REPORT TITLE:
New Economy


DESCRIPTION:
Consolidates state agencies that support technology-related
businesses.  Allows qualified high technology businesses to sell
their unused net operating loss carryover to any other taxpayer.
Expands the income tax exclusion for royalties and other income
from high technology businesses.  Allows partnership investors
the flexibility of allocating the high technology business
investment tax credit among partners without regard to their
proportionate interests in their partnership investment vehicle.
Makes the high-technology business investment tax credit and the
tax credit for increasing research activities refundable to the
taxpayer or allowing the credits to be used against the
taxpayer's income tax liability in subsequent years until
exhausted.  Conforms the state tax credit for increasing research
activities with the federal tax credit.  Allows the board of
trustees of the employees' retirement system (ERS) to invest ten
percent of ERS funds in qualified high technology businesses.
Appropriates funds for education, workforce development, and
University of Hawaii research and training.  Exempts members of
the governor's special advisory council for technology
development from the senate confirmation process and from the
need to file a disclosure of financial interest with the state
ethics commission.  Promotes Hawaii, through a coordinated
statewide effort, as an internet and server-friendly place to
conduct electronic commerce, including entering into appropriate
public-private sector business partnerships.  (HB2901 HD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2901
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE NEW ECONOMY.



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

 1      SECTION 1.  The "New Economy" is an economy based on
 
 2 knowledge and ideas.  It is an economy where the keys to job
 
 3 creation and higher standards of living are innovative ideas and
 
 4 technology embedded in services and manufactured products.  It is
 
 5 an economy where risk, uncertainty, and constant change are the
 
 6 rule rather than the exception.  It is an economy in a world of
 
 7 innovation where there is rapid convergence of technology,
 
 8 telecommunications, and media.  As a result, partnerships, such
 
 9 as MSNBC and AOL-Time Warner, become staples of this rapidly
 
10 moving industry.
 
11      Hawaii is competing in this New Economy.  Hawaii offers
 
12 great advantages not available in other areas of the world:
 
13 unparalleled quality of life, rich and diverse cultures, and an
 
14 educated populace.  In 1999, the twentieth legislature, the
 
15 educational system, and administration partnered to demonstrate
 
16 their commitment of support for an aggressive development of high
 
17 technology resources.  Act 178, Session Laws of Hawaii 1999,
 
18 called for the integration of technology with some of Hawaii's
 
19 industries, the increase of technology professionals through work
 

 
Page 2                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 force development programs, and the creation of economic
 
 2 incentives for businesses to increase high technology research
 
 3 activities.
 
 4      Since geographic location and isolation are no longer
 
 5 detrimental factors when competing in a global market, the
 
 6 legislature believes that it must continue the effort started in
 
 7 1999.  The purpose of this Act is to encourage the continued
 
 8 growth and development of high technology businesses and
 
 9 associate industries relying on these in Hawaii by:
 
10      (1)  Consolidating state agencies that support technology-
 
11           related businesses to provide clear focus and
 
12           functions;
 
13      (2)  Creating tax credits to encourage research and
 
14           development for intellectual properties;
 
15      (3)  Providing for the issuance of special purpose revenue
 
16           bonds for support and assistance to developers and high
 
17           technology companies;
 
18      (4)  Providing for the continued funding for Act 178,
 
19           Session Laws of Hawaii 1999;
 
20      (5)  Creating partnerships with the tourist industry to
 
21           market and promote Hawaii's emerging technology
 
22           industries and Hawaii as an ideal location to conduct
 
23           e-business; and
 

 
Page 3                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (6)  Effectively developing the growth indicators of the New
 
 2           Economy.
 
 3                PART I.  CONSOLIDATION OF AGENCIES
 
 4      SECTION 2.  The purpose of this part is to require the
 
 5 special advisor for technology development, which was established
 
 6 within the office of the governor by section 3 of Act 178,
 
 7 Session Laws of Hawaii 1999, to develop a plan for the
 
 8 consolidation of the Hawaii strategic development corporation,
 
 9 the natural energy laboratory of Hawaii authority, and the high
 
10 technology development corporation, to facilitate the efforts of
 
11 the private sector in a manner that is coordinated, focused, and
 
12 responsive to the needs of the private sector.
 
13      SECTION 3.  Section 27-41, Hawaii Revised Statutes, is
 
14 amended by amending subsection (b) to read as follows:
 
15      "(b)  The duties of the special advisor shall include but
 
16 not be limited to:
 
17      (1)  Developing, coordinating, and implementing short- and
 
18           long-range state policies and directions to enhance the
 
19           development of high technology industries in Hawaii;
 
20      (2)  Coordinating all state high technology agencies [while
 
21           developing];
 
22      (3)  Developing a plan for the reorganization or
 
23           consolidation of [these agencies] the Hawaii strategic
 

 
Page 4                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           development corporation, the natural energy laboratory
 
 2           of Hawaii authority, and the high technology
 
 3           development corporation in the interests of greater
 
 4           efficiency and cost effectiveness[;] and to facilitate
 
 5           the efforts of the private sector in a manner that is
 
 6           coordinated, focused, and responsive to the needs of
 
 7           that sector.  The reorganization or consolidation of
 
 8           these agencies shall include the following:
 
 9           (A)  The creation of a clear sense of mission for the
 
10                resulting agency or agencies;
 
11           (B)  The development of user-friendly services;
 
12           (C)  The adoption of "best practices" of management and
 
13                operations and search for economies of scale;
 
14           (D)  The elimination of duplicative or outmoded
 
15                functions and activities;
 
16           (E)  The enhancement of productivity by consolidating
 
17                functions;
 
18           (F)  The elimination of unnecessary regulation;
 
19           (G)  The redesigning of processes to increase
 
20                efficiency;
 
21           (H)  The exposure of government operations to
 
22                competition; and
 
23           (I)  The realization of long-term savings;
 

 
Page 5                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1     [(3)] (4)  Advising the private sector in the development of
 
 2           high technology activities and resources and providing
 
 3           technical or other assistance to private industry upon
 
 4           request;
 
 5     [(4)] (5)  Creating, disseminating, and updating a listing of
 
 6           all high technology assistance programs in the State
 
 7           and where they can be reached;
 
 8     [(5)] (6)  Pursuing appropriate public-private sector
 
 9           business partnerships;
 
10     [(6)] (7)  Coordinating the State's promotion and marketing
 
11           of the high technology industry, including a review of
 
12           current marketing efforts;
 
13     [(7)] (8)  Arranging for the conduct of research through
 
14           contractual services with the University of Hawaii or
 
15           any agency or other qualified persons;
 
16     [(8)] (9)  Encouraging the development of educational,
 
17           training, and career programs in high technology
 
18           industries; and
 
19     [(9)] (10)  Performing other necessary or desirable functions
 
20           to facilitate the intent of this section."
 
21                       PART II.  TAX CREDITS
 
22      SECTION 4.  The purpose of this part is to:
 

 
 
 
Page 6                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (1)  Allow qualified high technology businesses to sell
 
 2           their unused net operating loss carryover to any other
 
 3           taxpayer;
 
 4      (2)  Amend the high technology-related definitions in the
 
 5           income tax law by:
 
 6           (A)  Consolidating all of the high-technology
 
 7                definitions in chapter 235, Hawaii Revised
 
 8                Statutes, into section 235-1, Hawaii Revised
 
 9                Statutes;
 
10           (B)  Repealing the corresponding definitions from the
 
11                high technology tax credit sections;
 
12           (C)  Adding new definitions of "computer data" and
 
13                computer program"; and
 
14           (D)  Amending the definition of "qualified high
 
15                technology business" to mean a business that
 
16                conducts a majority, rather than one hundred per
 
17                cent, of its activities in performing qualified
 
18                research in Hawaii, or receives a majority, rather
 
19                than one hundred per cent, of its gross income
 
20                derived from qualified research;
 
21      (3)  Amend the income tax exclusion for royalties and other
 
22           income from high technology businesses established by
 
23           section 22 of Act 178, Session Laws of Hawaii 1999, by
 
24           expanding that exclusion to include royalties derived
 

 
Page 7                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           from any patent, copyright, or trade secret for any
 
 2           individual or other person who owns the patent or
 
 3           copyright;
 
 4      (4)  Amend the section relating to operation of certain
 
 5           Internal Revenue Code provisions to allow partnership
 
 6           investors the flexibility of allocating the high
 
 7           technology business investment tax credit in section
 
 8           235-110.9, Hawaii Revised Statutes, among partners
 
 9           without regard to their proportionate interests in
 
10           their partnership investment vehicle;
 
11      (5)  Amend the high-technology business investment tax
 
12           credit under section 235-110.9, Hawaii Revised
 
13           Statutes, and the tax credit for increasing research
 
14           activities under section 235-110.91, Hawaii Revised
 
15           Statutes, by making the credit refundable to the
 
16           taxpayer in addition to allowing the credit to be used
 
17           against the taxpayer's income tax liability in
 
18           subsequent years until exhausted; and
 
19      (6)  Conform the tax credit for increasing research
 
20           activities under section 235-110.91, Hawaii Revised
 
21           Statutes, to that provided under the Internal Revenue
 

 
 
 
 
 
Page 8                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           Code, thereby increasing the tax credit from 2.5 per
 
 2           cent to twenty per cent to match the federal rate.
 
