REPORT TITLE:
Information-based Industries


DESCRIPTION:
Spurs economic development and fosters the growth of knowledge-
based industries in Hawaii via tax incentives, special purpose
revenue bonds, and other incentives.  (HB 377 SD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        377
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 1999                                S.D. 2
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 Hawaii is one of the
 
 3 most geographically isolated communities on earth, and for many
 
 4 years, our economic opportunities were limited by this isolation.
 
 5 Recent advances in telecommunications, information technology,
 
 6 and the explosive growth of the Internet, however, present
 
 7 significant new opportunities for the State to develop and
 
 8 diversify its economy, opening the global market to Hawaii
 
 9 businesses.
 
10      Fiber optic cables, connecting Hawaii with the mainland
 
11 United States and Asia, and new communications satellites have
 
12 dramatically increased both the volume of information sent and
 
13 the range of transmittal.  While transmission capacity increases,
 
14 costs continue to fall.  Today, Internet commerce represents a
 
15 small fraction of all business transacted, but industry watchers
 
16 estimate that within the next seven years, half of all business
 
17 and consumer purchases will be done by computer.  In this new
 
18 era, connection is everything.
 
19      The legislature further finds that Hawaii's opportunities
 

 
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 1 also represent new challenges.  Businesses -- particularly the
 
 2 small, start-ups associated with high technology -- no longer
 
 3 need to factor in Hawaii's geographic isolation, but must still
 
 4 consider the cost of doing business in the State.  They also face
 
 5 a confusing, often overlapping, group of state agencies that
 
 6 provide support for technology-related business.  Providing
 
 7 targeted assistance to these businesses, as well as a clear focus
 
 8 of responsibility within state government for aggressive
 
 9 development and support of high technology resources will better
 
10 serve the burgeoning technology industry.
 
11      The legislature also finds that education will be forever
 
12 changed as businesses and workers alike demand new skills and
 
13 rapid-response delivery of these skills.  Our schools must move
 
14 beyond the traditional book and classroom delivery and embrace a
 
15 technologically connected model for learning.  In 1998, the
 
16 legislature appropriated funds to provide high-speed Internet
 
17 access to the university and all state agencies, including
 
18 schools.  As a result, establishing schools and libraries as
 
19 community access points can be accelerated.
 
20      If Hawaii is to become a state known for leading its people
 
21 effectively into the twenty-first century, the legislature
 
22 believes progress and change must begin immediately.  The purpose
 
23 of this Act is to support the growth and development of high
 

 
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 1 technology industries in Hawaii by:
 
 2      (1)  Consolidating the State's high technology agencies,
 
 3           divisions, and offices under the coordination and
 
 4           direction of a special advisor for technology
 
 5           development and creating a governor's special advisory
 
 6           council for technology development to assist the
 
 7           advisor;
 
 8      (2)  Offering a tax incentive through a technology training
 
 9           or job creation tax credit to offset the cost of
 
10           training, retraining, and related job creation costs;
 
11      (3)  Offering a tax incentive for investment in new high
 
12           technology businesses;
 
13      (4)  Offering a tax incentive for high technology research
 
14           activities;
 
15      (5)  Exempting royalty income from high technology business
 
16           from excise and income tax;
 
17      (6)  Authorizing special purpose revenue bonds to the Ohana
 
18           Foundation for the development of high technology
 
19           facilities;
 
20      (7)  Integrating technology with Hawaii's tourism and
 
21           marketing industries;
 
22      (8)  Prohibiting the imposition of taxes on Internet access
 
23           commerce;
 

 
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 1      (9)  Establishing the Hawaii Internet exchange to serve as a
 
 2           catalyst for the development of Internet-focused
 
 3           businesses;
 
 4     (10)  Focusing work force development programs to ensure a
 
 5           pool of technology professionals; and
 
 6     (11)  Accelerating high speed access to the Internet for the
 
 7           University of Hawaii and the public schools, and
 
 8           establishing educational technology programs within
 
 9           public schools.
 
10                             PART II.
 
11      SECTION 2.  Over the years, the legislature has created a
 
12 number of state agencies charged with promoting the development
 
13 of a variety of technological industries.  While these agencies
 
14 provide valuable services, they lack focus and in some cases
 
15 their original missions have changed considerably.  Consolidation
 
16 of these agencies under a single entity to coordinate their
 
17 activities will provide a more focused effort in attracting high
 
18 technology businesses to Hawaii.
 
19      SECTION 3.  The Hawaii Revised Statutes is amended by adding
 
20 two new sections to be appropriately designated and to read as
 
21 follows:
 
22      "§   -     Special advisor for technology development.  (a)
 
23 There is established within the office of the governor a special
 

 
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 1 advisor for technology development to be appointed by the
 
 2 governor as provided in section 26-34.
 
 3      (b)  The duties of the special advisor shall include, but
 
 4 not be limited to:
 
 5      (1)  Developing, coordinating, and implementing short- and
 
 6           long-range state policies and directions to enhance the
 
 7           development of high technology industries in Hawaii;
 
 8      (2)  Coordinating all state high technology agencies while
 
 9           developing a plan for reorganization or consolidation
 
10           of these agencies in the interests of greater
 
11           efficiency and cost effectiveness;
 
12      (3)  Advising the private sector in the development of high
 
13           technology activities and resources, and providing
 
14           technical or other assistance to private industry upon
 
15           request;
 
16      (4)  Creating, disseminating, and updating a listing of all
 
17           high technology assistance programs in the State and
 
18           where they can be reached;
 
19      (5)  Pursuing appropriate public-private sector business
 
20           partnerships;
 
21      (6)  Coordinating the State's promotion and marketing of the
 
22           high technology industry, including a review of current
 
23           marketing efforts;
 

 
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 1      (7)  Arranging for the conduct of research through
 
 2           contractual services with the University of Hawaii or
 
 3           any agency or other qualified persons;
 
 4      (8)  Encouraging the development of educational, training,
 
 5           and career programs in high technology industries; and
 
 6      (9)  Performing other necessary or desirable functions to
 
 7           facilitate the intent of this section.
 
