REPORT TITLE:
New Economy


DESCRIPTION:
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.  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.  Creates the Hawaii technology investment program
for small individual investors.  Creates new economy trust fund.
(SD2)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2901
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 2000                                S.D. 2
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 the administration partnered to
 
16 demonstrate their commitment of support for an aggressive
 
17 development of high technology resources.  Act 178, Session Laws
 
18 of Hawaii 1999, called for the integration of technology with
 
19 some of Hawaii's industries, the increase of technology
 
20 professionals through work force development programs, and the
 

 
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 1 creation of economic incentives for businesses to increase high
 
 2 technology research activities.
 
 3      Since geographic location and isolation are no longer
 
 4 detrimental factors when competing in a global market, the
 
 5 legislature believes that it must continue the effort started in
 
 6 1999.  The purpose of this Act is to encourage the continued
 
 7 growth and development of high technology businesses and
 
 8 associate industries relying on these in Hawaii by:
 
 9      (1)  Clarifying tax credits to encourage research and
 
10           development for intellectual properties;
 
11      (2)  Allowing the board of trustees of the employees'
 
12           retirement system to invest up to ten per cent in
 
13           venture capital for high technology businesses;
 
14      (3)  Creating partnerships with the tourist industry to
 
15           market and promote Hawaii's emerging technology
 
16           industries and Hawaii as an ideal location to conduct
 
17           e-business;
 
18      (4)  Creating the Hawaii technology investment program for
 
19           small individual investors; and
 
20      (5)  Creating the new economy trust fund to support public
 
21           education, innovative projects that expand access to
 
22           technology, and workforce development initiatives
 
23           emphasizing skills-building.
 

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

 
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 1           income from high technology businesses established by
 
 2           section 22 of Act 178, Session Laws of Hawaii 1999, by
 
 3           expanding that exclusion to include royalties derived
 
 4           from any patent, copyright, or trade secret for any
 
 5           individual or other person who owns the patent or
 
 6           copyright;
 
 7      (4)  Amend the section relating to operation of certain
 
 8           Internal Revenue Code provisions to allow partnership
 
 9           investors the flexibility of allocating the high
 
10           technology business investment tax credit in section
 
11           235-110.9, Hawaii Revised Statutes, among partners
 
12           without regard to their proportionate interests in
 
13           their partnership investment vehicle;
 
14      (5)  Amend the high-technology business investment tax
 
15           credit under section 235-110.9, Hawaii Revised
 
16           Statutes, and the tax credit for increasing research
 
17           activities under section 235-110.91, Hawaii Revised
 
18           Statutes, by making the credit refundable to the
 
19           taxpayer in addition to allowing the credit to be used
 
20           against the taxpayer's income tax liability in
 
21           subsequent years until exhausted; and
 
22      (6)  Conform the tax credit for increasing research
 
23           activities under section 235-110.91, Hawaii Revised
 

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

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

 
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 1 to chapter 91 to implement this section, which shall include the
 
 2 following:
 
 3      (1)  Procedure and criteria for the approval or disapproval
 
 4           of applications filed by qualified high technology
 
 5           businesses selling unused net operating losses; and
 
 6      (2)  Criteria to provide for the equitable apportionment of
 
 7           qualified sales allowed annually under this section to
 
 8           eligible applicants."
 
 9      SECTION 4.  Section 235-1, Hawaii Revised Statutes, is
 
10 amended by adding six new definitions to be appropriately
 
11 inserted and to read as follows:
 
12      ""Computer data" means any representation of information,
 
13 knowledge, facts, concepts, or instructions that is being
 
14 prepared or has been prepared and is intended to be processed, is
 
15 being processed, or has been processed in a computer or computer
 
16 network.  "Computer data" includes works in the performing arts
 
17 such as audio files, video files, audiovisual files, computer
 
18 animation, and other entertainment products that are perceived by
 
19 or through the operation of a computer.
 
20      "Computer program" means an ordered set of computer data
 
21 representing coded instructions or statements, that, when
 
22 executed by a computer, causes the computer to perform one or
 
23 more computer operations.
 

