HB2576 SD1

Report Title:

High Technology Tax Incentives; High Technology Development Corporation

Description:

Clarifies the application of certain high technology tax incentives; allows high technology development corporation to use federal funds and enter into undertakings with agencies of the federal government; and to agree to lawful donor conditions where funds are donated. (SD1)

HOUSE OF REPRESENTATIVES	H.B. NO.	2576
TWENTY-FIRST LEGISLATURE, 2002		H.D. 1
STATE OF HAWAII		S.D. 1

A BILL FOR AN ACT

RELATING TO HIGH TECHNOLOGY TAX INCENTIVES.

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

PART I

SECTION 1. Section 235-7.3, Hawaii Revised Statutes, is amended to read as follows:

"§235-7.3 Royalties derived from patents, copyrights, or trade secrets excluded from gross income. (a) In addition to the exclusions in section 235-7, there shall be excluded from gross income, adjusted gross income, and taxable income, amounts received by an individual or a qualified high technology business as royalties and other income derived from any patents, copyrights, and trade secrets:

(1) Owned by the individual or qualified high technology business; and

(2) Developed and arising out of a qualified high technology business.

(b) With respect to performing arts products, this exclusion shall extend to:

(1) The authors of performing arts products, or any parts thereof, without regard to the application of the work-for-hire doctrine under United States copyright law;

(2) The authors of performing arts products, or any parts thereof, under the work-for-hire doctrine under United States copyright law; and

(3) The assignors, licensors, and licensees of any copyright rights in performing arts products, or any parts thereof.

"Performing arts products" means:

(1) Audio files, video files, audiovideo files, computer animation, and other entertainment products perceived by or through the operation of a computer; and

(2) Commercial television and film products for sale or license[~~, and reuse or residual fee payments from these products.~~]; provided that:

(A) Marketing opportunities be made available to the department of business, economic development, and tourism to promote Hawaii;

(B) Training opportunities be made available for local talent and crew to develop jobs skills in the industry; and

(C) A reasonable number of local hires, based on availability, be included in each production to expand the local workforce.

Marketing opportunities means materials, collateral, and assistance obtained from the studio or other authorized agent of the performing arts project for the express purpose of incorporation into marketing and promotional plans benefiting Hawaii's film industry, tourism, and general business development with the understanding that such mediums will be for promotional use only, and not for profit, subject to prior approval of the studio or other authorized agent of the project.

"Qualified high technology business" means a business that conducts more than fifty per cent of its activities in qualified research.

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code;

(2) The development and design of [~~computer software using fourth generation or higher software development tools or native programming languages to design and construct~~] unique and specific code to create computer software applications and design databases for sale or license;

(3) Biotechnology;

(4) Performing arts products;

(5) Sensor and optic technologies;

(6) Ocean sciences;

(7) Astronomy; or

(8) Nonfossil fuel energy-related technology.

"Nonfossil fuel energy" means energy produced by wind, solar energy, hydropower, geothermal resources, ocean thermal energy conversion, wave energy, hydrogen, fuel cells, landfill gas, waste to energy, biomass including municipal solid waste, and biofuels.

"Nonfossil fuel energy-related technology" means system components, design, and assembly of a system used solely for the production, processing, storage, or transformation of nonfossil fuel energy for the transportation or stationary power; but does not include components of an electric utility transmission or distribution system; liquid, solid, or gaseous fuel transportation or distribution system; and the equipment used for the production, processing, storage, transformation or distribution of fossil energy."

SECTION 2. Section 235-110.9, Hawaii Revised Statutes, is amended to read as follows:

"§235-110.9 High technology business investment tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter a high technology business investment tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the investment was made and the following four years provided the credit is properly claimed. The tax credit shall be as follows:

(1) In the year the investment was made, thirty-five per cent;

(2) In the first year following the year in which the investment was made, twenty-five per cent;

(3) In the second year following the investment, twenty per cent;

(4) In the third year following the investment, ten per cent; and

(5) In the fourth year following the investment, ten per cent;

of the investment made by the taxpayer in each qualified high technology business, up to a maximum allowed credit in the year the investment was made, $700,000; in the first year following the year in which the investment was made, $500,000; in the second year following the year in which the investment was made, $400,000; in the third year following the year in which the investment was made, $200,000; and in the fourth year following the year in which the investment was made, $200,000.

(b) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. For the purpose of this section, "net income tax liability" means net income tax liability reduced by all other credits allowed under this chapter.