 8      (c)  In carrying out the duties of this section, the special
 
 9 advisor for technology development may utilize the services of
 
10 the State's high technology agencies, including those of the
 
11 University of Hawaii, as appropriate.
 
12      §   -     Governor's special advisory council for technology
 
13 development; establishment; appointment, number, and term of
 
14 members; duties.  (a)  There is established within the office of
 
15 the governor, for administrative purposes, an advisory council to
 
16 be known as the governor's special advisory council for
 
17 technology development, which shall review and make
 
18 recommendations on matters relating to the marketing and
 
19 promotion of Hawaii as a location for high technology companies.
 
20 The council shall be composed of         members appointed in
 
21 accordance with section 26-34, and shall include representatives
 
22 of the high technology industry, business leaders, educators,
 
23 government leaders, and legislators.
 

 
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 1      (b)  The members shall be appointed by the governor for four
 
 2 years, except that the terms of the members first appointed shall
 
 3 be for two and four years, respectively, as designated by the
 
 4 governor at the time of appointment.  The council shall elect a
 
 5 chairperson from among its members.
 
 6      (c)  In appointing members, the governor shall select
 
 7 persons who have knowledge of the high technology industry, the
 
 8 educational needs of the industry, or in the marketing and
 
 9 promotion of high technology industries.  The members of the
 
10 council shall serve without compensation but shall be reimbursed
 
11 for expenses, including travel expenses, necessary for the
 
12 performance of their duties.
 
13      (d)  The council shall assist the special advisor for
 
14 technology development in developing and coordinating the
 
15 marketing and promotion of the high technology industry in
 
16 Hawaii.
 
17      (e)  This section is repealed on January 1, 2005."
 
18      SECTION 4.  There is appropriated out of the general
 
19 revenues of the State of Hawaii the sum of $           , or so
 
20 much thereof as may be necessary for fiscal year 1999-2000, and
 
21 the same sum, or so much thereof as may be necessary, for fiscal
 
22 year 2000-2001, for the special advisor for technology
 
23 development and the governor's special advisory council for
 

 
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 1 technology development.  The sums appropriated shall be expended
 
 2 by the office of the governor for the purposes of section 3.
 
 3                             PART III.
 
 4      SECTION 5.  While the advantages of Hawaii's proximity to
 
 5 Pacific and Asian markets are a lure for technology business in
 
 6 Hawaii, the costs of doing business are high.  Opportunities must
 
 7 be created for high technology companies through tax credits, tax
 
 8 exemptions, and by providing additional investment capital
 
 9 through targeted assistance to technology start-ups and
 
10 technology research activities.
 
11      SECTION 6.  Chapter 235, Hawaii Revised Statutes, is amended
 
12 by adding a new section to be appropriately designated and to
 
13 read as follows:
 
14      "§235-     Tax credit for technology training or job
 
15 creation.  (a)  Each taxpayer in this State may claim a tax
 
16 credit for technology training or job creation under this section
 
17 in a qualified high technology business in this State.  The
 
18 credit shall be for the cost of training the taxpayer or the
 
19 taxpayer's employees to up-grade the taxpayer or the taxpayer's
 
20 employees technology related skills or for the creation of
 
21 technology related jobs in a qualified high technology business
 
22 in this State.  The credit shall be equal to the cost of this
 
23 training or creating those jobs but shall not exceed $        .
 

 
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 1 The credit may be claimed against the taxpayer's income tax
 
 2 liability for the taxable year.
 
 3      (b)  The tax credit claimed by a taxpayer pursuant to this
 
 4 section shall be deductible from the taxpayer's income tax
 
 5 liability, if any, for the tax year in which the credit is
 
 6 properly claimed.  If the tax credit claimed by a taxpayer
 
 7 exceeds the amount of income tax payment due from the taxpayer,
 
 8 the excess of credit over payments due shall be refunded to the
 
 9 taxpayer; provided that a tax credit properly claimed by a
 
10 taxpayer who has no income tax liability shall be paid to the
 
11 taxpayer; and provided further that no refunds or payment on
 
12 account of the tax credit allowed by this section shall be made
 
13 for amounts less than $1.
 
14      (c)  All claims for a tax credit under this section,
 
15 including any amended claims, must be filed on or before the end
 
16 of the twelfth month following the close of the taxable year for
 
17 which the credit may be claimed.  Failure to comply with the
 
18 foregoing provision shall constitute a waiver of the right to
 
19 claim the credit.
 
20      (d)  For the purpose of this section:
 
21      "Qualified high technology business" means:
 
22      (1)  A business, employing or owning capital or property, or
 
23           maintaining an office, in this State; and
 

 
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 1      (2)  (A)  That has qualified research expenses paid or
 
 2                incurred for research conducted in this State, or
 
 3           (B)  That receives income derived from qualified
 
 4                research expenses; provided that the income is
 
 5                received from products sold from, manufactured, or
 
 6                produced in the State; or services performed in
 
 7                this State.
 
 8 The term "qualified high technology business" does not include
 
 9 any trade or business involving the performance of services in
 
10 the field of law, engineering, architecture, accounting,
 
11 actuarial science, performing arts, consulting, athletics,
 
12 financial services, or brokerage services, or any trade or
 
13 business where the principal asset of the trade or business is
 
14 the reputation or skill of one or more of its employees; any
 
15 banking, insurance, financing, leasing, rental, investing, or
 
16 similar business; any farming business, including the business of
 
17 raising or harvesting trees; any business involving the
 
18 production or extraction of products of a character with respect
 
19 to which a deduction is allowable under section 611 (with respect
 
20 to allowance of deduction for depletion), 613 (with respect to
 
21 basis for percentage depletion), or 613A (with respect to
 
22 limitation on percentage depleting in cases of oil and gas wells)
 
23 of the Internal Revenue Code; any business operating a hotel,
 

 
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 1 motel, restaurant, or similar business; any trade or business
 
 2 involving a hospital, a private office of a licensed health care
 
 3 professional, a group practice of licensed health care
 
 4 professionals, or nursing home.
 
