REPORT TITLE:
High Technology; Tax Benefits


DESCRIPTION:
Enhances the tax benefits provided in Act 178, Session Laws of
Hawaii, 1999 for qualified high technology business.  (HB2607
HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2607
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1        
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO HIGH TECHNOLOGY.



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

 1      SECTION 1.  Section 235-2.4, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "§235-2.4  Operation of certain Internal Revenue Code
 
 4 provisions.(a)  Section 63 (with respect to taxable income
 
 5 defined) of the Internal Revenue Code shall be operative for the
 
 6 purposes of this chapter, except that the standard deduction
 
 7 amount in section 63(c) of the Internal Revenue Code shall
 
 8 instead mean:
 
 9      (1)  $1,900 in the case of:
 
10           (A)  A joint return as provided by section 235-93; or
 
11           (B)  A surviving spouse (as defined in section 2(a) of
 
12                the Internal Revenue Code);
 
13      (2)  $1,650 in the case of a head of household (as defined
 
14           in section 2(b) of the Internal Revenue Code);
 
15      (3)  $1,500 in the case of an individual who is not married
 
16           and who is not a surviving spouse or head of household;
 
17           or
 
18      (4)  $950 in the case of a married individual filing a
 
19           separate return.
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      Section 63(c)(4) shall not be operative in this State.
 
 2 Section 63(c)(5) shall be operative, except that the limitation
 
 3 on basic standard deduction in the case of certain dependents
 
 4 shall be the greater of $500 or [such] the individual's earned
 
 5 income.  Section 63(f) shall not be operative in this State.
 
 6      The standard deduction amount for nonresidents shall be
 
 7 calculated pursuant to section 235-5.
 
 8      (b)  Section 72 (with respect to annuities; certain proceeds
 
 9 of endowment and life insurance contracts) of the Internal
 
10 Revenue Code shall be operative for purposes of this chapter and
 
11 be interpreted with due regard to section 235-7(a), except that
 
12 the ten per cent additional tax on early distributions from
 
13 retirement plans in section 72(t) shall not be operative for
 
14 purposes of this chapter.
 
15      (c)  Section 121 (with respect to exclusion of gain from
 
16 sale of principal residence) of the Internal Revenue Code shall
 
17 be operative for purposes of this chapter, except that for the
 
18 election under section 121(f), a reference to section 1034
 
19 treatment means a reference to section 235-2.4(n) in effect for
 
20 taxable year 1997.
 
21     (d)  Section 219 (with respect to retirement savings) of the
 
22 Internal Revenue Code shall be operative for the purpose of this
 
23 chapter.  For the purpose of computing the limitation on the
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 deduction for active participants in certain pension plans for
 
 2 state income tax purposes, adjusted gross income as used in
 
 3 section 219 as operative for this chapter means federal adjusted
 
 4 gross income.
 
 5     (e)  Section 220 (with respect to medical savings accounts)
 
 6 of the Internal Revenue Code shall be operative for the purpose
 
 7 of this chapter, but only with respect to medical services
 
 8 accounts that have been approved by the Secretary of the Treasury
 
 9 of the United States.
 
10     (f)  Section 408A (with respect to Roth Individual Retirement
 
11 Accounts) of the Internal Revenue Code shall be operative for the
 
12 purposes of this chapter.  For the purposes of determining the
 
13 aggregate amount of contributions to a Roth Individual Retirement
 
14 Account or qualified rollover contribution to a Roth Individual
 
15 Retirement Account from an individual retirement plan other than
 
16 a Roth Individual Retirement Account, adjusted gross income as
 
17 used in section 408A as operative for this chapter means federal
 
18 adjusted gross income.
 
19     (g)  In administering the provisions of sections 410 to 417
 
20 (with respect to special rules relating to pensions, profit
 
21 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
22 respect to special rules for multiemployer plans), and sections
 
23 419 and 419A (with respect to treatment of welfare benefit funds)
 

 
Page 4                                                     2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 of the Internal Revenue Code, the department of taxation shall
 
 2 adopt rules under chapter 91 relating to the specific
 
 3 requirements under such sections and to such other administrative
 
 4 requirements under those sections as may be necessary for the
 
 5 efficient administration of sections 410 to 419A.
 
 6      In administering sections 401 to 419A (with respect to
 
 7 deferred compensation) of the Internal Revenue Code, Public Law
 
 8 93-406, section 1017(i), shall be operative for the purposes of
 
 9 this chapter.
 
