after January 1 following the enactment of this act, in a
 
16 qualified high technology business, up to a maximum allowed
 
17 credit of $500,000 for the tax year for each investment made by
 
18 the taxpayer.
 
19      (b)  The credit allowed under this section shall be claimed
 
20 against the net income tax liability for the taxable year.  For
 
21 the purpose of this section, "net income tax liability" means net
 
22 income tax liability reduced by all other credits allowed under
 
23 this chapter.
 

 
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 1      (c)  If the tax credit under this section exceeds the
 
 2 taxpayer's income tax liability, the excess of the tax credit
 
 3 over liability may be used as a credit against the taxpayer's
 
 4 income tax liability in subsequent years until exhausted.  All
 
 5 claims, including any amended claims, for tax credits under this
 
 6 section shall be filed on or before the end of the twelfth month
 
 7 following the close of the taxable year for which the credit may
 
 8 be claimed.  Failure to comply with the foregoing provision shall
 
 9 constitute a waiver of the right to claim the credit.
 
10      (d)  As used in this section:
 
11      "Investment" means a nonrefundable investment, at risk (as
 
12 that term is used in Internal Revenue Code section 465) in a
 
13 qualified high technology business, of cash that is transferred
 
14 to the qualified high technology business, the transfer of which
 
15 is in connection with a transaction in exchange for stock,
 
16 interests in partnerships, joint ventures, or other entities,
 
17 licenses (exclusive or non-exclusive), rights to use technology,
 
18 marketing rights, warrants, options or any items similar to those
 
19 included herein, including but not limited to options or rights
 
20 to acquire any of the items included herein.  The nonrefundable
 
21 investment is entirely at risk of loss where repayment depends
 
22 upon the success of the qualified high technology business.  If
 
23 the money invested is to be repaid to the taxpayer, no repayment
 

 
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 1 except for dividends or interest shall be made for at least three
 
 2 years from the date the investment is made.  The annual amount of
 
 3 any dividend and interest payment to the taxpayer shall not
 
 4 exceed twelve per cent of the amount of the investment.
 
 5      "Qualified high technology business" means:
 
 6      (1)  A business, employing or owning capital or property, or
 
 7           maintaining an office, in this State; and
 
 8      (2)  (A)  That has qualified research expenses paid or
 
 9                incurred for research conducted in this State; or
 
10           (B)  That receives income derived from qualified
 
11                research expenses; provided that the income is
 
12                received from products sold from, manufactured, or
 
13                produced in the State; or services performed in
 
14                this State.
 
15 The term "qualified high technology business" does not include
 
16 any trade or business involving the performance of services in
 
17 the field of law, engineering, architecture, accounting,
 
18 actuarial science, performing arts, consulting, athletics,
 
19 financial services, or brokerage services, or any trade or
 
20 business where the principal asset of the trade or business is
 
21 the reputation or skill of one or more of its employees; any
 
22 banking, insurance, financing, leasing, rental, investing, or
 
23 similar business; any farming business, including the business of
 

 
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 1 raising or harvesting trees; any business involving the
 
 2 production or extraction of products of a character with respect
 
 3 to which a deduction is allowable under section 611, 613, or 613A
 
 4 of the Internal Revenue Code; any business operating a hotel,
 
 5 motel, restaurant, or similar business; any trade or business
 
 6 involving a hospital, a private office of a licensed health care
 
 7 professional, a group practice of license health care
 
 8 professionals, or nursing home.
 
 9      (e)  For the purpose of this section "qualified research
 
10 expenses" means:
 
11      (1)  Research:
 
12           (A)  With respect to which expenditures may be treated
 
13                as expenses under Internal Revenue Code section
 
14                174;
 
15           (B)  Which is undertaken for the purpose of discovering
 
16                information:
 
17                (i)  Which is technological in nature; and
 
18               (ii)  The application of which is intended to be
 
19                     useful in the development of a new or
 
20                     improved business component of the taxpayer; 
 
21                and
 
22           (C)  Substantially all of the activities of which
 
23                constitute elements of a process of
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1                experimentation for a purpose described in
 
 2                paragraph (3).
 
 3           Such term does not include any activity described in
 
 4           paragraph (4);
 
 5      (2)  Tests to be applied separately to each business
 
 6           component:
 
 7           (A)  Paragraph (1) shall be applied separately with
 
 8                respect to each business component of the
 
 9                taxpayer.  The term "business component" means any
 
10                product, process, computer software, technique,
 
11                formula, or invention which is to be:
 
12                (i)  Held for sale, lease, or license; or
 
13               (ii)  Used by the taxpayer in a trade or business
 
14                     of the taxpayer;
 
15                and
 
16           (B)  Special rule for production processes.  Any plant
 
17                process, machinery, or technique for commercial
 
18                production of a business component shall be
 
19                treated as a separate business component (and not
 
20                as part of the business component being produced);
 
21      (3)  Purposes for which research may qualify for credit. For
 
22           purposes of paragraph (1)(C):
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1           (A)  Research shall be treated as conducted for a
 
 2                purpose described in this paragraph if it relates
 
 3                to:
 
 4                (i)  A new or improved function;
 
 5               (ii)  Performance; or
 
 6              (iii)  Reliability or quality;
 
 7                and
 
 8           (B)  Certain purposes not qualified.  Research shall in
 
 9                no event be treated as conducted for a purpose
 
10                described in this paragraph if it relates to
 
11                style, taste, cosmetic, or seasonal design
 
12                factors;
 
13      (4)  Activities for which credit not allowed.  "Qualified
 
14           research expenses" shall not include the following:
 
15           (A)  Any research conducted after the beginning of
 
16                commercial production of the business component;
 
17           (B)  Any research related to the adaptation of an
 
18                existing business component to a particular
 
19                customer's requirement or need;
 
20           (C)  Any research related to the reproduction of an
 
21                existing business component (in whole or in part)
 
22                from a physical examination of the business
 
23                component itself or from plans, blueprints,
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1                detailed specifications, or publicly available
 
 2                information with respect to such business
 
 3                component;
 
 4           (D)  Any efficiency survey; activity relating to
 
 5                management function or technique; market research,
 
 6                testing, or development (including advertising or
 
 7                promotions); routine data collection; or routine
 
 8                or ordinary testing or inspection for quality
 
 9                control;
 
10           (E)  Any research with respect to computer software
 
11                which is developed by (or for the benefit of) the
 
12                taxpayer primarily for internal use by the
 
13                taxpayer, other than for use in:
 
14                (i)  An activity which constitutes qualified
 
15                     research (determined with regard to this
 
16                     subparagraph); or
 
17               (ii)  A production process with respect to which
 
18                     the requirements of paragraph (1) are met;
 
19           (F)  Any research conducted outside the State;
 
20           (G)  Any research in the social sciences, arts, or
 
21                humanities; and
 

 
 
 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        

 
 1           (H)  Any research to the extent funded by any grant,
 
 2                contract, or otherwise by another person (or
 
 3                governmental entity)."
 
 4                              PART IX
 
 5      SECTION 24.  Statutory material to be repealed is bracketed.
 
 6 New statutory material is underscored.
 
 7      SECTION 25.  This Act shall take effect upon its approval;
 
 8 provided that:
 
 9      (1)  Sections 10, 13, 14, 15, and 18 shall take effect on
 
10           July 1, 1999;
 
11      (2)  Part III shall apply to taxable years beginning after
 
12           December 31, 1998;
 
13      (3)  Part VII shall apply to taxable years beginning after
 
14           December 31, 1999; and
 
15      (4)  Part VIII shall apply to taxable years beginning after
 
16           December 31, 1999 and before January 1, 2003.