 5      "Qualified research expenses" means:
 
 6      (1)  Research:
 
 7           (A)  With respect to which expenditures may be treated
 
 8                as expenses under Internal Revenue Code section
 
 9                174 (with respect to research and experimental
 
10                expenditures);
 
11           (B)  Which is undertaken for the purpose of discovering
 
12                information
 
13                (i)  Which is technological in nature; and
 
14               (ii)  The application of which is intended to be
 
15                     useful in the development of a new or
 
16                     improved business component of the taxpayer;
 
17                     and
 
18           (C)  Substantially all of the activities of which
 
19                constitute elements of a process of
 
20                experimentation for a purpose described in
 
21                paragraph (3).
 
22           This term does not include any activity described in
 
23           paragraph (4).
 

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

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

 
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 1                promotions); routine data collection; or routine
 
 2                or ordinary testing or inspection for quality
 
 3                control;
 
 4           (E)  Any research with respect to computer software
 
 5                which is developed by (or for the benefit of) the
 
 6                taxpayer primarily for internal use by the
 
 7                taxpayer, other than for use in:
 
 8                (i)  An activity which constitutes qualified
 
 9                     research (determined with regard to this
 
10                     subparagraph); or
 
11               (ii)  A production process with respect to which
 
12                     the requirements of paragraph (1) are met;
 
13           (F)  Any research conducted outside the State;
 
14           (G)  Any research in the social sciences, arts, or
 
15                humanities; and
 
16           (H)  Any research to the extent funded by any grant,
 
17                contract, or otherwise by another person (or
 
18                governmental entity)."
 
19      SECTION 7.  Chapter 241, Hawaii Revised Statutes, is amended
 
20 by adding a new section to be appropriately designated and to
 
21 read as follows:
 
22      "§241-     Tax credit for funds invested in qualified high
 
23 technology businesses.  (a)  Any bank, building and loan
 

 
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 1 association, development company, financial corporation,
 
 2 financial services loan company, trust company, mortgage loan
 
 3 company, financial holding company, small business investment
 
 4 company, or subsidiary may claim a tax credit for funds invested
 
 5 in qualified high technology businesses in this State under this
 
 6 section.  The credit shall be equal to      per cent of the total
 
 7 investment in a qualified high technology business in this State,
 
 8 but shall not exceed $           .
 
 9      (b)  The tax credit claimed pursuant to this section shall
 
10 be deductible from the bank, building and loan association,
 
11 development company, financial corporation, financial services
 
12 loan company, trust company, mortgage loan company, financial
 
13 holding company, small business investment company, or
 
14 subsidiary's tax liability, if any, for the tax year in which it
 
15 is properly claimed.  If the tax credit claimed by a bank,
 
16 building and loan association, development company, financial
 
17 corporation, financial services loan company, trust company,
 
18 mortgage loan company, financial holding company, small business
 
19 investment company, or subsidiary exceed the amount of tax
 
20 payment due, the excess of credit over payments due shall be
 
21 refunded; provided that no refunds or payment on account of the
 
22 tax credit allowed by this section shall be made for amounts less
 
23 than $1.
 

 
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 1      (c)  All claims for a tax credit under this section,
 
 2 including any amended claims, must be filed on or before the end
 
 3 of the twelfth month following the close of the taxable year for
 
 4 which the credit may be claimed.  Failure to comply with the
 
 5 foregoing provision shall constitute a waiver of the right to
 
 6 claim the credit.
 
 7      (d)  For the purpose of this section:
 
 8      "Qualified high technology business" has the same meaning as
 
 9 in section 235-   .
 
10      "Qualified research expenses" has the same meaning as in
 
11 section 235-   ."
 
12      SECTION 8.  Chapter 235, Hawaii Revised Statutes, is amended
 
13 by adding to part VI a new section to be appropriately designated
 
14 and to read as follows:
 
15      "§235-     Tax credit for increasing research activities.
 
16 (a)  Section 41 (with respect to the credit for increasing
 
17 research activities) and section 280C(c) (with respect to certain
 
18 expenses for which the credit for increasing research activities
 
19 are allowable) of the Internal Revenue Code shall be operative
 
20 for the purposes of this chapter as provided in this section.
 
21      (b)  All references to Internal Revenue Code sections within
 
22 section 41 and section 280C(c) of the Internal Revenue Code shall
 
23 be operative for purposes of this section.
 

 
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 1      (c)  There shall be allowed to each taxpayer subject to the
 
 2 tax imposed by this chapter, an income tax credit for increased
 
 3 research activities that shall be deductible from the taxpayer's
 
 4 net income tax liability, if any, imposed by this chapter for the
 
 5 taxable year in which the credit is properly claimed.
 
 6      (d)  The tax credit for increased research activities shall
 
 7 be equal to the sum of:
 
 8      (1)  2.5 per cent of the excess (if any) of:
 
 9           (A)  The qualified research expenses for the taxable
 
10                year; over
 
11           (B)  The base amount;
 
12           and
 
13      (2)  2.5 per cent of the basic research payments determined
 
14           under section 41(e)(1)(A) of the Internal Revenue Code.
 