 3      SECTION 5.  Chapter 235, Hawaii Revised Statutes, is amended
 
 4 by adding a new section to be appropriately designated and to
 
 5 read as follows:
 
 6      "§235-    High technology; sale of unused net operating loss
 
 7 carryover.  (a)  A qualified high technology business may apply
 
 8 to the department of taxation to sell its unused net operating
 
 9 loss carryover to another taxpayer.  If approved by the
 
10 department of taxation, a qualified high technology business may
 
11 sell its unused net operating loss carryover for private
 
12 financial assistance to another taxpayer in an amount equal to at
 
13 least seventy-five per cent of the amount of the surrendered tax
 
14 benefit.  The tax benefit purchased by the buyer shall be claimed
 
15 in the year the sale is approved by the department.  Any use of
 
16 the purchased tax benefit for tax carryback or carryforward
 
17 purposes shall comply with applicable law.  The financial
 
18 assistance gained by the seller, which is a qualified high
 
19 technology business, shall be reported on its tax return but
 
20 shall not be considered taxable income.  The total amount of
 
21 unused net operating losses sold annually pursuant to this
 
22 section shall not exceed $        .
 

 
 
 
Page 9                                                     2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (b)  No application for the sale of unused net operating
 
 2 losses shall be approved if the seller is a qualified high
 
 3 technology business that:
 
 4      (1)  Has demonstrated positive net income in any of the two
 
 5           previous full years of ongoing operations as determined
 
 6           on its financial statements;
 
 7      (2)  Has demonstrated a ratio in excess of one hundred ten
 
 8           per cent or greater of operating revenues divided by
 
 9           operating expenses in any of the two previous full
 
10           years of operations as determined on its financial
 
11           statements; or
 
12      (3)  Is directly or indirectly at least fifty per cent owned
 
13           or controlled by another corporation that has
 
14           demonstrated positive net income in any of the two
 
15           previous full years of ongoing operations as determined
 
16           on its financial statements or is part of a
 
17           consolidated group of affiliate corporations, as filed
 
18           for federal income tax purposes, that in the aggregate
 
19           has demonstrated positive net income in any of the two
 
20           previous full years of ongoing operations as determined
 
21           on its combined financial statements.
 
22      (c)  The department of taxation shall adopt rules pursuant
 
23 to chapter 91 to implement this section, which shall include the
 
24 following:
 

 
Page 10                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (1)  Procedure and criteria for the approval or disapproval
 
 2           of applications filed by qualified high technology
 
 3           businesses selling unused net operating losses; and
 
 4      (2)  Criteria to provide for the equitable apportionment of
 
 5           qualified sales allowed annually under this section to
 
 6           eligible applicants."
 
 7      SECTION 6.  Section 235-1, Hawaii Revised Statutes, is
 
 8 amended by adding six new definitions to be appropriately
 
 9 inserted and to read as follows:
 
10      ""Computer data" means any representation of information,
 
11 knowledge, facts, concepts, or instructions that is being
 
12 prepared or has been prepared and is intended to be processed, is
 
13 being processed, or has been processed in a computer or computer
 
14 network.  "Computer data" includes works in the performing arts
 
15 such as audio files, video files, audiovisual files, computer
 
16 animation, and other entertainment products that are perceived by
 
17 or through the operation of a computer.
 
18      "Computer program" means an ordered set of computer data
 
19 representing coded instructions or statements, that, when
 
20 executed by a computer, causes the computer to perform one or
 
21 more computer operations.
 
22      "Computer software" means computer data, a computer program,
 
23 or a set of computer programs, procedures, or associated
 

 
Page 11                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 documentation concerned with the operation and function of a
 
 2 computer system, and includes both systems and application
 
 3 programs and subdivisions, such as assemblers, compilers,
 
 4 routines, generators, and utility programs.
 
 5      "Investment" means a nonrefundable investment, at risk, as
 
 6 that term is used in section 465 (with respect to deductions
 
 7 limited to amount at risk) of the Internal Revenue Code, in a
 
 8 qualified high technology business, of cash that is transferred
 
 9 to the qualified high technology business, the transfer of which
 
10 is in connection with a transaction in exchange for stock,
 
11 interests in partnerships, joint ventures, or other entities,
 
12 licenses (exclusive or nonexclusive), rights to use technology,
 
13 marketing rights, warrants, options, or any items similar to
 
14 those included in this definition, including but not limited to
 
15 options or rights to acquire any of the items included in this
 
16 definition.  The nonrefundable investment is entirely at risk of
 
17 loss where repayment depends upon the success of the qualified
 
18 high technology business.  If the money invested is to be repaid
 
19 to the taxpayer, no repayment except for dividends or interest
 
20 shall be made for at least three years from the date the
 
21 investment is made.  The annual amount of any dividend and
 
22 interest payment to the taxpayer shall not exceed twelve per cent
 
23 of the amount of the investment.
 

 
Page 12                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      "Qualified high technology business" means a business,
 
 2 employing or owning capital or property, or maintaining an
 
 3 office, in this State that:
 
 4      (1)  Conducts a majority of its activities in performing
 
 5           qualified research in this State; or
 
 6      (2)  Receives a majority of its gross income derived from
 
 7           qualified research; provided that the income is
 
 8           received from:
 
 9           (A)  Products sold from, manufactured in, or produced
 
10                in the State; or
 
11           (B)  Services performed in this State.
 
12      The term "qualified high technology business" does not
 
13 include:
 
14      (1)  Any trade or business involving the performance of
 
15           services in the field of law, architecture, accounting,
 
16           actuarial science, performing arts, consulting,
 
17           athletics, financial services, or brokerage services;
 
18      (2)  Any banking, insurance, financing, leasing, rental,
 
19           investing, or similar business; any farming business,
 
20           including the business of raising or harvesting trees;
 
21           any business involving the production or extraction of
 
22           products of a character with respect to which a
 
23           deduction is allowable under section 611 (with respect
 

 
Page 13                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           to allowance of deduction for depletion), 613 (with
 
 2           respect to basis for percentage depletion), or 613A
 
 3           (with respect to limitation on percentage depleting in
 
 4           cases of oil and gas wells) of the Internal Revenue
 
 5           Code;
 
 6      (3)  Any business operating a hotel, motel, restaurant, or
 
 7           similar business; and
 
 8      (4)  Any trade or business involving a hospital, a private
 
 9           office of a licensed health care professional, a group
 
10           practice of licensed health care professionals, or a
 
11           nursing home.
 
12      "Qualified research" means:
 
13      (1)  The same as in section 41(d) of the Internal Revenue
 
14           Code; or
 
15      (2)  Developing, designing, modifying, programming, and
 
16           licensing computer software;
 
17 except that it shall not include research conducted outside the
 
18 State."
 
19      SECTION 7.  Section 235-2.4, Hawaii Revised Statutes, is
 
20 amended to read as follows:
 
21      "§235-2.4  Operation of certain Internal Revenue Code
 
22 provisions.(a)  Section 63 (with respect to taxable income
 
23 defined) of the Internal Revenue Code shall be operative for the
 

 
Page 14                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 purposes of this chapter, except that the standard deduction
 
 2 amount in section 63(c) of the Internal Revenue Code shall
 
 3 instead mean:
 
 4      (1)  $1,900 in the case of:
 
 5           (A)  A joint return as provided by section 235-93; or
 
 6           (B)  A surviving spouse (as defined in section 2(a) of
 
 7                the Internal Revenue Code);
 
 8      (2)  $1,650 in the case of a head of household (as defined
 
 9           in section 2(b) of the Internal Revenue Code);
 
10      (3)  $1,500 in the case of an individual who is not married
 
11           and who is not a surviving spouse or head of household;
 
12           or
 
13      (4)  $950 in the case of a married individual filing a
 
14           separate return.
 