 
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 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      "Investment" means a nonrefundable investment, at risk, as
 
 8 that term is used in section 465 (with respect to deductions
 
 9 limited to amount at risk) of the Internal Revenue Code, in a
 
10 qualified high technology business, of cash that is transferred
 
11 to the qualified high technology business, the transfer of which
 
12 is in connection with a transaction in exchange for stock,
 
13 interests in partnerships, joint ventures, or other entities,
 
14 licenses (exclusive or nonexclusive), rights to use technology,
 
15 marketing rights, warrants, options, or any items similar to
 
16 those included in this definition, including but not limited to
 
17 options or rights to acquire any of the items included in this
 
18 definition.  The nonrefundable investment is entirely at risk of
 
19 loss where repayment depends upon the success of the qualified
 
20 high technology business.  If the money invested is to be repaid
 
21 to the taxpayer, no repayment except for dividends or interest
 
22 shall be made for at least three years from the date the
 
23 investment is made.  The annual amount of any dividend and
 

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

 
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 1           products of a character with respect to which a
 
 2           deduction is allowable under section 611 (with respect
 
 3           to allowance of deduction for depletion), 613 (with
 
 4           respect to basis for percentage depletion), or 613A
 
 5           (with respect to limitation on percentage depleting in
 
 6           cases of oil and gas wells) of the Internal Revenue
 
 7           Code;
 
 8      (3)  Any business operating a hotel, motel, restaurant, or
 
 9           similar business; and
 
10      (4)  Any trade or business involving a hospital, a private
 
11           office of a licensed health care professional, a group
 
12           practice of licensed health care professionals, or a
 
13           nursing home.
 
14      "Qualified research" means:
 
15      (1)  The same as in section 41(d) of the Internal Revenue
 
16           Code; or
 
17      (2)  Developing, designing, modifying, programming, and
 
18           licensing computer software;
 
19 except that it shall not include research conducted outside the
 
20 State."
 
21      SECTION 5.  Section 235-2.4, Hawaii Revised Statutes, is
 
22 amended to read as follows:
 
23      "§235-2.4  Operation of certain Internal Revenue Code
 

 


 

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 1 provisions[.]; sections 63 to 530.  (a)  Section 63 (with respect
 
 2 to taxable income defined) of the Internal Revenue Code shall be
 
 3 operative for the purposes of this chapter, except that the
 
 4 standard deduction amount in section 63(c) of the Internal
 
 5 Revenue Code shall instead mean:
 
 6      (1)  $1,900 in the case of:
 
 7           (A)  A joint return as provided by section 235-93; or
 
 8           (B)  A surviving spouse (as defined in section 2(a) of
 
 9                the Internal Revenue Code);
 
10      (2)  $1,650 in the case of a head of household (as defined
 
11           in section 2(b) of the Internal Revenue Code);
 
12      (3)  $1,500 in the case of an individual who is not married
 
13           and who is not a surviving spouse or head of household;
 
14           or
 
15      (4)  $950 in the case of a married individual filing a
 
16           separate return.
 
17      Section 63(c)(4) shall not be operative in this State.
 
18 Section 63(c)(5) shall be operative, except that the limitation
 
19 on basic standard deduction in the case of certain dependents
 
20 shall be the greater of $500 or such individual's earned income.
 
21 Section 63(f) shall not be operative in this State.
 
22      The standard deduction amount for nonresidents shall be
 
23 calculated pursuant to section 235-5.
 

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

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

 
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 1 93-406, section 1017(i), shall be operative for the purposes of
 
 2 this chapter.
 
 3      In administering section 402 (with respect to the taxability
 
 4 of beneficiary of employees' trust) of the Internal Revenue Code,
 
 5 the tax imposed on lump sum distributions by section 402(e) of
 
 6 the Internal Revenue Code shall be operative for the purposes of
 
 7 this chapter and the tax imposed therein is hereby imposed by
 
 8 this chapter at the rate determined under this chapter.
 
 9      (h)  Section 468B (with respect to special rules for
 
10 designated settlement funds) of the Internal Revenue Code shall
 
11 be operative for the purposes of this chapter and the tax imposed
 
12 therein is hereby imposed by this chapter at a rate equal to the
 
13 maximum rate in effect for the taxable year imposed on estates
 
14 and trusts under section 235-51.
 
15      (i)  Section 469 (with respect to passive activities and
 
16 credits limited) of the Internal Revenue Code shall be operative
 
17 for the purposes of this chapter.  For the purpose of computing
 
18 the offset for rental real estate activities for state income tax
 
19 purposes, adjusted gross income as used in section 469 as
 
20 operative for this chapter means federal adjusted gross income.
 