15      (e)  For purposes of this section:
 
16      (1)  The alternative incremental credit in section 41(c)(4)
 
17           of the Internal Revenue Code shall be equal to the sum
 
18           of 12.5 per cent of:
 
19           (A)  1.65 per cent of so much of the qualified research
 
20                expenses for the taxable year as exceeds one per
 
21                cent of the average described in section
 
22                41(c)(1)(B) but does not exceed 1.5 per cent of
 
23                such average;
 

 
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 1           (B)  2.2 per cent of so much of such expenses as
 
 2                exceeds 1.5 per cent of such average but does not
 
 3                exceed two per cent of such average; and
 
 4           (C)  2.75 per cent of so much of such expenses as
 
 5                exceeds two per cent of such average;
 
 6      (2)  The term "qualified research" under paragraph (1) of
 
 7           the Internal Revenue Code shall not include research
 
 8           conducted outside of the State; and
 
 9      (3)  The term "basic research" under section 41(e) of the
 
10           Internal Revenue Code shall not include research
 
11           conducted outside of the State.
 
12      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
13 of the Internal Revenue Code shall be equal to the excess of:
 
14      (1)  The amount of credit determined under section 41(a) (as
 
15           provided for in this section) (without regard to this
 
16           paragraph); over
 
17      (2)  The product of:
 
18           (A)  The amount described in subsection (f)(1); and
 
19           (B)  12.5 per cent of the maximum rate of tax under
 
20                section 11(b)(1) of the Internal Revenue Code.
 
21      (g)  If the tax credit for increased research activities
 
22 claimed by a taxpayer exceeds the amount of income tax payment
 
23 due from the taxpayer, the excess of the tax credit over payments
 

 
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 1 due may be used as a credit against the taxpayer's income tax
 
 2 liability in subsequent years until exhausted.
 
 3      (h)  All claims for a tax credit under this section must be
 
 4 filed on or before the end of the twelfth month following the
 
 5 close of the taxable year for which the credit may be claimed.
 
 6 Failure to properly claim the credit shall constitute a waiver of
 
 7 the right to claim the credit.
 
 8      (i)  The director of taxation may adopt any rules under
 
 9 chapter 91 and forms necessary to carry out this section.
 
10      (j)  For the purpose of this section, "qualified research
 
11 expenses" has the same meaning as in section 235-   ."
 
12      SECTION 9.  Section 235-7 Hawaii Revised Statutes, is
 
13 amended by amending subsection (a) to read as follows:
 
14      "(a)  There shall be excluded from gross income, adjusted
 
15 gross income, and taxable income:
 
16      (1)  Income not subject to taxation by the State under the
 
17           Constitution and laws of the United States;
 
18      (2)  Rights, benefits, and other income exempted from
 
19           taxation by section 88-91, having to do with the state
 
20           retirement system, and the rights, benefits, and other
 
21           income, comparable to the rights, benefits, and other
 
22           income exempted by section 88-91, under any other
 
23           public retirement system;
 

 
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 1      (3)  Any compensation received in the form of a pension for
 
 2           past services;
 
 3      (4)  Compensation paid to a patient affected with Hansen's
 
 4           disease employed by the State or the United States in
 
 5           any hospital, settlement, or place for the treatment of
 
 6           Hansen's disease;
 
 7      (5)  Except as otherwise expressly provided, payments made
 
 8           by the United States or this State, under an act of
 
 9           Congress or a law of this State, which by express
 
10           provision or administrative regulation or
 
11           interpretation are exempt from both the normal and
 
12           surtaxes of the United States, even though not so
 
13           exempted by the Internal Revenue Code itself;
 
14      (6)  Any income expressly exempted or excluded from the
 
15           measure of the tax imposed by this chapter by any other
 
16           law of the State, it being the intent of this chapter
 
17           not to repeal or supersede any such express exemption
 
18           or exclusion;
 
19      (7)  The first $1,750 received by each member of the reserve
 
20           components of the Army, Navy, Air Force, Marine Corps,
 
21           or Coast Guard of the United States of America, and the
 
22           Hawaii national guard as compensation for performance
 
23           of duty;
 

 
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 1      (8)  Income derived from the operation of ships or aircraft
 
 2           if the income is exempt under the Internal Revenue Code
 
 3           pursuant to the provisions of an income tax treaty or
 
 4           agreement entered into by and between the United States
 
 5           and a foreign country, provided that the tax laws of
 
 6           the local governments of that country reciprocally
 
 7           exempt from the application of all of their net income
 
 8           taxes, the income derived from the operation of ships
 
 9           or aircraft which are documented or registered under
 
10           the laws of the United States;
 
11      (9)  The value of legal services provided by a prepaid legal
 
12           service plan to a taxpayer, the taxpayer's spouse, and
 
13           the taxpayer's dependents;
 
14      (10) Amounts paid, directly or indirectly, by a prepaid
 
15           legal service plan to a taxpayer as payment or
 
16           reimbursement for the provision of legal services to
 
17           the taxpayer, the taxpayer's spouse, and the taxpayer's
 
18           dependents;
 
19     (11)  Contributions by an employer to a prepaid legal service
 
20           plan for compensation (through insurance or otherwise)
 
21           to the employer's employees for the costs of legal
 
22           services incurred by the employer's employees, their
 
23           spouses, and their dependents; [and]
 

 
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 1     (12)  Amounts received in the form of a monthly surcharge by
 
 2           a utility acting on behalf of an affected utility under
 
 3           section 269-16.3 shall not be gross income, adjusted
 
 4           gross income, or taxable income for the acting utility
 
 5           under this chapter.  Any amounts retained by the acting
 
 6           utility for collection or other costs shall not be
 
 7           included in this exemption[.]; and
 
 8     (13)  Amounts received as royalty income from the sale or
 
 9           licensing of intellectual property whether or not the
 
10           intellectual property was developed within the State;
 
11           provided that the intellectual property is developed
 
12           for use in a qualified high technology business.  For
 
13           the purpose of this paragraph:
 
14                "Qualified high technology business" has the same
 
15           meaning as in section 235-   .
 
16                "Qualified research expenses" has the same meaning
 
17           as in section 235-   ."
 
18      SECTION 10.  Section 237-3, Hawaii Revised Statutes, is
 
19 amended to read as follows:
 
20      "§237-3 "Gross income", "gross proceeds of sale", defined.
 