15      Section 63(c)(4) shall not be operative in this State.
 
16 Section 63(c)(5) shall be operative, except that the limitation
 
17 on basic standard deduction in the case of certain dependents
 
18 shall be the greater of $500 or such individual's earned income.
 
19 Section 63(f) shall not be operative in this State.
 
20      The standard deduction amount for nonresidents shall be
 
21 calculated pursuant to section 235-5.
 
22      (b)  Section 72 (with respect to annuities; certain proceeds
 
23 of endowment and life insurance contracts) of the Internal
 

 
Page 15                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 Revenue Code shall be operative for purposes of this chapter and
 
 2 be interpreted with due regard to section 235-7(a), except that
 
 3 the ten per cent additional tax on early distributions from
 
 4 retirement plans in section 72(t) shall not be operative for
 
 5 purposes of this chapter.
 
 6      (c)  Section 121 (with respect to exclusion of gain from
 
 7 sale of principal residence) of the Internal Revenue Code shall
 
 8 be operative for purposes of this chapter, except that for the
 
 9 election under section 121(f), a reference to section 1034
 
10 treatment means a reference to section 235-2.4(n) in effect for
 
11 taxable year 1997.
 
12      (d)  Section 219 (with respect to retirement savings) of the
 
13 Internal Revenue Code shall be operative for the purpose of this
 
14 chapter.  For the purpose of computing the limitation on the
 
15 deduction for active participants in certain pension plans for
 
16 state income tax purposes, adjusted gross income as used in
 
17 section 219 as operative for this chapter means federal adjusted
 
18 gross income.
 
19      (e)  Section 220 (with respect to medical savings accounts)
 
20 of the Internal Revenue Code shall be operative for the purpose
 
21 of this chapter, but only with respect to medical services
 
22 accounts that have been approved by the Secretary of the Treasury
 
23 of the United States.
 

 
Page 16                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (f)  Section 408A (with respect to Roth Individual
 
 2 Retirement Accounts) of the Internal Revenue Code shall be
 
 3 operative for the purposes of this chapter.  For the purposes of
 
 4 determining the aggregate amount of contributions to a Roth
 
 5 Individual Retirement Account or qualified rollover contribution
 
 6 to a Roth Individual Retirement Account from an individual
 
 7 retirement plan other than a Roth Individual Retirement Account,
 
 8 adjusted gross income as used in section 408A as operative for
 
 9 this chapter means federal adjusted gross income.
 
10      (g)  In administering the provisions of sections 410 to 417
 
11 (with respect to special rules relating to pensions, profit
 
12 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
13 respect to special rules for multiemployer plans), and sections
 
14 419 and 419A (with respect to treatment of welfare benefit funds)
 
15 of the Internal Revenue Code, the department of taxation shall
 
16 adopt rules under chapter 91 relating to the specific
 
17 requirements under such sections and to such other administrative
 
18 requirements under those sections as may be necessary for the
 
19 efficient administration of sections 410 to 419A.
 
20      In administering sections 401 to 419A (with respect to
 
21 deferred compensation) of the Internal Revenue Code, Public Law
 
22 93-406, section 1017(i), shall be operative for the purposes of
 
23 this chapter.
 

 
Page 17                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      In administering section 402 (with respect to the taxability
 
 2 of beneficiary of employees' trust) of the Internal Revenue Code,
 
 3 the tax imposed on lump sum distributions by section 402(e) of
 
 4 the Internal Revenue Code shall be operative for the purposes of
 
 5 this chapter and the tax imposed therein is hereby imposed by
 
 6 this chapter at the rate determined under this chapter.
 
 7      (h)  Section 468B (with respect to special rules for
 
 8 designated settlement funds) of the Internal Revenue Code shall
 
 9 be operative for the purposes of this chapter and the tax imposed
 
10 therein is hereby imposed by this chapter at a rate equal to the
 
11 maximum rate in effect for the taxable year imposed on estates
 
12 and trusts under section 235-51.
 
13      (i)  Section 469 (with respect to passive activities and
 
14 credits limited) of the Internal Revenue Code shall be operative
 
15 for the purposes of this chapter.  For the purpose of computing
 
16 the offset for rental real estate activities for state income tax
 
17 purposes, adjusted gross income as used in section 469 as
 
18 operative for this chapter means federal adjusted gross income.
 
19      (j)  Sections 512 to 514 (with respect to taxation of
 
20 business income of certain exempt organizations) of the Internal
 
21 Revenue Code shall be operative for the purposes of this chapter
 
22 as provided in this subsection.
 

 
 
 
Page 18                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      "Unrelated business taxable income" means the same as in the
 
 2 Internal Revenue Code, except that in the computation thereof
 
 3 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
 4 apply, and in the determination of the net operating loss
 
 5 deduction there shall not be taken into account any amount of
 
 6 income or deduction which is excluded in computing the unrelated
 
 7 business taxable income.  Unrelated business taxable income shall
 
 8 not include any income from a prepaid legal service plan.
 
 9      For a person described in section 401 or 501 of the Internal
 
10 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
11 section 235-51 or 235-71 shall be imposed upon the person's
 
12 unrelated business taxable income.
 
13      (k)  Section 521 (with respect to cooperatives) and
 
14 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
15 and their patrons) of the Internal Revenue Code shall be
 
16 operative for the purposes of this chapter as to any cooperative
 
17 fully meeting the requirements of section 421-23, except that
 
18 Internal Revenue Code section 521 cooperatives need not be
 
19 organized in Hawaii.
 
20      (l)  Sections 527 (with respect to political organizations)
 
21 and 528 (with respect to certain homeowners associations) of the
 
22 Internal Revenue Code shall be operative for the purposes of this
 
23 chapter and the taxes imposed in each such section are hereby
 

 
Page 19                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 imposed by this chapter at the rates determined under section
 
 2 235-71.
 
 3      (m)  Section 530 (with respect to education individual
 
 4 retirement accounts) of the Internal Revenue Code shall be
 
 5 operative for the purposes of this chapter.  For the purpose of
 
 6 determining the maximum amount that a contributor could make to
 
 7 an education individual retirement account for state income tax
 
 8 purposes, modified adjusted gross income as used in section 530
 
 9 for this chapter means federal modified adjusted gross income as
 
10 defined in section 530.
 
11      (n)  Section 641 (with respect to imposition of tax) of the
 
12 Internal Revenue Code shall be operative for the purposes of this
 
13 chapter subject to the following:
 
14      (1)  The deduction for exemptions shall be allowed as
 
15           provided in section 235-54(b).
 
16      (2)  The deduction for contributions and gifts in
 
17           determining taxable income shall be limited to the
 
18           amount allowed in the case of an individual, unless the
 
19           contributions and gifts are to be used exclusively in
 
20           the State.
 
21      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
22           Code as applied by section 641 of the Internal Revenue
 

 
 
 
Page 20                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           Code is hereby imposed by this chapter at the rate and
 
 2           amount as determined under section 235-51 on estates
 
 3           and trusts.
 
 4      (o)  Section 667 (with respect to treatment of amounts
 
 5 deemed distributed by trusts in preceding years) of the Internal
 
 6 Revenue Code shall be operative for the purposes of this chapter
 
 7 and the tax imposed therein is hereby imposed by this chapter at
 
 8 the rate determined under this chapter; except that the reference
 
 9 to tax-exempt interest to which section 103 of the Internal
 
10 Revenue Code applies in section 667(a) of the Internal Revenue
 
11 Code shall instead be a reference to tax-exempt interest to which
 
12 section 235-7(b) applies.
 
13      (p)  Section 685 (with respect to treatment of qualified
 
14 funeral trusts) of the Internal Revenue Code shall be operative
 
15 for purposes of this chapter, except that the tax imposed under
 
16 this chapter shall be computed at the tax rates provided under
 
17 section 235-51, and no deduction for the exemption amount
 
18 provided in section 235-54(b) shall be allowed.  The cost-of-
 
19 living adjustment determined under section 1(f)(3) of the
 
20 Internal Revenue Code shall be operative for the purpose of
 
21 applying section 685(c)(3) under this chapter.
 
22      (q)  Section 704 of the Internal Revenue Code (with respect
 
23 to a partner's distributive share) shall be operative for
 

 
Page 21                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 purposes of this chapter; except that subsection (b)(2) shall not
 
 2 apply to allocations of the high-technology business investment
 
 3 tax credit allowed by section 235-110.9.
 