10      In administering section 402 (with respect to the taxability
 
11 of beneficiary of employees' trust) of the Internal Revenue Code,
 
12 the tax imposed on lump sum distributions by section 402(e) of
 
13 the Internal Revenue Code shall be operative for the purposes of
 
14 this chapter and the tax imposed therein is hereby imposed by
 
15 this chapter at the rate determined under this chapter.
 
16     (h)  Section 468B (with respect to special rules for
 
17 designated settlement funds) of the Internal Revenue Code shall
 
18 be operative for the purposes of this chapter and the tax imposed
 
19 therein is hereby imposed by this chapter at a rate equal to the
 
20 maximum rate in effect for the taxable year imposed on estates
 
21 and trusts under section 235-51.
 
22     (i)  Section 469 (with respect to passive activities and
 
23 credits limited) of the Internal Revenue Code shall be operative
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 for the purposes of this chapter.  For the purpose of computing
 
 2 the offset for rental real estate activities for state income tax
 
 3 purposes, adjusted gross income as used in section 469 as
 
 4 operative for this chapter means federal adjusted gross income.
 
 5     (j)  Sections 512 to 514 (with respect to taxation of
 
 6 business income of certain exempt organizations) of the Internal
 
 7 Revenue Code shall be operative for the purposes of this chapter
 
 8 as provided in this subsection.
 
 9     "Unrelated business taxable income" means the same as in the
 
10 Internal Revenue Code, except that in the computation thereof
 
11 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
12 apply, and in the determination of the net operating loss
 
13 deduction there shall not be taken into account any amount of
 
14 income or deduction [which] that is excluded in computing the
 
15 unrelated business taxable income.  Unrelated business taxable
 
16 income shall not include any income from a prepaid legal service
 
17 plan.
 
18     For a person described in section 401 or 501 of the Internal
 
19 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
20 section 235-51 or 235-71 shall be imposed upon the person's
 
21 unrelated business taxable income.
 
22     (k)  Section 521 (with respect to cooperatives) and
 
23 subchapter T (sections 1381 to 1388, with respect to cooperatives
 

 
Page 6                                                     2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 and their patrons) of the Internal Revenue Code shall be
 
 2 operative for the purposes of this chapter as to any cooperative
 
 3 fully meeting the requirements of section 421-23, except that
 
 4 Internal Revenue Code section 521 cooperatives need not be
 
 5 organized in Hawaii.
 
 6     (l)  Sections 527 (with respect to political organizations)
 
 7 and 528 (with respect to certain homeowners associations) of the
 
 8 Internal Revenue Code shall be operative for the purposes of this
 
 9 chapter and the taxes imposed in each such section are hereby
 
10 imposed by this chapter at the rates determined under section
 
11 235-71.
 
12     (m)  Section 530 (with respect to education individual
 
13 retirement accounts) of the Internal Revenue Code shall be
 
14 operative for the purposes of this chapter.  For the purpose of
 
15 determining the maximum amount that a contributor could make to
 
16 an education individual retirement account for state income tax
 
17 purposes, modified adjusted gross income as used in section 530
 
18 for this chapter means federal modified adjusted gross income as
 
19 defined in section 530.
 
20     (n)  Section 641 (with respect to imposition of tax) of the
 
21 Internal Revenue Code shall be operative for the purposes of this
 
22 chapter subject to the following:
 

 
 
 
Page 7                                                     2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (1)  The deduction for exemptions shall be allowed as
 
 2           provided in section 235-54(b)[.];
 
 3      (2)  The deduction for contributions and gifts in
 
 4           determining taxable income shall be limited to the
 
 5           amount allowed in the case of an individual, unless the
 
 6           contributions and gifts are to be used exclusively in
 
 7           the State[.]; and
 
 8      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
 9           Code as applied by section 641 of the Internal Revenue
 
10           Code is hereby imposed by this chapter at the rate and
 
11           amount as determined under section 235-51 on estates
 
12           and trusts.
 
13      (o)  Section 667 (with respect to treatment of amounts
 
14 deemed distributed by trusts in preceding years) of the Internal
 
15 Revenue Code shall be operative for the purposes of this chapter
 
16 and the tax imposed therein is hereby imposed by this chapter at
 
17 the rate determined under this chapter; except that the reference
 
18 to tax-exempt interest to which section 103 of the Internal
 
19 Revenue Code applies in section 667(a) of the Internal Revenue
 
20 Code shall instead be a reference to tax-exempt interest to which
 
21 section 235-7(b) applies.
 