21 (a)  "Gross income" means the gross receipts, cash or accrued, of
 
22 the taxpayer received as compensation for personal services and
 
23 the gross receipts of the taxpayer derived from trade, business,
 

 
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 1 commerce, or sales and the value proceeding or accruing from the
 
 2 sale of tangible personal property, or service, or both, and all
 
 3 receipts, actual or accrued as hereinafter provided, by reason of
 
 4 the investment of the capital of the business engaged in,
 
 5 including interest, discount, rentals, royalties, except as
 
 6 provided by subsection (b), fees, or other emoluments however
 
 7 designated and without any deductions on account of the cost of
 
 8 property sold, the cost of materials used, labor cost, taxes,
 
 9 royalties, interest, or discount paid or any other expenses
 
10 whatsoever.  Every taxpayer shall be presumed to be dealing on a
 
11 cash basis unless the taxpayer proves to the satisfaction of the
 
12 department of taxation that the taxpayer is dealing on an accrual
 
13 basis and the taxpayer's books are so kept, or unless the
 
14 taxpayer employs or is required to employ the accrual basis for
 
15 the purposes of the tax imposed by chapter 235 for any taxable
 
16 year in which event the taxpayer shall report the taxpayer's
 
17 gross income for the purposes of this chapter on the accrual
 
18 basis for the same period.
 
19      "Gross proceeds of sale" means the value actually proceeding
 
20 from the sale of tangible personal property without any deduction
 
21 on account of the cost of property sold or expenses of any kind.
 
22      (b)  The words "gross income" and "gross proceeds of sales"
 
23 shall not be construed to include:  gross receipts from the sale
 

 
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 1 of securities as defined in 15 United States Code section 78c or
 
 2 similar laws of jurisdictions outside the United States,
 
 3 contracts for the sale of a commodity for future delivery and
 
 4 other agreements, options, and rights as defined in 7 United
 
 5 States Code section 2 that are permitted to be traded on a board
 
 6 of trade designated by the Commodities Futures Trading Commission
 
 7 under the Commodity Exchange Act, or evidence of indebtedness or,
 
 8 except as otherwise provided, from the sale of land in fee
 
 9 simple, improved or unimproved, dividends as defined by chapter
 
10 235; cash discounts allowed and taken on sales; the proceeds of
 
11 sale of goods, wares, or merchandise returned by customers when
 
12 the sale price is refunded either in cash or by credit; [or] the
 
13 sale price of any article accepted as part payment on any new
 
14 article sold, if the full sale price of the new article is
 
15 included in the "gross income" or "gross proceeds of sales";
 
16 gross receipts from the sale or transfer of materials or
 
17 supplies, interest on loans, or the provision of engineering,
 
18 construction, maintenance, or managerial services by one "member"
 
19 of an "affiliated public service company group" to another
 
20 "member" of the same group as such terms are defined in section
 
21 239-2[.]; or royalties earned on the sale or licensing of
 
22 intellectual property whether or not the intellectual property
 
23 was developed within the State; provided that the intellectual
 

 
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                                                        S.D. 2
                                                        

 
 1 property is developed for use in a qualified high technology
 
 2 business.  For the purpose of this subsection:
 
 3      "Qualified high technology business" has the same meaning as
 
 4 in section 235-   .
 
 5      "Qualified research expenses" has the same meaning as in
 
 6 section 235-   .
 
 7      Accounts found to be worthless and actually charged off for
 
 8 income tax purposes may, at corresponding periods, be deducted
 
 9 from gross proceeds of sale, or gross income, within this
 
10 chapter, so far as they reflect taxable sales made, or gross
 
11 income earned, after July 1, 1935, but shall be added to gross
 
12 proceeds of sale or gross income when and if afterwards
 
13 collected."
 
14                             PART IV.
 
15      SECTION 11.  The legislature finds and determines that
 
16 employment and economic opportunities have exponentially
 
17 increased in communities in which the high technology industry is
 
18 concentrated, and that it is in the public interest to promote
 
19 Hawaii's economic growth by supporting the high technology
 
20 industry in this State.  The legislature further finds and
 
21 declares that facilities which support the high technology
 
22 industry will promote the economic growth of the State by making
 
23 the State a more attractive location for the high technology
 

 
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 1 industry and support the State's existing high technology
 
 2 industry, that the high technology industry constitutes an
 
 3 industrial enterprise within the meaning of part V, chapter 39A,
 
 4 Hawaii Revised Statutes, and that the issuance of special purpose
 
 5 revenue bonds, the proceeds of which will be loaned to a not-for-
 
 6 profit corporation for the acquisition and development of such
 
 7 facilities, is also authorized under part V, chapter 39A, Hawaii
 
 8 Revised Statutes.  
 
 9      The legislature further finds and declares that the issuance
 
10 of special purpose revenue bonds under this Part is in the public
 
11 interest, and for the public health, safety, and general welfare
 
12 of the State, and promotes the development of a high technology
 
13 industry in the State.
 
14      SECTION 12.  Pursuant to part V, chapter 39A, Hawaii Revised
 
15 Statutes, the department of budget and finance, with the approval
 
16 of the governor, is authorized to issue in one or more series
 
17 special purpose revenue bonds in a total amount not to exceed
 
18 $100,000,000, for the purpose of assisting Ohana Foundation, a
 
19 Hawaii not-for-profit corporation, and/or one or more of its not-
 
20 for-profit affiliates in financing or refinancing costs related
 
21 to the acquisition and development of facilities of, or for, or
 
22 to assist the high technology industry, including without
 
23 limitation, facilities for research, development, technology
 

 
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 1 development, and technology support.  The legislature finds and
 
 2 determines that the activities and facilities of Ohana
 
 3 Foundation, or its not-for-profit affiliates, constitute a
 
 4 project as defined in part V, chapter 39A, Hawaii Revised
 
 5 Statutes, and the financing thereof is assistance to an
 
 6 industrial enterprise.
 