21      (j)  Sections 512 to 514 (with respect to taxation of
 
22 business income of certain exempt organizations) of the Internal
 
23 Revenue Code shall be operative for the purposes of this chapter
 

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

 
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 1 chapter and the taxes imposed in each such section are hereby
 
 2 imposed by this chapter at the rates determined under section
 
 3 235-71.
 
 4      (m)  Section 530 (with respect to education individual
 
 5 retirement accounts) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter.  For the purpose of
 
 7 determining the maximum amount that a contributor could make to
 
 8 an education individual retirement account for state income tax
 
 9 purposes, modified adjusted gross income as used in section 530
 
10 for this chapter means federal modified adjusted gross income as
 
11 defined in section 530.
 
12      [(n)] §235-2.45  Operation of certain Internal Revenue Code
 
13 provisions; sections 641 to 7518.  (a)  Section 641 (with respect
 
14 to imposition of tax) of the Internal Revenue Code shall be
 
15 operative for the purposes of this chapter subject to the
 
16 following:
 
17      (1)  The deduction for exemptions shall be allowed as
 
18           provided in section 235-54(b).
 
19      (2)  The deduction for contributions and gifts in
 
20           determining taxable income shall be limited to the
 
21           amount allowed in the case of an individual, unless the
 
22           contributions and gifts are to be used exclusively in
 
23           the State.
 

 
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 1      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
 2           Code as applied by section 641 of the Internal Revenue
 
 3           Code is hereby imposed by this chapter at the rate and
 
 4           amount as determined under section 235-51 on estates
 
 5           and trusts.
 
 6      [(o)] (b)  Section 667 (with respect to treatment of amounts
 
 7 deemed distributed by trusts in preceding years) of the Internal
 
 8 Revenue Code shall be operative for the purposes of this chapter
 
 9 and the tax imposed therein is hereby imposed by this chapter at
 
10 the rate determined under this chapter; except that the reference
 
11 to tax-exempt interest to which section 103 of the Internal
 
12 Revenue Code applies in section 667(a) of the Internal Revenue
 
13 Code shall instead be a reference to tax-exempt interest to which
 
14 section 235-7(b) applies.
 
15      [(p)] (c)  Section 685 (with respect to treatment of
 
16 qualified funeral trusts) of the Internal Revenue Code shall be
 
17 operative for purposes of this chapter, except that the tax
 
18 imposed under this chapter shall be computed at the tax rates
 
19 provided under section 235-51, and no deduction for the exemption
 
20 amount provided in section 235-54(b) shall be allowed.  The cost-
 
21 of-living adjustment determined under section 1(f)(3) of the
 
22 Internal Revenue Code shall be operative for the purpose of
 
23 applying section 685(c)(3) under this chapter.
 

 
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 1      (d)  Section 704 of the Internal Revenue Code (with respect
 
 2 to a partner's distributive share) shall be operative for
 
 3 purposes of this chapter; except that subsection (b)(2) shall not
 
 4 apply to allocations of the high-technology business investment
 
 5 tax credit allowed by section 235-110.9.
 
 6      [(q)] (e)  Section 1212 (with respect to capital loss
 
 7 carrybacks and carryforwards) of the Internal Revenue Code shall
 
 8 be operative for the purposes of this chapter; except that for
 
 9 the purposes of this chapter the capital loss carryback
 
10 provisions of section 1212 shall not be operative and the capital
 
11 loss carryforward allowed by section 1212(a) shall be limited to
 
12 five years[.]; except for qualified high technology businesses as
 
13 defined in section 235-1, which shall be limited to fifteen
 
14 years.
 
15      [(r)] (f)  Subchapter S (sections 1361 to 1379) (with
 
16 respect to tax treatment of S corporations and their
 
17 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
18 operative for the purposes of this chapter as provided in part
 
19 VII.
 
20      [(s)] (g)  Section 6015 (with respect to relief from joint
 
21 and several liability on joint return) of the Internal Revenue
 
22 Code is operative for purposes of this chapter.
 
23      [(t)] (h)  Subchapter C (sections 6221 to 6233) (with
 

 
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 1 respect to tax treatment of partnership items) of chapter 63 of
 
 2 the Internal Revenue Code shall be operative for the purposes of
 
 3 this chapter.
 
 4      [(u)] (i)  Subchapter D (sections 6240 to 6255) (with
 
 5 respect to simplified audit procedures for electing large
 
 6 partnerships) of the Internal Revenue Code shall be operative for
 
 7 the purposes of this chapter, with due regard to chapter 232
 
 8 relating to tax appeals.
 