(c) If the tax credit under this section exceeds the taxpayer's income tax liability for any of the five years that the credit is taken, the excess of the tax credit over liability may be used as a credit against the taxpayer's income tax liability in subsequent years until exhausted. Every claim, including amended claims, for a tax credit under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) If at the close of any taxable year in the five-year period in subsection (a):

(1) The business no longer qualifies as a qualified high technology business;

(2) The business or an interest in the business has been sold or taxably transacted by the taxpayer investing in the qualified high technology business; or

(3) The taxpayer has withdrawn the taxpayer's investment wholly or partially from the qualified high technology business;

the credit claimed under this section shall be recaptured. The recapture shall be equal to ten per cent of the amount of the total tax credit claimed under this section in the preceding two taxable years. The amount of the credit recaptured shall apply only to the investment in the particular qualified high technology business that meets the requirements of paragraph (1), (2), or (3). The recapture provisions of this subsection shall not apply to a tax credit claimed for a qualified high technology business that does not fall within the provisions of paragraph (1), (2), or (3). The amount of the recaptured tax credit determined under this subsection shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs under this subsection.

(e) As used in this section:

"Qualified high technology business" means a business, employing or owning capital or property, or maintaining an office, in this State; provided that[:] at the close of the taxable year for the business, for such taxable year, and regardless of when an investment was made:

(1) More than fifty per cent of its total business activities are qualified research; and provided further that the business conducts more than seventy-five per cent of its qualified research in this State; or

(2) More than seventy-five per cent of its gross income is derived from qualified research; and provided further that this income is received from:

(A) Products sold from, manufactured in, or produced in this State; or

(B) Services performed in this State.

"Qualified research" means the same as defined in section 235-7.3.

(f) In the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S-corporations, the credit available under this section may be claimed; provided that each partner, member, or shareholder certify that, in any taxable year in which any partner, member, or shareholder claims a credit under this section, no other credits shall be claimed under chapter 235 for the same investment.

[~~(f)~~] (g) This section shall not apply to taxable years beginning after December 31, 2005."

PART II

SECTION 3. Chapter 206M, Hawaii Revised Statutes, is further amended by adding a new section to be appropriately designated and to read as follows:

"206M- Federal funds. Where the high technology development corporation is able to secure federal funds to be expended in connection with or for the development, encouragement, and financial support of industrial parks, projects, and multi-project programs, or for any other purpose, the high technology development corporation, upon approval of the board, shall have the power to enter into such undertakins with the appropriate officers or agencies of the federal government. The high technology development corporation may adopt rules pursuant to chapter 91 as may be necessary to administer and effectuate federal grants and programs that it has been assigned."

SECTION 4. Section 206M-3, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"§206M-3 Powers, generally. (a) The development corporation shall have all the powers necessary to carry out its purposes, including the powers to:

(1) Sue and be sued;

(2) Have a seal and alter the same at its pleasure;

(3) Make and execute, enter into, amend, supplement, and carry out contracts and all other instruments necessary or convenient for the exercise of its powers and functions under this chapter, including, with the approval of the governor, a project agreement, or an amendment or supplement to an existing project agreement, with a qualified person, and to enter into and carry out any agreement whereby the obligations of a qualified person under a project agreement shall be unconditionally guaranteed or insured by, or the performance thereof assigned to, or guaranteed or insured by, a person or persons other than the qualified person; and extend or renew any project agreement or any other agreement related thereto; provided that any such renewal or extension shall be subject to the approval of the governor unless made in accordance with provisions for the extension or renewal contained in a project agreement or related agreement theretofore approved by the governor;

(4) Make and alter bylaws for its organization and internal management;

(5) Adopt rules under chapter 91 necessary to effectuate this chapter in connection with industrial parks, projects, multi-project programs, and the operations, properties, and facilities of the development corporation;

(6) Through its chief executive officer, appoint officers, agents, and employees, prescribe their duties and qualifications, and fix their salaries, without regard to chapters 76 and 77;

(7) Prepare or cause to be prepared development plans for industrial parks;

(8) Acquire, own, lease, hold, clear, improve, and rehabilitate real, personal, or mixed property and assign, exchange, transfer, convey, lease, sublease, or encumber any project, including by way of easements;

(9) Acquire, construct, improve, install, equip, or develop or provide for the acquisition, construction, improvement, installation, equipping, or development of any project and designate a qualified person as its agent for such purpose;

(10) Own, hold, assign, transfer, convey, exchange, lease, sublease, or encumber any project;

(11) Arrange or initiate appropriate action for the planning, replanning, opening, grading, or closing of streets, roads, roadways, alleys, easements, or other places, the furnishing of improvements, the acquisition of property or property rights, or the furnishing of property or services in connection with an industrial park or project;

(12) Prepare, or cause to be prepared, plans, specifications, designs, and estimates of cost for the acquisition, construction, reconstruction, improvement, installation, equipping, development, or maintenance of any project or industrial park, and from time to time modify the plans, specifications, designs, or estimates;

(13) Engage the services of consultants on a contractual basis for rendering professional and technical assistance and advice;

(14) Procure insurance against any loss in connection with its property and other assets and operations in amounts and from insurers as it deems desirable;