 7      SECTION 13.  The special purpose revenue bonds issued under
 
 8 this part shall be issued pursuant to part V, chapter 39A, Hawaii
 
 9 Revised Statutes, relating to the power to issue special purpose
 
10 revenue bonds to assist industrial enterprises.
 
11      SECTION 14.  The department of budget and finance is further
 
12 authorized to issue from time to time refunding special purpose
 
13 revenue bonds authorized in such principal amounts as the
 
14 department shall determine to be necessary to refund the special
 
15 purpose revenue bonds authorized in section 12.
 
16      SECTION 15.  The authorization to issue special purpose
 
17 revenue bonds under section 12 of this Part shall lapse on
 
18 June 30, 2003.
 
19      SECTION 16.  Section 39A-151, Hawaii Revised Statutes, is
 
20 amended by amending the definitions of "project" and "project
 
21 agreement" to read as follows:
 
22      ""Project" means any combination of land, buildings, and
 
23 other improvements thereon, including without limitation parking
 

 
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 1 facilities, for use [as] of, or for, or to assist an industrial
 
 2 enterprise, including, without limiting the generality of the
 
 3 foregoing, machinery, equipment, furnishings, and apparatus which
 
 4 shall be deemed necessary, suitable, or useful to such
 
 5 enterprise.
 
 6      "Project agreement" means any agreement entered into under
 
 7 this part by the department with a project party to finance,
 
 8 construct, operate, or maintain [an industrial plant] a project
 
 9 from the proceeds of special purpose revenue bonds, or to lend
 
10 the proceeds of special purpose revenue bonds to assist an
 
11 industrial enterprise, including without limitation any loan
 
12 agreement."
 
13      SECTION 17.  The director of finance may petition the state
 
14 supreme court for an opinion as to the validity of any special
 
15 purpose revenue bonds to be issued under sections 11 to 16 of
 
16 this Part to assist an industrial enterprise under article VII,
 
17 section 12, of the state constitution.
 
18      The petition shall constitute a case for the purposes of
 
19 section 602-5, Hawaii Revised Statutes, and the supreme court
 
20 shall have exclusive and original jurisdiction to receive and
 
21 determine the question presented in the petition, irrespective of
 
22 an actual controversy or dispute regarding the project agreement
 
23 or its validity.
 

 
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 1                              PART V.
 
 2      SECTION 18.  The purpose of this Part is to foster the
 
 3 development of knowledge-based industries by integrating those
 
 4 industries with Hawaii's economy in a way that enhances and
 
 5 strengthens the tourism industry.
 
 6      SECTION 19.  Section 201-97, Hawaii Revised Statutes, is
 
 7 amended to read as follows:
 
 8      "[[]§201-97[]]  Integration and development of the tourism
 
 9 industry.  The office shall be responsible for planning for the
 
10 integrated and coordinated development and expansion of the
 
11 tourism industry of the State.  The office shall investigate and
 
12 recommend to appropriate governmental officers, agencies,
 
13 legislative committees, and private groups ways and means of
 
14 coordinating promotional activities on behalf of tourism with the
 
15 development of recreational and other facilities, and with
 
16 existing and potential information and communications technology
 
17 networks and services in the State, for improved tourism
 
18 development.  The office shall also review the expenditure of
 
19 governmental funds for tourism-related activities and shall
 
20 prepare an annual report on the expenditures, together with any
 
21 recommendations the office may have.  The annual report shall be
 
22 submitted to the legislature as part of the annual report
 
23 required under section 201-98."
 

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

 
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 1                             PART VI.
 
 2      SECTION 21.  Economic development opportunities are
 
 3 changing.  The playing field is now the world and not the next
 
 4 state or country.  The Internet is the catalyst and the enabling
 
 5 infrastructure is technology and telecommunications.  The
 
 6 legislature finds that exempting Internet commerce from state
 
 7 taxation for five years and an Internet exchange will be a key
 
 8 element that allows Hawaii's businesses to establish a global
 
 9 presence.
 
10      The legislature finds that in making this exemption for
 
11 Internet access and commerce it is encouraging a new type of
 
12 worldwide commerce.  In doing so, the legislature is fully aware
 
13 that other types of commerce exist such as local and catalogue
 
14 mail service.  The legislature finds, however, that while the
 
15 result of all commerce is to deliver goods to the consumer, the
 
16 Internet does it in a bold new way.  As it is seldom clear where
 
17 the seller actually is situated, or in the case of a sales tax,
 
18 who the customer is in an Internet sale, all states are finding
 
19 Internet transactions difficult to tax.  That is one reason that
 
20 Congress has formed a study group to review the challenges in
 
21 taxing this activity with the desired result of some uniformity
 
22 at least within the United States.  The legislature finds that a
 
23 three year moratorium in the taxation of Internet access and
 

 
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 1 commerce will let the fledgling industry develop unhindered by
 
 2 Hawaii taxes and will give the study group time to resolve the
 
 3 many issues that need to be resolved. 
 
 4      The legislature finds that while Internet commerce may
 
 5 compete with other types of commerce it is sufficiently unique
 
 6 that the legislature may grant a temporary exemption that does
 
 7 not discriminate against interstate commerce and does not raise a
 
 8 question of equal protection that cannot be defended.
 
 9      SECTION 22.  Chapter 231, Hawaii Revised Statutes, is
 
10 amended by adding a new section to be appropriately designated
 
11 and to read as follows:
 
12      "§231-    Hawaii Internet Tax Freedom Act.  (a)  No income
 
13 tax under chapter 235, general excise tax under chapter 237, or
 
14 use tax under chapter 238, shall be imposed on Internet
 
15 electronic commerce or Internet access.
 
16      (b)  The exemption under this section shall not be claimed
 
17 unless there is a true Internet electronic commerce transaction.
 