 9      [(v)] (j)  Section 6511(h) (with respect to running of
 
10 periods of limitation suspended while taxpayer is unable to
 
11 manage financial affairs due to disability) of the Internal
 
12 Revenue Code shall be operative for purposes of this chapter,
 
13 with due regard to section 235-111 relating to the limitation
 
14 period for assessment, levy, collection, or credit.
 
15      [(w)] (k)  Section 7518 (with respect to capital
 
16 construction fund for commercial fishers) of the Internal Revenue
 
17 Code shall be operative for the purposes of this chapter.
 
18 Qualified withdrawals for the acquisition, construction, or
 
19 reconstruction of any qualified asset which is attributable to
 
20 deposits made before the effective date of this section shall not
 
21 reduce the basis of the asset when withdrawn.  Qualified
 
22 withdrawals shall be treated on a first-in-first-out basis."
 
23      SECTION 6.  Section 235-7.3, Hawaii Revised Statutes, is
 

 
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 1 amended to read as follows:
 
 2      "[[]§235-7.3[]]  Royalties [and other income from high
 
 3 technology business] derived from patents, copyrights, or trade
 
 4 secrets excluded from gross income.  [(a)] In addition to the
 
 5 exclusions in section 235-7, there shall be excluded from gross
 
 6 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 any patents [and],
 
 9 copyrights[:], or trade secrets:
 
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 software" means a set of computer programs,
 
16 procedures, or associated documentation concerned with the
 
17 operation and function of a computer system, and includes both
 
18 systems and application programs and subdivisions, such as
 
19 assemblers, compilers, routines, generators, and utility
 
20 programs.
 
21      "Qualified high technology business" means a business
 
22 performing qualified research.  The term "qualified high
 
23 technology business" does not include:
 

 
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 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
 

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

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

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

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

 
 1      (2)  Developing, designing, modifying, programming, and
 
 2           licensing computer software.]"
 
 3      SECTION 8.  Section 235-110.9, Hawaii Revised Statutes, is
 
 4 amended to read as follows:
 
 5      "[[]§235-110.9[]]  [High-technology] High technology
 
 6 business investment tax credit.(a)  There shall be allowed to
 
 7 each taxpayer, subject to the taxes imposed by this chapter, a
 
 8 high technology investment tax credit that shall be deductible
 
 9 from the taxpayer's net income tax liability, if any, imposed by
 
10 this chapter for the taxable year in which the credit is properly
 
11 claimed.  The tax credit shall be an amount equal to ten per cent
 
12 of the investment made by the taxpayer in each qualified high
 
13 technology business, up to a maximum allowed credit of $500,000
 
14 for the taxable year for the investment made by the taxpayer in a
 
15 qualified high 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 25                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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 26                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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 27                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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 28                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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 9.  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 (g).
 
22      (b)  All references to Internal Revenue Code sections within
 
23 sections 41 and 280C(c) of the Internal Revenue Code shall be
 

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

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

 
Page 30                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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.
 
23      (g)] (d)  If the tax credit for increased research
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 
 1           district thereof or of any country;
 
 2      (5)  Obligations eligible by law for purchase in the open
 
 3           market by federal reserve banks;
 
 4      (6)  Obligations issued or guaranteed by the International
 
 5           Bank for Reconstruction and Development, the Inter-
 
 6           American Development Bank, the Asian Development Bank,
 
 7           or the African Development Bank;
 
 8      (7)  Obligations secured by collateral consisting of any of
 
 9           the securities or stock listed above and worth at the
 
10           time the investment is made at least fifteen per cent
 
11           more than the amount of the respective obligations;
 
12      (8)  Insurance company obligations.  Contracts and
 
13           agreements supplemental thereto providing for
 
14           participation in one or more accounts of a life
 
15           insurance company authorized to do business in Hawaii,
 
16           including its separate accounts, and whether the
 
17           investments allocated thereto are comprised of stocks
 
18           or other securities or of real or personal property or
 
19           interests therein;
 
20      (9)  Interests in real property.  Interests in improved or
 
21           productive real property in which, in the informed
 
22           opinion of the board of trustees, it is prudent to
 
23           invest funds of the system.  For purposes of this
 

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

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

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

 
 1           or not the securities, stock, futures contracts, or
 
 2           options on futures are expressly authorized by or
 
 3           qualify under the foregoing paragraphs, and
 
 4           notwithstanding any limitation of any of the foregoing
 
 5           paragraphs (including paragraph (4)); and
 
 6     (11)  Private placements.  Investments in institutional blind
 
 7           pool limited partnerships or direct investments that
 
 8           make private debt and equity investments in privately
 
 9           held companies[.] including, but not limited to
 
10           investments in Hawaii qualified high technology
 
11           businesses or venture capital investments that, in the
 
12           informed opinion of the board of trustees, are
 
13           appropriate to invest funds of the system.
 
