REPORT TITLE:
High Technology


DESCRIPTION:
Provides an investment tax credit for high technology business
ventures. (SD1)

 
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THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE HIGH TECHNOLOGY BUSINESS INVESTMENT TAX CREDIT.



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

 1      SECTION 1.  Chapter 235, Hawaii Revised Statutes, is amended
 
 2 by adding to part VI a new section to be appropriately designated
 
 3 and to read as follows:
 
 4      "§235-    High-technology business investment tax credit.
 
 5 (a)  There shall be allowed to each taxpayer subject to the taxes
 
 6 imposed by this chapter, a high technology investment tax credit
 
 7 which shall be deductible from the taxpayer's net income tax
 
 8 liability, if any, imposed by this chapter for the taxable year
 
 9 in which the credit is properly claimed.  The tax credit shall be
 
10 an amount equal to ten per cent of the investment made by the
 
11 taxpayer in each of the three consecutive tax years beginning on
 
12 or after January 1 following the enactment of this section, in a
 
13 qualified high technology business, up to a maximum allowed
 
14 credit of $500,000 for the tax year for each investment made by
 
15 the taxpayer.
 
16      (b)  The credit allowed under this section shall be claimed
 
17 against the net income tax liability for the taxable year.  For
 
18 purposes of this section, "net income tax liability" means net
 
19 income tax liability reduced by all other credits allowed under
 
20 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 section 465 (with respect to deductions
 
13 limited to amount at risk) of the Internal Revenue Code) in a
 
14 qualified high technology business, of cash that is transferred
 
15 to the qualified high technology business, the transfer of which
 
16 is in connection with a transaction in exchange for stock,
 
17 interests in partnerships, joint ventures, or other entities,
 
18 licenses (exclusive or non-exclusive), rights to use technology,
 
19 marketing rights, warrants, options or any items similar to those
 
20 included herein, including but not limited to options or rights
 
21 to acquire any of the items included herein.  The nonrefundable
 
22 investment is entirely at risk of loss where repayment depends
 
23 upon the success of the qualified high technology business.  If
 

 
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 1 the money invested is to be repaid to the taxpayer, no repayment
 
 2 except for dividends or interest, shall be made for at least
 
 3 three years from the date the investment is made.  The annual
 
 4 amount of any dividend and interest payment to the taxpayer shall
 
 5 not exceed twelve per cent of the amount of the investment.
 
 6      "Qualified high technology business" means:
 
 7      (1)  A business, employing or owning capital or property, or
 
 8           maintaining an office, in this State; and
 
 9      (2)  (A)  That has qualified research expenses paid or
 
10                incurred for research conducted in this State, or
 
11           (B)  That receives income derived from qualified
 
12                research expenses; provided that the income is
 
13                received from products sold from, manufactured, or
 
14                produced in the State; or services performed in
 
15                this State.
 
16 The term "qualified high technology business" does not include
 
17 any trade or business involving the performance of services in
 
18 the field of law, engineering, architecture, accounting,
 
19 actuarial science, performing arts, consulting, athletics,
 
20 financial services, or brokerage services, or any trade or
 
21 business where the principal asset of the trade or business is
 
22 the reputation or skill of one or more of its employees; any
 
23 banking, insurance, financing, leasing, rental, investing, or
 

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

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

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

 
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 1                component itself or from plans, blueprints,
 
 2                detailed specifications, or publicly available
 
 3                information with respect to a business 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
 
22           (H)  Any research to the extent funded by any grant,
 
23                contract, or otherwise by another person (or
 
24                governmental entity)."
 

 
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 1      SECTION 2.  New statutory material is underscored.
 
 2      SECTION 3.  This Act, upon its approval, shall apply to
 
 3 taxable years beginning after December 31, 1999, and before
 
 4 January 1, 2003.
 

 
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