 4      [(q)] (r)  Section 1212 (with respect to capital loss
 
 5 carrybacks and carryforwards) of the Internal Revenue Code shall
 
 6 be operative for the purposes of this chapter; except that for
 
 7 the purposes of this chapter the capital loss carryback
 
 8 provisions of section 1212 shall not be operative and the capital
 
 9 loss carryforward allowed by section 1212(a) shall be limited to
 
10 five years[.]; except for qualified high technology businesses
 
11 under section 235-   , which shall be limited to fifteen years.
 
12      [(r)] (s)  Subchapter S (sections 1361 to 1379) (with
 
13 respect to tax treatment of S corporations and their
 
14 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
15 operative for the purposes of this chapter as provided in part
 
16 VII.
 
17      [(s)] (t)  Section 6015 (with respect to relief from joint
 
18 and several liability on joint return) of the Internal Revenue
 
19 Code is operative for purposes of this chapter.
 
20      [(t)] (u)  Subchapter C (sections 6221 to 6233) (with
 
21 respect to tax treatment of partnership items) of chapter 63 of
 
22 the Internal Revenue Code shall be operative for the purposes of
 
23 this chapter.
 

 
Page 22                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      [(u)] (v)  Subchapter D (sections 6240 to 6255) (with
 
 2 respect to simplified audit procedures for electing large
 
 3 partnerships) of the Internal Revenue Code shall be operative for
 
 4 the purposes of this chapter, with due regard to chapter 232
 
 5 relating to tax appeals.
 
 6      [(v)] (w)  Section 6511(h) (with respect to running of
 
 7 periods of limitation suspended while taxpayer is unable to
 
 8 manage financial affairs due to disability) of the Internal
 
 9 Revenue Code shall be operative for purposes of this chapter,
 
10 with due regard to section 235-111 relating to the limitation
 
11 period for assessment, levy, collection, or credit.
 
12      [(w)] (x)  Section 7518 (with respect to capital
 
13 construction fund for commercial fishers) of the Internal Revenue
 
14 Code shall be operative for the purposes of this chapter.
 
15 Qualified withdrawals for the acquisition, construction, or
 
16 reconstruction of any qualified asset which is attributable to
 
17 deposits made before the effective date of this section shall not
 
18 reduce the basis of the asset when withdrawn.  Qualified
 
19 withdrawals shall be treated on a first-in-first-out basis."
 
20      SECTION 8.  Section 235-7.3, Hawaii Revised Statutes, is
 
21 amended to read as follows:
 
22      "[[]§235-7.3[]]  Royalties [and other income from high
 
23 technology business] derived from patents, copyrights, or trade
 

 


 

Page 23                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 secrets excluded from gross income.  [(a)] In addition to the
 
 2 exclusions in section 235-7, there shall be excluded from gross
 
 3 income, adjusted gross income, and taxable income, amounts
 
 4 received by an individual or [a qualified high technology
 
 5 business] other person as defined in section 1-19 as royalties
 
 6 and other income derived from any patents [and], copyrights[:
 
 7      (1)  Owned], or trade secrets owned by the individual or
 
 8           [qualified high technology business; and
 
 9      (2)  Developed and arising out of a qualified high
 
10           technology business.] other person.
 
11      [(b)  For the purposes of this section:
 
12      "Computer software" means a set of computer programs,
 
13 procedures, or associated documentation concerned with the
 
14 operation and function of a computer system, and includes both
 
15 systems and application programs and subdivisions, such as
 
16 assemblers, compilers, routines, generators, and utility
 
17 programs.
 
18      "Qualified high technology business" means a business
 
19 performing qualified research.  The term "qualified high
 
20 technology business" does not include:
 
21      (1)  Any trade or business involving the performance of
 
22           services in the field of law, architecture, accounting,
 

 
Page 24                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           actuarial science, performing arts, consulting,
 
 2           athletics, financial services, or brokerage services;
 
 3      (2)  Any banking, insurance, financing, leasing, rental,
 
 4           investing, or similar business; any farming business,
 
 5           including the business of raising or harvesting trees;
 
 6           any business involving the production or extraction of
 
 7           products of a character with respect to which a
 
 8           deduction is allowable under section 611 (with respect
 
 9           to allowance of deduction for depletion), 613 (with
 
10           respect to basis for percentage depletion), or 613A
 
11           (with respect to limitation on percentage depleting in
 
12           cases of oil and gas wells) of the Internal Revenue
 
13           Code;
 
14      (3)  Any business operating a hotel, motel, restaurant, or
 
15           similar business; and
 
16      (4)  Any trade or business involving a hospital, a private
 
17           office of a licensed health care professional, a group
 
18           practice of licensed health care professionals, or a
 
19           nursing home.
 
20      "Qualified research" means:
 
21      (1)  The same as in section 41(d) of the Internal Revenue
 
22           Code; or
 

 
 
 
Page 25                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (2)  Developing, designing, modifying, programming, and
 
 2           licensing computer software.]"
 
 3      SECTION 9.  Section 235-9.5, Hawaii Revised Statutes, is
 
 4 amended to read as follows:
 
 5      "[[]§235-9.5[]]  Stock options from qualified high
 
 6 technology businesses exempt from taxation.  [(a)]
 
 7 Notwithstanding any law to the contrary, all income received from
 
 8 stock options from a qualified high technology business by an
 
 9 employee that would otherwise be taxed as ordinary income or as
 
10 capital gains to those employees is exempt from taxation under
 
11 this chapter.
 
12      [(b)  For the purposes of this section:
 
13      "Computer software" means a set of computer programs,
 
14 procedures, or associated documentation concerned with the
 
15 operation and function of a computer system, and includes both
 
16 systems and application programs and subdivisions, such as
 
17 assemblers, compilers, routines, generators, and utility
 
18 programs.
 
19      "Qualified high technology business" means a business
 
20 performing qualified research.  The term "qualified high
 
21 technology business" does not include:
 
22      (1)  Any trade or business involving the performance of
 
23           services in the field of law, architecture, accounting,
 

 
Page 26                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           actuarial science, performing arts, consulting,
 
 2           athletics, financial services, or brokerage services;
 
 3      (2)  Any banking, insurance, financing, leasing, rental,
 
 4           investing, or similar business; any farming business,
 
 5           including the business of raising or harvesting trees;
 
 6           any business involving the production or extraction of
 
 7           products of a character with respect to which a
 
 8           deduction is allowable under section 611 (with respect
 
 9           to allowance of deduction for depletion), 613 (with
 
10           respect to basis for percentage depletion), or 613A
 
11           (with respect to limitation on percentage depleting in
 
12           cases of oil and gas wells) of the Internal Revenue
 
13           Code;
 
14      (3)  Any business operating a hotel, motel, restaurant, or
 
15           similar business; and
 
16      (4)  Any trade or business involving a hospital, a private
 
17           office of a licensed health care professional, a group
 
18           practice of licensed health care professionals, or a
 
19           nursing home.
 
20      "Qualified research" means:
 
21      (1)  The same as in section 41(d) of the Internal Revenue
 
22           Code; or
 

 
 
 
Page 27                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (2)  Developing, designing, modifying, programming, and
 
 2           licensing computer software.]"
 
 3      SECTION 10.  Section 235-110.9, Hawaii Revised Statutes, is
 
 4 amended to read as follows:
 
 5      "[[]§235-110.9[]]  High-technology business investment tax
 
 6 credit.(a)  There shall be allowed to each taxpayer, subject to
 
 7 the taxes imposed by this chapter, a high technology investment
 
 8 tax credit that shall be deductible from the taxpayer's net
 
 9 income tax liability, if any, imposed by this chapter for the
 
10 taxable year in which the credit is properly claimed.  The tax
 
11 credit shall be an amount equal to ten per cent of the investment
 
12 made by the taxpayer in each qualified high technology business,
 
13 up to a maximum allowed credit of $500,000 for the taxable year
 
14 for the investment made by the taxpayer in a qualified high
 
15 technology business.
 
16      (b)  The credit allowed under this section shall be claimed
 
17 against the net income tax liability for the taxable year.  For
 
18 the purpose of this section, "net income tax liability" means net
 
19 income tax liability reduced by all other credits allowed under
 
20 this chapter.
 