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 41                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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, consulting,
 
22                athletics, financial services, or brokerage
 
23                services;
 

 
Page 42                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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 43                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.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, that is for
 
13           a term of not less than three years, that has no part
 
14           amortized during the first three years;
 
15      (4)  General or limited partnership interests; and
 
16      (5)  Membership interests in limited liability companies."
 
17            PART IV.  MARKETING AND ELECTRONIC COMMERCE
 
18      SECTION 17.  The legislature finds that the Internet is a
 
19 critical component of the new economy because of its enormous
 
20 potential to increase efficiency and raise productivity.
 
21 Internet commerce, which is probably the most significant
 
22 component of electronic commerce, or "e-commerce", includes such
 
23 areas as online financial services, consumer retail and business-
 

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

 
 1 to-business transactions, media, infrastructure, and consumer and
 
 2 business Internet access services.
 
 3      The legislature further finds that the total United States
 
 4 Internet economy more than doubled between 1996 and 1997, from
 
 5 $15,500,000,000 to $38,800,000,000.  By 2001, it has been
 
 6 projected that the total United States Internet economy will be
 
 7 over $350,000,000,000.  Of this amount, business-to-business
 
 8 e-commerce is expected to account for the largest share, while
 
 9 consumer retail activity is expected to emerge more slowly,
 
10 totaling over $18,000,000,000 in the year 2001.
 
11      The purpose of this Part is to increase the State's share of
 
12 this significant economic activity and the facilitation of
 
13 e-commerce in Hawaii through the development of partnerships
 
14 between the Hawaii tourism authority and Hawaii's business
 
15 community to promote the State, through a coordinated statewide
 
16 effort, as an Internet and server-friendly place to conduct
 
17 electronic commerce.
 
18      SECTION 18.  Section 201B-6, Hawaii Revised Statutes, is
 
19 amended by amending subsection (a) to read as follows:
 
20      "(a)  The authority shall be responsible for developing a
 
21 strategic tourism marketing plan that shall be updated every
 
22 three years and includes the following:
 
23      (1)  Identification and evaluation of current and future
 

 
Page 45                                                    2901
                                     H.B. NO.           H.D. 2
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 1           tourism needs for the different regions of the State;
 
 2      (2)  Goals and objectives in accordance with identified
 
 3           needs;
 
 4      (3)  Statewide promotional efforts and programs;
 
 5      (4)  Targeted markets;
 
 6      (5)  Efforts to enter into brand marketing projects that
 
 7           make effective use of cooperative advertising programs;
 
 8      (6)  Measures of effectiveness for the authority's
 
 9           promotional programs; and
 
10      (7)  Coordination of marketing plans of all destination
 
11           marketing organizations receiving state funding prior
 
12           to finalization of the authority's marketing plan.
 
13      The authority shall also develop and include in its
 
14 marketing plan, goals and objectives for marketing the State to
 
15 the techno-tourism niche [as well as], for marketing Hawaii's
 
16 technology assets to appropriate visitor markets worldwide as a
 
17 high technology destination, and for integrating marketing
 
18 objectives with existing and potential state telecommunications
 
19 and information resources in the public and private sectors.  The
 
20 authority shall also coordinate the requirements for and
 
21 availability of the State's existing and potential
 
22 telecommunications and information resources with the department
 
23 of accounting and general services."
 

 
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 1      SECTION 19.  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
 
23     [(8)] (9)  Any and all other activities necessary to carry
 

 
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 1           out the intent of this chapter;
 
 2 provided that for the purposes of continuity, the Hawaii Visitors
 
 3 and Convention Bureau shall be the designated agency to conduct
 
 4 the marketing and promotion of the State until the end of fiscal
 
 5 year 1998-1999 or until a date specified by the board."
 