22     (p)  Section 685 (with respect to treatment of qualified
 
23 funeral trusts) of the Internal Revenue Code shall be operative
 

 
Page 8                                                     2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 for purposes of this chapter, except that the tax imposed under
 
 2 this chapter shall be computed at the tax rates provided under
 
 3 section 235-51, and no deduction for the exemption amount
 
 4 provided in section 235-54(b) shall be allowed.  The cost-of-
 
 5 living adjustment determined under section 1(f)(3) shall be
 
 6 operative for the purpose of applying section 685(c)(3) under
 
 7 this chapter.
 
 8     (q)  Section 1212 (with respect to capital loss carrybacks
 
 9 and carryforwards) of the Internal Revenue Code shall be
 
10 operative for the purposes of this chapter; except that for the
 
11 purposes of this chapter the capital loss carryback provisions of
 
12 section 1212 shall not be operative and the capital loss
 
13 carryforward allowed by section 1212(a) shall be limited to five
 
14 years.
 
15     (r)  Subchapter S (sections 1361 to 1379) (with respect to
 
16 tax treatment of S corporations and their shareholders) of
 
17 chapter 1 of the Internal Revenue Code shall be operative for the
 
18 purposes of this chapter as provided in part VII.
 
19     (s)  Section 6015 (with respect to relief from joint and
 
20 several liability on joint return) of the Internal Revenue Code
 
21 is operative for purposes of this chapter.
 
22     (t)  Subchapter C (sections 6221 to 6233) (with respect to
 
23 tax treatment of partnership items) of chapter 63 of the Internal
 
24 Revenue Code shall be operative for the purposes of this chapter.
 

 
Page 9                                                     2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1     (u)  Subchapter D (sections 6240 to 6255) (with respect to
 
 2 simplified audit procedures for electing large partnerships) of
 
 3 the Internal Revenue Code shall be operative for the purposes of
 
 4 this chapter, with due regard to chapter 232 relating to tax
 
 5 appeals.
 
 6     (v)  Section 6511(h) (with respect to running of periods of
 
 7 limitation suspended while taxpayer is unable to manage financial
 
 8 affairs due to disability) of the Internal Revenue Code shall be
 
 9 operative for purposes of this chapter, with due regard to
 
10 section 235-111 relating to the limitation period for assessment,
 
11 levy, collection, or credit.
 
12     (w)  Section 7518 (with respect to capital construction fund
 
13 for commercial fishers) of the Internal Revenue Code shall be
 
14 operative for the purposes of this chapter.  Qualified
 
15 withdrawals for the acquisition, construction, or reconstruction
 
16 of any qualified asset [which] that is attributable to deposits
 
17 made before the effective date of this section shall not reduce
 
18 the basis of the asset when withdrawn.  Qualified withdrawals
 
19 shall be treated on a first-in-first-out basis.
 
20     (x)  Section 704 of the Internal Revenue Code (with respect
 
21 to a partner's distributive share) shall be operative for
 
22 purposes of this chapter; except that subsection (b)(2) shall not
 
23 apply to allocations of the high-technology business investment
 
24 tax credit allowed by section 235-110.9."
 

 
Page 10                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      SECTION 2.  Section 235-7.3, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "[[]§235-7.3[]]  Royalties and other income from high
 
 4 technology business excluded from gross income.(a)  In addition
 
 5 to the exclusions in section 235-7, there shall be excluded from
 
 6 gross income, adjusted gross income, and taxable income, amounts
 
 7 received by an individual or a qualified high technology business
 
 8 as royalties and other income derived from patents, trade
 
 9 secrets, and copyrights:
 
10      (1)  Owned by the individual or qualified high technology
 
11           business; and
 
12      (2)  Developed and arising out of a qualified high
 
13           technology business.
 
14      (b)  For the purposes of this section:
 
15      "Computer data" means any representation of information,
 
16 knowledge, facts, concepts, or instructions that is being
 
17 prepared or has been prepared and is intended to be processed, is
 
18 being processed, or has been processed in a computer or computer
 
19 network.  "Computer data" includes works in the performing arts
 
20 such as audio files, video files, audiovisual files, computer
 
21 animation, and other entertainment products that are perceived by
 
22 or through the operation of a computer.
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      "Computer program" means an ordered set of computer data
 
 2 representing coded instructions or statements, that, when
 
 3 executed by a computer, causes the computer to perform one or
 
 4 more computer operations.
 
 5      "Computer software" means computer data, a computer program,
 
 6 or a set of computer programs, procedures, or associated
 
 7 documentation concerned with the operation and function of a
 
 8 computer system, and includes both systems and application
 
 9 programs and subdivisions, such as assemblers, compilers,
 
10 routines, generators, and utility programs.
 