21      (c)  If the tax credit under this section exceeds the
 
22 taxpayer's income tax liability, the excess of the tax credit
 
23 over liability shall be refunded to the taxpayer or may be used
 

 
Page 28                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 as a credit against the taxpayer's income tax liability in
 
 2 subsequent years until exhausted[.]; provided that no refund on
 
 3 account of the tax credit allowed by this section shall be made
 
 4 for amounts less than $1.  All claims, including any amended
 
 5 claims, for tax credits under this section shall be filed on or
 
 6 before the end of the twelfth month following the close of the
 
 7 taxable year for which the credit may be claimed.  Failure to
 
 8 comply with the foregoing provision shall constitute a waiver of
 
 9 the right to claim the credit.
 
10      [(d)  As used in this section:
 
11      "Computer software" means a set of computer programs,
 
12 procedures, or associated documentation concerned with the
 
13 operation and function of a computer system, and includes both
 
14 systems and application programs and subdivisions, such as
 
15 assemblers, compilers, routines, generators, and utility
 
16 programs.
 
17      "Investment" means a nonrefundable investment, at risk, as
 
18 that term is used in section 465 (with respect to deductions
 
19 limited to amount at risk) of the Internal Revenue Code, in a
 
20 qualified high technology business, of cash that is transferred
 
21 to the qualified high technology business, the transfer of which
 
22 is in connection with a transaction in exchange for stock,
 
23 interests in partnerships, joint ventures, or other entities,
 

 
Page 29                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 licenses (exclusive or nonexclusive), rights to use technology,
 
 2 marketing rights, warrants, options, or any items similar to
 
 3 those included herein, including but not limited to options or
 
 4 rights to acquire any of the items included herein.  The
 
 5 nonrefundable investment is entirely at risk of loss where
 
 6 repayment depends upon the success of the qualified high
 
 7 technology business.  If the money invested is to be repaid to
 
 8 the taxpayer, no repayment except for dividends or interest shall
 
 9 be made for at least three years from the date the investment is
 
10 made.  The annual amount of any dividend and interest payment to
 
11 the taxpayer shall not exceed twelve per cent of the amount of
 
12 the investment.
 
13      (e)  For the purposes of this section:
 
14      "Qualified high technology business" means:
 
15      (1)  A business, employing or owning capital or property, or
 
16           maintaining an office, in this State; and which
 
17      (2)  (A)  Conducts one hundred per cent of its activities in
 
18                performing qualified research in this State; or
 
19           (B)  Receives one hundred per cent of its gross income
 
20                derived from qualified research; provided that the
 
21                income is received from products sold from,
 
22                manufactured, or produced in the State; or
 
23                services performed in this State.
 

 
Page 30                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      The term "qualified high technology business" does not
 
 2 include:
 
 3      (1)  Any trade or business involving the performance of
 
 4           services in the field of law, architecture, accounting,
 
 5           actuarial science, performing arts, consulting,
 
 6           athletics, financial services, or brokerage services;
 
 7      (2)  Any banking, insurance, financing, leasing, rental,
 
 8           investing, or similar business; any farming business,
 
 9           including the business of raising or harvesting trees;
 
10           any business involving the production or extraction of
 
11           products of a character with respect to which a
 
12           deduction is allowable under section 611 (with respect
 
13           to allowance of deduction for depletion), 613 (with
 
14           respect to basis for percentage depletion), or 613A
 
15           (with respect to limitation on percentage depleting in
 
16           cases of oil and gas wells) of the Internal Revenue
 
17           Code;
 
18      (3)  Any business operating a hotel, motel, restaurant, or
 
19           similar business; and
 
20      (4)  Any trade or business involving a hospital, a private
 
21           office of a licensed health care professional, a group
 
22           practice of licensed health care professionals, or a
 
23           nursing home.
 

 
Page 31                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      "Qualified research" means:
 
 2      (1)  The same as in section 41(d) of the Internal Revenue
 
 3           Code; or
 
 4      (2)  Developing, designing, modifying, programming, and
 
 5           licensing computer software;
 
 6 except that it shall not include research conducted outside the
 
 7 State.]
 
 8      [(f)] (d)  This section shall not apply to taxable years
 
 9 beginning after December 31, 2005."
 
10      SECTION 11.  Section 235-110.91, Hawaii Revised Statutes, is
 
11 amended to read as follows:
 
12      "[[]§235-110.91[]]  Tax credit for increasing research
 
13 activities.(a)  Section 41 (with respect to the credit for
 
14 increasing research activities) and section 280C(c) (with respect
 
15 to certain expenses for which the credit for increasing research
 
16 activities are allowable) of the Internal Revenue Code shall be
 
17 operative for the purposes of this chapter as provided in this
 
18 section.  If section 41 of the Internal Revenue Code is repealed
 
19 or terminated prior to January 1, 2006, its provisions shall
 
20 remain in effect for purposes of the income tax law of the State
 
21 as provided for in subsection (j).
 
22      (b)  All references to Internal Revenue Code sections within
 
23 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
24 operative for purposes of this section.
 

 
Page 32                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 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] equal to the credit for research
 
 4 activities provided by section 41 of the Internal Revenue Code.
 
 5 The credit shall be deductible from the taxpayer's net income tax
 
 6 liability, if any, imposed by this chapter for the taxable year
 
 7 in which the credit is properly claimed.
 
 8      [(d)  The tax credit for increased research activities shall
 
 9 be equal to the sum of:
 
10      (1)  2.5 per cent of the excess (if any) of:
 
11           (A)  The qualified research expenses for the taxable
 
12                year; over
 
13           (B)  The base amount; and
 
14      (2)  2.5 per cent of the basic research payments determined
 
15           under section 41(e)(1)(A) of the Internal Revenue Code.
 
16      (e)  For purposes of this section:
 
17      (1)  The alternative incremental credit in section 41(c)(4)
 
18           of the Internal Revenue Code shall be equal to the sum
 
19           of 12.5 per cent of:
 
20           (A)  1.65 per cent of so much of the qualified research
 
21                expenses for the taxable year as exceeds one per
 
22                cent of the average described in section
 

 
 
 
Page 33                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


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

 
 
 
Page 34                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (g)] (d)  If the tax credit for increased research
 
 2 activities claimed by a taxpayer exceeds the amount of income tax
 
 3 payment due from the taxpayer, the excess of the tax credit over
 
 4 payments due shall be refunded to the taxpayer or may be used as
 
 5 a credit against the taxpayer's income tax liability in
 
 6 subsequent years until exhausted[.]; provided that no refund on
 
 7 account of the tax credit allowed by this section shall be made
 
 8 for amounts less than $1.
 
 9      [(h)] (e)  All claims for a tax credit under this section
 
10 [must] shall be filed on or before the end of the twelfth month
 
11 following the close of the taxable year for which the credit may
 
12 be claimed.  Failure to properly claim the credit shall
 
13 constitute a waiver of the right to claim the credit.
 
14      [(i)] (f)  The director of taxation may adopt any rules
 
15 under chapter 91 and forms necessary to carry out this section.
 
16      [(j)] (g)  This section shall not apply to taxable years
 
17 beginning after December 31, 2005."
 
18             PART III.  HIGH TECHNOLOGY INDUSTRY BONDS
 
19      SECTIONS 12 to 16  Reserved.
 
20                     PART IV.  VENTURE CAPITAL
 
21      SECTION 17.  The legislature finds that the shortage of
 
22 venture capital in Hawaii makes it difficult for local high
 
23 technology businesses to obtain the necessary financing to
 

 
Page 35                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 develop products, enter new markets, and expand on their early
 
 2 success.  The purpose of this part is to allow the board of
 
 3 trustees of the employees' retirement system to invest ten per
 
 4 cent of employees' retirement system funds in qualified high
 
 5 technology businesses as a means of providing venture capital for
 
 6 those businesses.
 
 7      SECTION 18.  Section 88-119, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "§88-119  Investments.  (a)  Investments may be made in:
 
10      (1)  Real estate loans and mortgages.  Obligations (as
 
11           defined in section 431:6-101) of any of the following
 
12           classes:
 
13           (A)  Obligations secured by mortgages of nonprofit
 
14                corporations desiring to build multirental units
 
15                (ten units or more) subject to control of the
 
16                government for occupancy by families displaced as
 
17                a result of government action;
 
18           (B)  Obligations secured by mortgages insured by the
 
19                Federal Housing Administration;
 
20           (C)  Obligations for the repayment of home loans made
 
21                under the Servicemen's Readjustment Act of 1944 or
 
22                under Title II of the National Housing Act;
 

 
 
 
Page 36                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           (D)  Other obligations secured by first mortgages on
 
 2                unencumbered improved real estate owned in fee
 
 3                simple; provided that the amount of the obligation
 
 4                at the time investment is made therein shall not
 
 5                exceed eighty per cent of the value of the real
 
 6                estate and improvements mortgaged to secure it,
 
 7                and except that the amount of the obligation at
 
 8                the time investment is made therein may exceed
 
 9                eighty per cent but no more than ninety per cent
 
10                of the value of the real estate and improvements
 
11                mortgaged to secure it; provided further that the
 
12                obligation is insured or guaranteed against
 
13                default or loss under a mortgage insurance policy
 
14                issued by a casualty insurance company licensed to
 
15                do business in the State.  The coverage provided
 
16                by the insurer shall be sufficient to reduce the
 
17                system's exposure to not more than eighty per cent
 
18                of the value of the real estate and improvements
 
19                mortgaged to secure it.  The insurance coverage
 
20                shall remain in force until the principal amount
 
21                of the obligation is reduced to eighty per cent of
 
22                the market value of the real estate and
 
23                improvements mortgaged to secure it, at which time
 

 
Page 37                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1                the coverage shall be subject to cancellation
 
 2                solely at the option of the board of trustees.
 