 6                  PART V. TECHNOLOGY INVESTMENTS 
 
 7      SECTION 20.  The legislature finds that there are many
 
 8 investors in Hawaii who would like to invest in local start-up
 
 9 companies or in commercialization of research efforts, such as
 
10 those carried out by the University of Hawaii.  However, these
 
11 investors are often unable to meet the standards of an accredited
 
12 investor -- which require $2,000,000 in net assets and an annual
 
13 income of $250,000 -- and thus cannot invest in the majority of
 
14 private placements being offered.
 
15      The legislature further finds that there is a need for an
 
16 investment vehicle that would allow participation by smaller
 
17 investors, as a means of proving additional options for Hawaii
 
18 investors, and in aiding the growth of Hawaii technology
 
19 companies.
 
20      The purpose of this Part is to create such a program -- the
 
21 Hawaii technology investment program for small individual
 
22 investors.
 
23      SECTION 21.  Chapter 211F, Hawaii Revised Statutes, is
 

 
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 1 amended by adding a new part to be appropriately designated and
 
 2 to read as follows:
 
 3       "PART .  THE HAWAII TECHNOLOGY INVESTMENT PROGRAM
 
 4      §211F-   Definitions.  As used in this part:
 
 5      "Computer data" means any representation of information,
 
 6 knowledge, facts, concepts, or instructions that is being
 
 7 prepared or has been prepared and is intended to be processed, is
 
 8 being processed, or has been processed in a computer or computer
 
 9 network.  "Computer data" includes works in the performing arts
 
10 such as audio files, video files, audiovisual files, computer
 
11 animation, and other entertainment products that are perceived by
 
12 or through the operation of a computer.
 
13      "Computer program" means an ordered set of computer data
 
14 representing coded instructions or statements, that, when
 
15 executed by a computer, causes the computer to perform one or
 
16 more computer operations.
 
17      "Computer software" means computer data, a computer program,
 
18 or a set of computer programs, procedures, or associated
 
19 documentation concerned with the operation and function of a
 
20 computer system, and includes both systems and application
 
21 programs and subdivisions, such as assemblers, compilers,
 
22 routines, generators, and utility programs.
 
23      "Financial organization" means an organization authorized to
 

 
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 1 do business in Hawaii that is:
 
 2      (1)  Certified as an insurer by the insurance commissioner;
 
 3      (2)  Licensed or chartered as a financial institution by the
 
 4           commissioner of financial institutions;
 
 5      (3)  Chartered by an agency of the federal government;
 
 6      (4)  Subject to the jurisdiction and regulation of the
 
 7           federal Securities and Exchange Commission; or
 
 8      (5)  Any other entity otherwise authorized to do business in
 
 9           the State that meets the requirements of this part.
 
10      "Program" means the Hawaii technology investment program.
 
11      "Program manager" means a financial organization selected by
 
12 the corporation to manage the program.
 
13      "Qualified high technology business":
 
14      (1)  Means a business, employing or owning capital or
 
15           property, or maintaining an office, in this State that:
 
16           (A)  Conducts a majority of its activities in
 
17                performing qualified research in this State; or
 
18           (B)  Receives a majority of its gross income derived
 
19                from qualified research; provided that the income
 
20                is received from:
 
21                (i)  Products sold from, manufactured in, or
 
22                     produced in the State; or
 
23               (ii)  Services performed in this State.
 

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

 
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 1                care professionals, or a nursing home.
 
 2      "Qualified research" means:
 
 3      (1)  The same as in section 41(d) of the Internal Revenue
 
 4           Code; or
 
 5      (2)  Developing, designing, modifying, programming, and
 
 6           licensing computer software;
 
 7 except that it shall not include research conducted outside the
 
 8 State.
 
 9      "Venture capital investment" means any of the following
 
10 investments in a qualified high technology business:
 
11      (1)  Common or preferred stock and equity securities without
 
12           a repurchase requirement for at least five years;
 
13      (2)  A right to purchase stock or equity securities;
 
14      (3)  Any debenture or loan, whether or not convertible or
 
15           having stock purchase rights, which are subordinated,
 
16           together with security interests against the assets of
 
17           the borrower, by their terms to all borrowings of the
 
18           borrower from other institutional lenders, that is for
 
19           a term of not less than three years, and that has no
 
20           part amortized during the first three years;
 
21      (4)  General or limited partnership interests; and
 
22      (5)  Membership interests in limited liability companies.
 