11      "Qualified high technology business" means a business
 
12 performing qualified research. The term "qualified high
 
13 technology business" does not 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
 

 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 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      SECTION 3.  Section 235-9.5, Hawaii Revised Statutes, is
 
18 amended to read as follows:
 
19      "[[]§235-9.5[]]  Stock options from qualified high
 
20 technology businesses exempt from taxation.(a)  Notwithstanding
 
21 any law to the contrary, all income received from stock options
 
22 from a qualified high technology business by an employee that
 
23 would otherwise be taxed as ordinary income or as capital gains
 
24 to those employees is exempt from taxation under this chapter.
 

 
Page 13                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (b)  For the purposes of this section:
 
 2      "Computer data" means any representation of information,
 
 3 knowledge, facts, concepts, or instructions that is being
 
 4 prepared or has been prepared and is intended to be processed, is
 
 5 being processed, or has been processed in a computer or computer
 
 6 network.  "Computer data" includes works in the performing arts
 
 7 such as audio files, video files, audiovisual files, computer
 
 8 animation, and other entertainment products that are perceived by
 
 9 or through the operation of a computer.
 
10      "Computer program" means an ordered set of computer data
 
11 representing coded instructions or statements, that, when
 
12 executed by a computer, causes the computer to perform one or
 
13 more computer operations.
 
14      "Computer software" means computer data, a computer program,
 
15 or a set of computer programs, procedures, or associated
 
16 documentation concerned with the operation and function of a
 
17 computer system, and includes both systems and application
 
18 programs and subdivisions, such as assemblers, compilers,
 
19 routines, generators, and utility programs.
 
20      "Qualified high technology business" means a business
 
21 performing qualified research.  The term "qualified high
 
22 technology business" does not include:
 

 
 
 
Page 14                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


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

 
Page 15                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (2)  Developing, designing, modifying, programming, and
 
 2           licensing computer software."
 
 3      SECTION 4.  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 may be used as a credit against the taxpayer's
 

 
Page 16                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 income tax liability in subsequent years until exhausted.  All
 
 2 claims, including any amended claims, for tax credits under this
 
 3 section shall be filed on or before the end of the twelfth month
 
 4 following the close of the taxable year for which the credit may
 
 5 be claimed.  Failure to comply with the foregoing provision shall
 
 6 constitute a waiver of the right to claim the credit.
 
 7      (d)  [As used in] For the purposes of this section:
 
 8      "Computer data" means any representation of information,
 
 9 knowledge, facts, concepts, or instructions that is being
 
10 prepared or has been prepared and is intended to be processed, is
 
11 being processed, or has been processed in a computer or computer
 
12 network.  "Computer data" includes works in the performing arts
 
13 such as audio files, video files, audiovisual files, computer
 
14 animation, and other entertainment products that are perceived by
 
15 or through the operation of a computer; provided the works are
 
16 created in the State and are transmitted or broadcast to users
 
17 over the Internet by way of servers located in the State.
 
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 a set of computer programs,
 
23 procedures, or associated documentation concerned with the
 

 
Page 17                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1 operation and function of a computer system, and includes both
 
 2 systems and application programs and subdivisions, such as
 
 3 assemblers, compilers, routines, generators, and utility
 
 4 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 herein, including but not limited to options or
 
15 rights to acquire any of the items included herein.  The
 
16 nonrefundable investment is entirely at risk of loss where
 
17 repayment depends upon the success of the qualified high
 
18 technology business.  If the money invested is to be repaid to
 
19 the taxpayer, no repayment except for dividends or interest shall
 
20 be made for at least three years from the date the investment is
 
21 made.  The annual amount of any dividend and interest payment to
 
22 the taxpayer shall not exceed twelve per cent of the amount of
 
23 the investment.
 

 
Page 18                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      [(e) For the purposes of this section:]
 
 2      "Qualified high technology business" means[:
 
 3      (1)  A] a business, employing or owning capital or property,
 
 4           or maintaining an office, in this State; and which:
 
 5  [(2)(A)] (1)  Conducts one hundred per cent of its activities in
 
 6           performing qualified research in this State; or
 
 7     [(B)] (2)  Receives one hundred per cent of its gross income
 
 8           derived from qualified research; provided that the
 
 9           income is received from products sold from,
 
10           manufactured, or produced in the State; or services
 
11           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 19                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 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      [(f)](e)  This section shall not apply to taxable years
 
20 beginning after December 31, 2005."
 