 3                Real estate shall not be deemed to be encumbered
 
 4                within the meaning of this subparagraph by reason
 
 5                of the existence of any of the restrictions,
 
 6                charges, or claims described in section 431:6-308;
 
 7           (E)  Other obligations secured by first mortgages of
 
 8                leasehold interests in improved real estate;
 
 9                provided that:
 
10                (i)  Each such leasehold interest at such time
 
11                     shall have a current term extending at least
 
12                     two years beyond the stated maturity of the
 
13                     obligation it secures; and
 
14               (ii)  The amount of the obligation at the time
 
15                     investment is made therein shall not exceed
 
16                     eighty per cent of the value of the
 
17                     respective leasehold interest and
 
18                     improvements, and except that the amount of
 
19                     the obligation at the time investment is made
 
20                     therein may exceed eighty per cent but no
 
21                     more than ninety per cent of the value of the
 
22                     leasehold interest and improvements mortgaged
 
23                     to secure it;
 

 
Page 38                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1                provided further that the obligation is insured or
 
 2                guaranteed against default or loss under a
 
 3                mortgage insurance policy issued by a casualty
 
 4                insurance company licensed to do business in the
 
 5                State.  The coverage provided by the insurer shall
 
 6                be sufficient to reduce the system's exposure to
 
 7                not more than eighty per cent of the value of the
 
 8                leasehold interest and improvements mortgaged to
 
 9                secure it.  The insurance coverage shall remain in
 
10                force until the principal amount of the obligation
 
11                is reduced to eighty per cent of the market value
 
12                of the leasehold interest and improvements
 
13                mortgaged to secure it, at which time the coverage
 
14                shall be subject to cancellation solely at the
 
15                option of the board of trustees;
 
16           (F)  Obligations for the repayment of home loans
 
17                guaranteed by the department of Hawaiian home
 
18                lands pursuant to section 214(b) of the Hawaiian
 
19                Homes Commission Act, 1920; and
 
20           (G)  Obligations secured by second mortgages on
 
21                improved real estate for which the mortgagor
 
22                procures a second mortgage on the improved real
 
23                estate for the purpose of acquiring the
 

 
Page 39                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1                leaseholder's fee simple interest in the improved
 
 2                real estate; provided that any prior mortgage does
 
 3                not contain provisions that might jeopardize the
 
 4                security position of the retirement system or the
 
 5                borrower's ability to repay the mortgage loan.
 
 6           The board of trustees may retain such real estate,
 
 7           including leasehold interests therein, as it may
 
 8           acquire by foreclosure of mortgages or in enforcement
 
 9           of security, or as may be conveyed to it in
 
10           satisfaction of debts previously contracted; provided
 
11           that all such real estate, other than leasehold
 
12           interests, shall be sold within five years after
 
13           acquiring the same, subject to extension by the
 
14           governor for additional periods not exceeding five
 
15           years each, and that all such leasehold interests shall
 
16           be sold within one year after acquiring the same,
 
17           subject to extension by the governor for additional
 
18           periods not exceeding one year each;
 
19      (2)  Government obligations, etc.  Obligations of any of the
 
20           following classes:
 
21           (A)  Obligations issued or guaranteed as to principal
 
22                and interest by the United States or by any state
 
23                thereof or by any municipal or political
 

 
Page 40                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1                subdivision or school district of any of the
 
 2                foregoing; provided that principal of and interest
 
 3                on such obligations are payable in currency of the
 
 4                United States; or sovereign debt instruments
 
 5                issued by agencies of, or guaranteed by foreign
 
 6                governments;
 
 7           (B)  Revenue bonds, whether or not permitted by any
 
 8                other provision hereof, of the State or any
 
 9                municipal or political subdivision thereof,
 
10                including the board of water supply of the city
 
11                and county of Honolulu, and street or improvement
 
12                district bonds of any district or project in the
 
13                State; and
 
14           (C)  Obligations issued or guaranteed by any federal
 
15                home loan bank including consolidated federal home
 
16                loan bank obligations, the Home Owner's Loan
 
17                Corporation, the Federal National Mortgage
 
18                Association, or the Small Business Administration;
 
19      (3)  Corporate obligations.  Below investment grade or
 
20           nonrated debt instruments, foreign or domestic, in
 
21           accordance with investment guidelines adopted by the
 
22           board of trustees;
 

 
 
 
Page 41                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (4)  Preferred and common stocks.  Shares of preferred or
 
 2           common stock of any corporation created or existing
 
 3           under the laws of the United States or of any state or
 
 4           district thereof or of any country;
 
 5      (5)  Obligations eligible by law for purchase in the open
 
 6           market by federal reserve banks;
 
 7      (6)  Obligations issued or guaranteed by the International
 
 8           Bank for Reconstruction and Development, the Inter-
 
 9           American Development Bank, the Asian Development Bank,
 
10           or the African Development Bank;
 
11      (7)  Obligations secured by collateral consisting of any of
 
12           the securities or stock listed above and worth at the
 
13           time the investment is made at least fifteen per cent
 
14           more than the amount of the respective obligations;
 
15      (8)  Insurance company obligations.  Contracts and
 
16           agreements supplemental thereto providing for
 
17           participation in one or more accounts of a life
 
18           insurance company authorized to do business in Hawaii,
 
19           including its separate accounts, and whether the
 
20           investments allocated thereto are comprised of stocks
 
21           or other securities or of real or personal property or
 
22           interests therein;
 

 
 
 
Page 42                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (9)  Interests in real property.  Interests in improved or
 
 2           productive real property in which, in the informed
 
 3           opinion of the board of trustees, it is prudent to
 
 4           invest funds of the system.  For purposes of this
 
 5           paragraph, "real property" includes any property
 
 6           treated as real property either by local law or for
 
 7           federal income tax purposes.  Investments in improved
 
 8           or productive real property may be made directly or
 
 9           through pooled funds, including common or collective
 
10           trust funds of banks and trust companies, group or unit
 
11           trusts, limited partnerships, limited liability
 
12           companies, investment trusts, title-holding
 
13           corporations recognized under section 501(c) of the
 
14           Internal Revenue Code of 1986, as amended, similar
 
15           entities that would protect the system's interest, and
 
16           other pooled funds invested on behalf of the system by
 
17           investment managers retained by the system;
 
18     (10)  Other securities and futures contracts.  Securities and
 
19           futures contracts in which in the informed opinion of
 
20           the board of trustees it is prudent to invest funds of
 
21           the system, including currency, interest rate, bond,
 
22           and stock index futures contracts and options on such
 
23           contracts to hedge against anticipated changes in
 

 
Page 43                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           currencies, interest rates, and bond and stock prices
 
 2           that might otherwise have an adverse effect upon the
 
 3           value of the system's securities portfolios; covered
 
 4           put and call options on securities; and stock; whether
 
 5           or not the securities, stock, futures contracts, or
 
 6           options on futures are expressly authorized by or
 
 7           qualify under the foregoing paragraphs, and
 
 8           notwithstanding any limitation of any of the foregoing
 
 9           paragraphs (including paragraph (4)); and
 
10     (11)  Private placements.  Investments in institutional blind
 
11           pool limited partnerships or direct investments that
 
12           make private debt and equity investments in privately
 
13           held companies.
 
14      (b)  Ten per cent of alternative investments may be
 
15 dedicated as venture capital investments by the board of trustees
 
16 in qualified high technology businesses.  Investment under this
 
17 subsection shall be made under the condition that there shall be
 
18 three or more unrelated investors other than the system involved
 
19 in the investment.  The board, in making investments under this
 
20 subsection, may consult with knowledgeable state agencies,
 
21 corporations, and financial institutions before investing assets
 
22 in qualified high technology businesses.
 