(15) Accept and expend gifts [or], grants, or funds in any form from any public agency, the federal government, or from any other source[;], and agree to lawful and reasonable conditions and terms that the donor of funds may require, all toward the end of furthering the purposes of this chapter; and that the funds may be expended by the high technology development corporation, upon approval of the board, or may be transferred to other agencies, public or private, for expenditure by them in effectuating the purposes of this chapter;

(16) Issue special purpose revenue bonds and refunding special purpose revenue bonds pursuant to and in accordance with this chapter in principal amounts as may be authorized from time to time by law to finance or refinance the cost of a project, singly or as part of a multi-project program, or an industrial park as authorized by law and provide for the security thereof as permitted by this chapter;

(17) Lend or otherwise apply the proceeds of the bonds issued for a project or an industrial park either directly or through a trustee to a qualified person for use and application by the qualified person in the acquisition, construction, improvement, installation, equipping, or development of a project or industrial park, or agree with the qualified person whereby any of these activities shall be undertaken or supervised by that qualified person or by a person designated by the qualified person;

(18) As security for the payment of the principal of, premium, if any, and interest of the special purpose revenue bonds issued for a project to:

(A) Pledge, assign, hypothecate, or otherwise encumber all or any part of the revenues and receipts derived or to be derived by the development corporation under the project agreement for the project for which the bonds are issued;

(B) Pledge and assign the interest and rights of the development corporation under the project agreement or other agreement with respect to the project or the special purpose revenue bonds;

(C) Pledge and assign any bond, debenture, note, or other evidence of indebtedness received by the development corporation with respect to the project; or

(D) Any combination of the foregoing;

(19) With or without terminating a project agreement, exercise any and all rights provided by law for entry and reentry upon or take possession of a project at any time or from time to time upon breach or default by a qualified person under a project agreement, including any action at law or in equity for the purpose of effecting its rights of entry or reentry or obtaining possession of the project or for the payments of rentals, user taxes, or charges, or any other sum due and payable by the qualified person to the development corporation pursuant to the project agreement;

(20) Enter into arrangements with qualified county development entities whereby the board would provide financial support to qualified projects proposed;

(21) Create an environment in which to support high technology economic development, including but not limited to:

(A) Supporting all aspects of technology-based economic development;

(B) Developing instructive programs, identifying issues and impediments to the growth of high technology industry in Hawaii; and

(22) Develop programs that support start-up and existing high technology companies in Hawaii and attract new companies to relocate to or establish operations in Hawaii by assessing the needs of these companies and providing the physical and technical infrastructure to support their operations;

(23) Coordinate its efforts with other public and private agencies involved in stimulating technology-based economic development in Hawaii, including but not limited to:

(A) The department of business, economic development, and tourism;

(B) The Pacific international center for high technology research; and

(24) Promote and market Hawaii as a site for commercial high technology activity, including the expenditure of funds for protocol purposes at the discretion of the board;

(25) Provide advice on policy and planning for technology-based economic development;

(26) Finance, conduct, or cooperate in financing or conducting technological, business, financial, or other investigations that are related to or likely to lead to business, technology, and economic development by making and entering into contracts and other appropriate arrangements, including the provision of loans, start-up and expansion capital, loan guaranty, loans convertible to equity, equity charged and received by the corporation, and other forms of assistance;

(27) Solicit, study, and assist in the preparation of business plans and proposals of new or established businesses;

(28) Provide advice, technical and marketing assistance, support, and promotion to enterprises in which investments have been made;

(29) Acquire, hold, and sell qualified securities;

(30) Consent, subject to the provisions of any contract with noteholders or bondholders, whenever the corporation deems it necessary or desirable in the fulfillment of the purposes of this chapter, to the modification, with respect to rate of interest, time of payment of any installment of principal or interest, or any other terms, of any contract or agreement of any kind to which the corporation is a party;

(31) Invest any funds held in reserves or sinking funds, or any funds not required for immediate disbursement, in such investments as may be lawful for fiduciaries in the State; and

(32) Do any and all things necessary or convenient to carry out its purposes and exercise the powers given and granted in this chapter.

(b) The corporation shall be exempt from chapters 102 and 103D."

PART III

SECTION 5. There is appropriated out of the general revenues of the State of Hawaii the sum of $1, or so much thereof as may be necessary for fiscal year 2002-2003, for the marketing of the tax incentives in this Act and other high technology tax incentives locally, on the mainland, and abroad.

The sum appropriated shall be expended by the department of business, economic development, and tourism for the purposes of this section.

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect on July 1, 2050; provided that:

(1) Section 1 and the amendment in section 2 adding section 235-110.9(f), Hawaii Revised Statutes, shall apply to investments made after July 1, 2002; and

(2) The amendment in section 2 to section 235-110.9(d)(2), Hawaii Revised Statutes, shall apply to transfers made after July 1, 2002.