18 A true Internet electronic commerce transaction involves
 
19 electronic commerce that occurs when:
 
20      (1)  The buyer, lessee, licensee, or receiver of property,
 
21           goods, services, or information resides in Hawaii and
 
22           the seller, lessor, licensor, or provider of property,
 
23           goods, services, or information does not reside in
 

 
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 1           Hawaii and has no agents or employees in Hawaii; or
 
 2      (2)  The seller, lessor, licensor, or provider of property,
 
 3           goods, services, or information resides in Hawaii and
 
 4           the buyer, lessee, licensee, or receiver of property,
 
 5           goods, services, or information resides outside of
 
 6           Hawaii.
 
 7 Attempts by persons actually in Hawaii to sell to persons who
 
 8 reside in Hawaii through the Internet where the person uses the
 
 9 Internet to take advantage of the tax exemption under this
 
10 section where they would not otherwise be qualified to claim the
 
11 exemption shall not be allowed this exemption.  The director of
 
12 taxation may disallow any exemptions claimed under this section
 
13 if the director finds that the basis for the exemption is a sham.
 
14      (c)  As used in this section:
 
15      "Electronic commerce" means any transaction conducted over
 
16 the Internet or through Internet access, comprising the sale,
 
17 lease, license, offer, or delivery of property, goods, services,
 
18 or information, whether or not for consideration, and includes
 
19 the provision of Internet access.
 
20      "Internet" means collectively the myriad of computer and
 
21 telecommunications facilities, including equipment and operating
 
22 software which comprise the interconnected world-wide network of
 
23 networks that employ the Transmission Control Protocol/Internet
 

 
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 1 Protocol, or any predecessor or successor protocols to that
 
 2 protocol, to communicate information of all kinds by wire or
 
 3 radio.
 
 4      "Internet access" means a service that enables users to
 
 5 access content, information, electronic mail, or other services
 
 6 offered over the Internet, and may also include access to
 
 7 proprietary content, information, and other services as part of a
 
 8 package of services offered to user.  The term does not include
 
 9 telecommunications service as defined in section 269-1.
 
10      (d)  This section is repealed on January 1, 2002."
 
11      SECTION 23.  Chapter 304, Hawaii Revised Statutes, is
 
12 amended by adding a new section to part II, subpart L, to be
 
13 appropriately designated and to read as follows:
 
14      "§304-      Hawaii Internet exchange; established.  There is
 
15 established within the University of Hawaii office of information
 
16 technology services, an Internet exchange that shall be known as
 
17 the Hawaii Internet exchange.  The Hawaii Internet exchange shall
 
18 serve as a switching and peering point for Internet service
 
19 providers."
 
20      SECTION 24.  Section 226-103, Hawaii Revised Statutes, is
 
21 amended by amending subsection (g) to read as follows:
 
22      "(g)  Priority guidelines to promote the development of the
 
23 information industry: 
 

 
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 1      (1)  Establish an information network that will serve as the
 
 2           catalyst for establishing a viable information industry
 
 3           in Hawaii.
 
 4      (2)  Encourage the development of services such as financial
 
 5           data processing, a products and services exchange,
 
 6           foreign language translations, telemarketing,
 
 7           teleconferencing, a twenty-four-hour international
 
 8           stock exchange, international banking, [and] a Pacific
 
 9           Rim management center[.], and an Internet exchange.
 
10      (3)  Encourage the development of small businesses in the
 
11           information field such as software development, the
 
12           development of new information systems and peripherals,
 
13           data conversion and data entry services, and home or
 
14           cottage services such as computer programming,
 
15           secretarial, and accounting services.
 
16      (4)  Encourage the development or expansion of educational
 
17           and training opportunities for residents in the
 
18           information and telecommunications fields.
 
19      (5)  Encourage research activities, including legal research
 
20           in the information and telecommunications fields.
 
21      (6)  Support promotional activities to market Hawaii's
 
22           information industry services."
 
23      SECTION 25.  There is appropriated out of the general
 

 
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 1 revenues of the State of Hawaii the sum of $         , or so much
 
 2 thereof as may be necessary, for fiscal year 1999-2000, and the
 
 3 same sum, or so much thereof as may be necessary, for fiscal year
 
 4 2000-2001, to purchase the information technology equipment and
 
 5 support services necessary for the establishment of the Hawaii
 
 6 Internet exchange within the University of Hawaii, information
 
 7 technology services.  The sums appropriated shall be deposited
 
 8 into the University of Hawaii information technology services
 
 9 special fund for the purposes of section 23.
 
10                             PART VII.
 
11      SECTION 26.  While Hawaii's economy struggles with low
 
12 economic growth for the eighth consecutive year, jobs in the
 
13 information industry continue to grow.  Industry watchers
 
14 estimate that there are 190,000 jobs in the high-tech industry
 
15 that are currently unfilled, and the shortage is not expected to
 
16 resolve itself anytime soon.  By the year 2005, more than 750,000
 
17 additional high-tech jobs are expected to be created.  It has
 
18 been estimated that Hawaii will have 5,000 technical jobs by the
 
19 year 2000 that will go unfilled by the local employment pool.
 
20      SECTION 27.  Chapter 304, Hawaii Revised Statutes, is
 
21 amended by adding a new section to part II, subpart L, to be
 
22 appropriately designated and to read as follows:
 
23      "§304-      Technology work force development training
 

 


 

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 1 program.  (a)  There is established a technology work force
 
 2 training program hereinafter referred to as the training program.
 
 3 The training program shall be placed within the University of
 
 4 Hawaii for administrative purposes as provided in section 26-35.
 
 5 The training program shall provide accelerated technology
 
 6 education and training at the post-high-school to graduate
 
 7 levels, and shall include public, private, and for-profit
 
 8 educational institutions.  In the design and delivery of
 
 9 programs, the training program may cooperate or contract with
 
10 other public, private, and for-profit institutions.
 