23      For the purposes of this subsection:
 

 
Page 44                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      "Computer software" means computer data, a computer program,
 
 2 or a set of computer programs, procedures, or associated
 
 3 documentation concerned with the operation and function of a
 
 4 computer system, and includes both systems and application
 
 5 programs and subdivisions, such as assemblers, compilers,
 
 6 routines, generators, and utility programs.
 
 7      "Qualified high technology business":
 
 8      (1)  Means a business, employing or owning capital or
 
 9           property, or maintaining an office, in this State that:
 
10           (A)  Conducts a majority of its activities in
 
11                performing qualified research in this State; or
 
12           (B)  Receives a majority of its gross income derived
 
13                from qualified research; provided that the income
 
14                is received from:
 
15                (i)  products sold from, manufactured in, or
 
16                     produced in the State; or
 
17               (ii)  Services performed in this State.
 
18      (2)  Does not include:
 
19           (A)  Any trade or business involving the performance of
 
20                services in the field of law, architecture,
 
21                accounting, actuarial science, performing arts,
 
22                consulting, athletics, financial services, or
 
23                brokerage services;
 

 
Page 45                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1           (B)  Any banking, insurance, financing, leasing,
 
 2                rental, investing, or similar business; any
 
 3                farming business, including the business of
 
 4                raising or harvesting trees; any business
 
 5                involving the production or extraction of products
 
 6                of a character with respect to which a deduction
 
 7                is allowable under section 611 (with respect to
 
 8                allowance of deduction for depletion), 613 (with
 
 9                respect to basis for percentage depletion), or
 
10                613A (with respect to limitation on percentage
 
11                depleting in cases of oil and gas wells) of the
 
12                Internal Revenue Code;
 
13           (C)  Any business operating a hotel, motel, restaurant,
 
14                or similar business; and
 
15           (D)  Any trade or business involving a hospital, a
 
16                private office of a licensed health care
 
17                professional, a group practice of licensed health
 
18                care professionals, or a nursing home.
 
19      "Qualified research" means:
 
20      (1)  The same as in section 41(d) of the Internal Revenue
 
21           Code; or
 
22      (2)  Developing, designing, modifying, programming, and
 
23           licensing computer software;
 

 
Page 46                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 except that it shall not include research conducted outside the
 
 2 State.
 
 3      "Venture capital investment" means any of the following
 
 4 investments in a qualified high technology business:
 
 5      (1)  Common or preferred stock and equity securities without
 
 6           a repurchase requirement for at least five years;
 
 7      (2)  A right to purchase stock or equity securities;
 
 8      (3)  Any debenture or loan, whether or not convertible or
 
 9           having stock purchase rights, which are subordinated,
 
10           together with security interests against the assets of
 
11           the borrower, by their terms to all borrowings of the
 
12           borrower from other institutional lenders, and that is
 
13           for a term of not less than three years, and that has
 
14           no part amortized during the first three years; and
 
15      (4)  General or limited partnership interests."
 
16                        PART V.  EDUCATION
 
17      SECTION 19.  The legislature finds that there is a need to
 
18 expand educational programs in science and math at Hawaii's "E
 
19 Academies", which were established by section 17 of Act 178,
 
20 Session Laws of Hawaii 1999, to afford students greater
 
21 opportunities in new educational technologies, and provide
 
22 relevant, challenging, and meaningful course offerings for
 
23 students interested in pursuing a career in advanced technology
 

 
Page 47                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 fields.  The legislature finds that the use of "E Academies",
 
 2 which are virtual, site-based schools that provide students with
 
 3 industry and academic standards-based instruction and assessments
 
 4 in technology, science, math, and engineering, offer enhanced
 
 5 opportunities to students who are interested in furthering their
 
 6 preparation for technology positions or who are interested in
 
 7 advanced studies in post secondary information technology,
 
 8 science, engineering, and math.
 
 9      SECTION 20.  There is appropriated out of the general
 
10 revenues of the State of Hawaii the sum of $           or so much
 
11 thereof as may be necessary for fiscal year 2000-2001 for the
 
12 expansion of the department of education's E Academies to provide
 
13 students at virtual onsite locations based at selected high
 
14 schools with industry and academic standards-based instruction
 
15 and assessments in technology, science, math, and engineering.  
 
16      The sum appropriated shall be expended by the department of
 
17 education for the purposes of this part.
 
18                  PART VI.  WORKFORCE DEVELOPMENT
 
19      SECTION 21.  The legislature finds that there is a need to
 
20 expand the millennium workforce development training program,
 
21 which was created by section 12 of Act 178, Session Laws of
 
22 Hawaii 1999, and placed within the department of labor and
 
23 industrial relations for administrative purposes.  In particular,
 

 
Page 48                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 the legislature finds that there is a need for Hawaii's public
 
 2 community colleges to develop training programs to improve the
 
 3 skills of students in those colleges for jobs in the new economy,
 
 4 in such industries as biotechnology, health care, information
 
 5 technology, environmental science and technology, and
 
 6 telecommunications.  The development of new or enhanced programs
 
 7 in these and related areas at the State's community colleges will
 
 8 help to lessen the need to import workers and increase job
 
 9 opportunities for Hawaii's residents by improving their skills in
 
10 these areas.
 
11      SECTION 22.  There is appropriated out of the general
 
12 revenues of the State of Hawaii the sum of $           or so much
 
13 thereof as may be necessary for fiscal year 2000-2001 to be
 
14 expended by the University of Hawaii's community colleges for the
 
15 purposes of establishing the Pacific center for advanced
 
16 technology training where a coordinated statewide approach to
 
17 designing and delivering customized training to the high
 
18 technology industry in Hawaii will be implemented.  
 
19      The sum appropriated shall be expended by the University of
 
20 Hawaii for the purposes of this part.
 
21      SECTION 23.  There is appropriated out of the general
 
22 revenues of the State of Hawaii the sum of $          or so much
 
23 thereof as may be necessary for fiscal year 2000-2001 to be
 

 
Page 49                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 expended by Hawaii's public community colleges for the purposes
 
 2 of the millennium workforce development program established in
 
 3 section 371-17, Hawaii Revised Statutes, to prepare students for
 
 4 the workforce of the new economy.  
 
 5      The sum appropriated shall be expended by the department of
 
 6 labor and industrial relations for the purposes of this part.
 
 7            PART VII.  UNIVERSITY RESEARCH AND TRAINING
 
 8      SECTION 24.  The purpose of this part is to appropriate
 
 9 funds to the University of Hawaii's college of engineering,
 
10 college of business administration, and school of medicine, and
 
11 the University of Hawaii at Hilo to develop new programs and
 
12 enhance existing programs to enable Hawaii's students to more
 
13 effectively compete for jobs in the new economy, in such
 
14 industries as biotechnology, health care, information technology,
 
15 environmental science and technology, and telecommunications.
 
16 The legislature finds that funding these programs for these
 
17 colleges at the University of Hawaii will assist in lessening the
 
18 need to import workers and increase job opportunities for
 
19 Hawaii's residents by improving their skills in these areas.
 
20      SECTION 25.  There is appropriated out of the general
 
21 revenues of the State of Hawaii the sum of $           or so much
 
22 thereof as may be necessary for fiscal year 2000-2001 to conduct
 

 
 
 
Page 50                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 advanced communications research at the University of Hawaii's
 
 2 college of engineering.  
 
 3      The sum appropriated shall be expended by the University of
 
 4 Hawaii for the purposes of this part.
 
 5      SECTION 26.  There is appropriated out of the general
 
 6 revenues of the State of Hawaii the sum of $           or so much
 
 7 thereof as may be necessary for fiscal year 2000-2001 for the
 
 8 expansion of research, scholarship, and instruction in electronic
 
 9 commerce at the University of Hawaii's college of business
 
10 administration.  
 
11      The sum appropriated shall be expended by the University of
 
12 Hawaii for the purposes of this part.
 
13      SECTION 27.  There is appropriated out of the general
 
14 revenues of the State of Hawaii the sum of $           or so much
 
15 thereof as may be necessary for fiscal year 2000-2001 to conduct
 
16 research in molecular genetics at the University of Hawaii's
 
17 school of medicine.  
 