21      SECTION 5.  Section 235-110.91, Hawaii Revised Statutes, is
 
22 amended to read as follows:
 

 
 
 
Page 20                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      "[[]§235-110.91[]]  Tax credit for increasing research
 
 2 activities.(a)  Section 41 (with respect to the credit for
 
 3 increasing research activities) and section 280C(c) (with respect
 
 4 to certain expenses for which the credit for increasing research
 
 5 activities are allowable) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter as provided in this
 
 7 section.  If Section 41 of the Internal Revenue Code is repealed
 
 8 or terminated prior to January 1, 2006, its provisions shall
 
 9 remain in effect for purposes of the income tax law of the State
 
10 as provided for in subsection (j).
 
11      (b)  All references to Internal Revenue Code sections within
 
12 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
13 operative for purposes of this section.
 
14      (c)  There shall be allowed to each taxpayer, subject to the
 
15 tax imposed by this chapter, an income tax credit for increased
 
16 research activities [that] equal to the credit for research
 
17 activities provided by Section 41 of the Internal Revenue Code.
 
18 The credit shall be deductible from the taxpayer's net income tax
 
19 liability, if any, imposed by this chapter for the taxable year
 
20 in which the credit is properly claimed.
 
21      (d)  [The tax credit for increased research activities shall
 
22 be equal to the sum of:
 
23      (1)  2.5 per cent of the excess (if any) of:
 

 
Page 21                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1           (A)  The qualified research expenses for the taxable
 
 2                year; over
 
 3           (B)  The base amount; and
 
 4      (2)  2.5 per cent of the basic research payments determined
 
 5           under section 41(e)(1)(A) of the Internal Revenue Code.
 
 6      (e)  For purposes of this section:
 
 7      (1)  The alternative incremental credit in section 41(c)(4)
 
 8           of the Internal Revenue Code shall be equal to the sum
 
 9           of 12.5 per cent of:
 
10           (A)  1.65 per cent of so much of the qualified research
 
11                expenses for the taxable year as exceeds one per
 
12                cent of the average described in section
 
13                41(c)(1)(B) but does not exceed 1.5 per cent of
 
14                such average;
 
15           (B)  2.2 per cent of so much of those expenses as
 
16                exceeds 1.5 per cent of the average but does not
 
17                exceed two per cent of the average; and
 
18           (C)  2.75 per cent of so much of those expenses as
 
19                exceeds two per cent of the average;
 
20      (2)  The term] For purposes of this section, "qualified
 
21           research" [under section 41(d)(1) of the Internal
 
22           Revenue Code shall not include research conducted
 
23           outside of the State; and
 

 
Page 22                                                    2607
                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      (3)  The term] and "basic research" under section 41(e) of
 
 2           the Internal Revenue Code shall not include research
 
 3           conducted outside of the State.
 
 4      [(f)  The amount of reduced credit in section 280C(c)(3)(B)
 
 5 of the Internal Revenue Code shall be equal to the excess of:
 
 6      (1)  The amount of credit determined under section 41(a) (as
 
 7           provided for in this section) (without regard to this
 
 8           paragraph); over
 
 9      (2)  The product of:
 
10           (A)  The amount described in subsection (f)(1); and
 
11           (B)  12.5 per cent of the maximum rate of tax under
 
12                section 11(b)(1) of the Internal Revenue Code.
 
13      (g)  If the tax credit for increased research activities
 
14 claimed by a taxpayer exceeds the amount of income tax payment
 
15 due from the taxpayer, the excess of the tax credit over payments
 
16 due may be used as a credit against the taxpayer's income tax
 
17 liability in subsequent years until exhausted.
 
18      [(h)]   All claims for a tax credit under this section
 
19 [must] shall  be filed on or before the end of the twelfth month
 
20 following the close of the taxable year for which the credit may
 
21 be claimed. Failure to properly claim the credit shall constitute
 
22 a waiver of the right to claim the credit.
 

 
 
 
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                                     H.B. NO.           H.D. 1
                                                        
                                                        


 1      [(i)]  (g)  The director of taxation may adopt any rules
 
 2 under chapter 91 and forms necessary to carry out this section.
 
 3      [(j)]  (h)  This section shall not apply to taxable years
 
 4 beginning after December 31, 2005."
 
 5      SECTION 6.  Statutory material to be repealed is bracketed.
 
 6 New statutory material is underscored.
 
 7      SECTION 7.  This Act, upon its approval, shall apply to
 
 8 taxable years beginning after December 31, 1999.