11      (b)  The administrator of the training program shall seek
 
12 and encourage partnerships between members of the private
 
13 information technology industry and the training program, as may
 
14 be appropriate, to provide preemployment or employment training,
 
15 or on-the-job training for local residents hired by businesses
 
16 relocating to Hawaii or expanding local operations.
 
17      (c)  The university shall establish and lead an inter-agency
 
18 task force to include representatives from the department of
 
19 business, economic development, and tourism, the department of
 
20 labor and industrial relations, and the county economic
 
21 development boards to advise on the program design, industry
 
22 recruitment, and training delivery activities of participating
 
23 entities."
 

 
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 1      SECTION 28.  There is appropriated out of the general
 
 2 revenues of the State of Hawaii the sum of $           , or so
 
 3 much thereof as may be necessary, for fiscal year 1999-2000, and
 
 4 the same sum, or so much thereof as may be necessary, for fiscal
 
 5 year 2000-2001, to provide funds to educational institutions to
 
 6 establish an information and telecommunications training program.
 
 7 The sums appropriated shall be expended by the University of
 
 8 Hawaii for the purposes of section 27.
 
 9                            PART VIII.
 
10      SECTION 29.  The legislature finds that Hawaii's students
 
11 will require high-speed access to the Internet.  Hawaii, because
 
12 of its remote geographic location, pays a significant cost for
 
13 high-speed access.  A university on the continental United States
 
14 pays $20,000 per year for high speed access to the Internet
 
15 whereas the same access would cost $2,500,000 per year for the
 
16 University of Hawaii.  Hawaii's students must have equal access
 
17 to the Internet to ensure global competitiveness.  
 
18      In addition, students must be afforded opportunities in new
 
19 educational technologies, such as the E Academy concept, which
 
20 will provide relevant, challenging, and meaningful course
 
21 offerings for students interested in pursuing a career in the
 
22 advanced technology fields.  This educational program will
 
23 provide Hawaii's students with meaningful and relevant
 

 
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 1 preparation for both immediate opportunities in entry level
 
 2 technology positions, and advanced studies in post secondary
 
 3 information technology, science, engineering, and math.
 
 4      SECTION 30.  Section 226-107, Hawaii Revised Statutes, is
 
 5 amended to read as follows:
 
 6      "§226-107  Quality education.  Priority guidelines to
 
 7 promote quality education:
 
 8      (1)  Pursue effective programs which reflect the varied
 
 9           district, school, and student needs to strengthen basic
 
10           skills achievement.
 
11      (2)  Continue emphasis on general education "core"
 
12           requirements to provide common background to students
 
13           and essential support to other university programs.
 
14      (3)  Initiate efforts to improve the quality of education by
 
15           improving the capabilities of the education work force.
 
16      (4)  Promote increased opportunities for greater autonomy
 
17           and flexibility of educational institutions in their
 
18           decisionmaking responsibilities.
 
19      (5)  Increase and improve the use of information technology
 
20           in education [and encourage] by the availability of
 
21           telecommunication equipment for:
 
22           (A)  The electronic exchange of information;
 
23           (B)  Statewide electronic mail; and
 

 
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 1           (C)  Access to the Internet.
 
 2           Encourage programs which increase the public's
 
 3           awareness and understanding of the impact of
 
 4           information technologies on our lives.
 
 5      (6)  Pursue the establishment of Hawaii's public and private
 
 6           universities and colleges as research and training
 
 7           centers of the Pacific.
 
 8      (7)  Develop resources and programs for early childhood
 
 9           education.
 
10      (8)  Explore alternatives for funding and delivery of
 
11           educational services to improve the overall quality of
 
12           education.
 
13      (9)  Strengthen and expand educational programs and services
 
14           for students with special needs."
 
15      SECTION 31.  (a)  The department of education shall
 
16 establish twelve to fourteen E Academies throughout the State
 
17 with onsite locations based at selected public high schools in
 
18 each district.  The department of education shall also develop
 
19 new challenging high school course offerings in math, science,
 
20 and technology content areas and include the new courses in the
 
21 Authorized Course Code and Number guide, for the purposes of the
 
22 E Academies.  The department of education shall provide an
 
23 innovative training program for E Academy teachers, and conduct
 

 
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                                                        S.D. 2
                                                        

 
 1 instructional assessment activities beginning in the 1999-2000
 
 2 school year.  
 
 3      (b)  As used in this section, "E Academy" means a virtual,
 
 4 site-based school which provides students with industry and
 
 5 academic standards-based instruction and assessments in 
 
 6 technology, science, math, and engineering.
 
 7      SECTION 32.  There is appropriated out of the general
 
 8 revenues of the State of Hawaii the sum of $           , or so
 
 9 much thereof as may be necessary for fiscal year 1999-2000, and
 
10 the same sum, or so much thereof as may be necessary, for fiscal
 
11 year 2000-2001, to provide funds for the establishment of twelve
 
12 to fourteen E Academies statewide at selected schools in each of
 
13 the school districts.  The sum appropriated shall be expended by
 
14 the department of education for the purposes of section 31.
 
15                             PART IX.
 
16      SECTION 33.  Statutory material to be repealed is bracketed.
 
17 New statutory material is underscored.
 
18      SECTION 34.  This Act shall take effect upon its approval;
 
19 provided that sections 4, 22, 25, 28, and 32 of this Act take
 
20 effect on July 1, 1999; provided that sections 6, 8, and 9 of
 
21 this Act shall apply to taxable years beginning after
 
22 December 31, 1998; provided that section 10 of this Act shall
 
23 apply to gross income or gross proceeds received after
 
24 December 31, 1999; and provided further that section 7 of this
 

 
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                                                        S.D. 2
                                                        

 
 1 Act shall apply to calendar year 1999 and for calendar years
 
 2 thereafter, or if a fiscal year taxpayer, section 7 of this Act
 
 3 shall apply to the fiscal year in which January 1, 1999, occurs
 
 4 and fiscal years thereafter.