18      The sum appropriated shall be expended by the University of
 
19 Hawaii for the purposes of this part.
 
20      SECTION 28.  There is appropriated out of the general
 
21 revenues of the State of Hawaii the sum of $           or so much
 
22 thereof as may be necessary for fiscal year 2000-2001 to develop
 
23 new programs and enhance existing programs at the University of
 

 
Page 51                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 Hawaii at Hilo to prepare students for the workforce of the new
 
 2 economy.  
 
 3      The sum appropriated shall be expended by the University of
 
 4 Hawaii for the purposes of this part.
 
 5            PART VIII.  TECHNOLOGY ADVISORY COMMISSION
 
 6      SECTION 29.  The legislature finds that the governor's
 
 7 special advisory council for technology development, which was
 
 8 established under section 3 of Act 178, Session Laws of Hawaii
 
 9 1999, has the potential to make significant contributions to the
 
10 development of the State's high technology industry.  The intent
 
11 of the advisory council was to attract leaders in high technology
 
12 development from around the world to Hawaii.  However, the
 
13 legislature finds it highly unlikely that these individuals will
 
14 come to Hawaii for this purpose if they are faced with a possibly
 
15 lengthy senate confirmation process and must file financial
 
16 disclosure forms with the state ethics commission.
 
17      The legislature finds that there is no reason to subject
 
18 these individuals to confirmation hearings and the filing of
 
19 ethics disclosure forms, in view of the fact that the advisory
 
20 council is strictly advisory in nature and the members of that
 
21 council have no influence over spending or budgetary matters.
 
22 The legislature also recognizes the need to bring in persons who
 
23 have international prestige and expertise in high technology.  It
 

 
Page 52                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1 would be extremely difficult to find such highly qualified people
 
 2 to serve on the council before its expiration on December 31,
 
 3 2005.  Accordingly, the purpose of this part is to exempt the
 
 4 members of the governor's special advisory council for technology
 
 5 development from the senate confirmation process and from the
 
 6 need to file a disclosure of financial interests with the state
 
 7 ethics commission.
 
 8      SECTION 30.  Section 27-42, Hawaii Revised Statutes, is
 
 9 amended to read as follows:
 
10      "[[]§27-42[]]  Governor's special advisory council for
 
11 technology development; establishment; appointment, number, and
 
12 term of members; duties.(a)  There is established within the
 
13 office of the governor, for administrative purposes, an advisory
 
14 council to be known as the governor's special advisory council
 
15 for technology development, that shall review and make
 
16 recommendations on matters relating to the marketing and
 
17 promotion of Hawaii as a location for high technology companies.
 
18 The council shall be composed of at least eleven but no more than
 
19 twenty-five members [appointed in accordance with section 26-34],
 
20 and shall include representatives of the high technology
 
21 industry, business leaders, educators, government leaders, and
 
22 legislators.
 

 
 
 
Page 53                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 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)  In carrying out the duties of this section, the council
 
18 shall seek and utilize any available funding sources, including
 
19 grant moneys.
 
20      (f)  This section is repealed on December 31, 2005."
 
21      SECTION 31.  Section 84-17, Hawaii Revised Statutes, is
 
22 amended by amending subsection (c) to read as follows:
 

 
 
 
Page 54                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      "(c)  The following persons shall file annually with the
 
 2 state ethics commission a disclosure of financial interests:
 
 3      (1)  The governor, the lieutenant governor, the members of
 
 4           the legislature, and delegates to the constitutional
 
 5           convention; provided that delegates to the
 
 6           constitutional convention shall only be required to
 
 7           file initial disclosures;
 
 8      (2)  The directors and their deputies, the division chiefs,
 
 9           the executive directors and the executive secretaries
 
10           and their deputies, the purchasing agents and the
 
11           fiscal officers, regardless of the titles by which the
 
12           foregoing persons are designated, of every state agency
 
13           and department;
 
14      (3)  The permanent employees of the legislature and its
 
15           service agencies, other than persons employed in
 
16           clerical, secretarial, or similar positions;
 
17      (4)  The administrative director of the State, and the
 
18           assistants in the office of the governor and the
 
19           lieutenant governor, other than persons employed in
 
20           clerical, secretarial, or similar positions;
 
21      (5)  The hearings officers of every state agency and
 
22           department;
 

 
 
 
Page 55                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      (6)  The president, the vice presidents, assistant vice
 
 2           presidents, the chancellors, and the provosts of the
 
 3           University of Hawaii and its community colleges;
 
 4      (7)  The superintendent, the deputy superintendent, the
 
 5           assistant superintendents, the district
 
 6           superintendents, the state librarian, and the deputy
 
 7           state librarian of the department of education;
 
 8      (8)  The administrative director and the deputy director of
 
 9           the courts;
 
10      (9)  The members of every state board or commission whose
 
11           original terms of office are for periods exceeding one
 
12           year and whose functions are not solely advisory;
 
13           provided that the governor's special advisory council
 
14           for technology development established pursuant to
 
15           section 27-42 shall be exempt from this subsection;
 
16     (10)  Candidates for state elective offices, including
 
17           candidates for election to the constitutional
 
18           convention, provided that candidates shall only be
 
19           required to file initial disclosures; and
 
20     (11)  The administrator and assistant administrator of the
 
21           office of Hawaiian affairs."
 
22            PART X.  MARKETING AND ELECTRONIC COMMERCE
 

 
 
 
Page 56                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      SECTION 32.  The legislature finds that the internet is a
 
 2 critical component of the new economy because of its enormous
 
 3 potential to increase efficiency and raise productivity.
 
 4 Internet commerce, which is probably the most significant
 
 5 component of electronic commerce, or "e-commerce", includes such
 
 6 areas as online financial services, consumer retain and business-
 
 7 to-business transactions, media, infrastructure, and consumer and
 
 8 business internet access services.
 
 9      The legislature further finds that the total United States
 
10 internet economy more than doubled between 1996 and 1997, from
 
11 $15,500,000,000 to $38,800,000,000.  By 2001, it has been
 
12 projected that the total United States internet economy will be
 
13 over $350,000,000,000.  Of this amount, business-to-business e-
 
14 commerce is expected to account for the largest share, while
 
15 consumer retail activity is expected to emerge more slowly,
 
16 totaling over $18,000,000,000 in the year 2001.
 
17      The purpose of this part is to increase the State's share of
 
18 this significant economic activity and the facilitation of e-
 
19 commerce in Hawaii through the development of partnerships
 
20 between the Hawaii tourism authority and Hawaii's business
 
21 community to promote the State, through a coordinated statewide
 
22 effort, as an internet and server-friendly place to conduct
 
23 electronic commerce.
 

 
Page 57                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1      SECTION 33.  Section 201B-7, Hawaii Revised Statutes, is
 
 2 amended by amending subsection (a) to read as follows:
 
 3      "(a)  The authority may enter into contracts and agreements
 
 4 that include the following:
 
 5      (1)  Tourism promotion, marketing, and development;
 
 6      (2)  Market development-related research;
 
 7      (3)  Product development and diversification issues;
 
 8      (4)  Promotion, development, and coordination of sports-
 
 9           related activities and events;
 
10      (5)  Promotion of Hawaii, through a coordinated statewide
 
11           effort, as an internet and server-friendly place to
 
12           conduct electronic commerce, including entering into
 
13           appropriate public-private sector business
 
14           partnerships.  As used in this paragraph, the terms
 
15           "electronic commerce" and "internet" have the same
 
16           meanings as defined in section 231-8.6(c);
 
17     [(5)] (6)  Reduction of barriers to travel;
 
18     [(6)] (7)  Tourism public information and educational
 
19           programs;
 
20     [(7)] (8)  Programs to monitor and investigate complaints
 
21           about the problems resulting from the tourism industry
 
22           in the State; and
 

 
 
 
Page 58                                                    2901
                                     H.B. NO.           H.D. 2
                                                        
                                                        


 1     [(8)] (9)  Any and all other activities necessary to carry
 
 2           out the intent of this chapter;
 
 3 provided that for the purposes of continuity, the Hawaii Visitors
 
 4 and Convention Bureau shall be the designated agency to conduct
 
 5 the marketing and promotion of the State until the end of fiscal
 
 6 year 1998-1999 or until a date specified by the board."
 
 7      SECTION 34.  Statutory material to be repealed is bracketed.
 
 8 New statutory material is underscored.
 
 9      SECTION 35.  This Act shall take effect upon its approval;
 
10 provided that:
 
11      (1)  Sections 20, 22, 23, 25, 26, 27, and 28 shall take
 
12           effect on July 1, 2000; and
 
13      (2)  Part II, upon its approval, shall apply to taxable
 
14           years beginning after December 31, 1999.