23      §211F-   Formation of Hawaii technology investment
 

 


 

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 1 program.(a)  The corporation shall establish the Hawaii
 
 2 technology investment program for the purpose of allowing
 
 3 individual investors to contribute to the program to invest
 
 4 venture capital in businesses in Hawaii.  The corporation may
 
 5 establish the program either:
 
 6      (1)  By forming a separate corporation as a regulated
 
 7           investment company meeting the requirements of sections
 
 8           851 to 855 of the federal Internal Revenue Code of
 
 9           1986, as amended, any requirements of the federal
 
10           Securities and Exchange Commission or the Hawaii
 
11           Uniform Securities Act, chapter 485, and the
 
12           requirements of this section; or
 
13      (2)  As provided in subsections (b) to (l).
 
14      (b)  The corporation may implement the Hawaii technology
 
15 investment program through a regulated investment company under
 
16 the terms and conditions established by this part.  The
 
17 corporation may make changes to the program as required for
 
18 participants to obtain the federal and state income tax benefits
 
19 or treatment provided by sections 851 to 855 of the federal
 
20 Internal Revenue Code of 1986, as amended.
 
21      The corporation may establish any of the following:
 
22      (1)  A program that allows an income tax credit under
 
23           section 235-    ; or
 

 
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 1      (2)  A program that does not allow an income tax credit but
 
 2           under the program the dividends distributed by the
 
 3           regulated investment company are exempt from income
 
 4           taxation under chapter 235.  If the corporation
 
 5           establishes a program that is proposed to be exempt
 
 6           from income taxation under chapter 235, it shall
 
 7           furnish sufficient information and notify the
 
 8           department of taxation and investors of the tax exempt
 
 9           status of that program.
 
10      (c)  The corporation may implement the program through the
 
11 use of financial organizations as program managers.  Under the
 
12 program, individuals may establish accounts directly with a
 
13 program manager.
 
14      (d)  The corporation may solicit proposals from one or more
 
15 financial organizations to act as a program manager.  Financial
 
16 organizations submitting proposals shall describe the investment
 
17 instrument.  The corporation shall select as program managers the
 
18 financial organizations from among the bidding financial
 
19 organizations that demonstrate the most advantageous combination,
 
20 both to potential program participants and this State, based on
 
21 the following factors:
 
22      (1)  The financial stability and integrity of the financial
 
23           organization;
 

 
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 1      (2)  The ability of the financial organization to establish
 
 2           or act as a regulated investment company for the
 
 3           purposes of this part;
 
 4      (3)  The ability of the financial organization to satisfy
 
 5           recordkeeping and reporting requirements for the
 
 6           purposes of a program that allows a tax credit under
 
 7           section 235-    , a program that is exempt from
 
 8           taxation under chapter 235, or both;
 
 9      (4)  The financial organization's plan for promoting the
 
10           program and the resources it is willing to allocate to
 
11           promote the program;
 
12      (5)  The fees, if any, proposed to be charged to persons for
 
13           opening accounts;
 
14      (6)  The minimum initial deposit and minimum contributions,
 
15           subject to this section that the financial organization
 
16           will require;
 
17      (7)  Other benefits to the State or its residents included
 
18           in the proposal, including fees payable to the State to
 
19           cover expenses to operate the program.
 
20      (e)  The corporation may enter into a management contract of
 
21 up to ten years with a financial organization.  The financial
 
22 organization shall provide investment instruments meeting the
 
23 requirements of this section.  The management contract shall
 

 
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 1 include, at a minimum, terms requiring the financial organization
 
 2 to:
 
 3      (1)  Take any action required to keep the program in
 
 4           compliance with requirements of this section and to
 
 5           manage the program to meet the requirements of sections
 
 6           851 to 855 of the federal Internal Revenue Code of
 
 7           1986, as amended;
 
 8      (2)  Keep adequate records of each account, keep each
 
 9           account segregated from each other account, and provide
 
10           the corporation with the information necessary to
 
11           prepare any necessary statements;
 
12      (4)  Provide the corporation with the information necessary
 
13           to determine compliance with this section;
 
14      (5)  Provide the corporation access to the books and records
 
15           of the financial organization to the extent needed to
 
16           determine compliance with the contract;
 
17      (6)  Hold all accounts for the benefit of the account owner;
 
18      (7)  Be audited at least annually by a firm of independent
 
19           certified public accountants selected by the financial
 
20           organization, and provide the results of the audit to
 
21           the corporation; and
 
22      (8)  Provide the corporation with copies of all regulatory
 
23           filings and reports related to the program made by the
 

 
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 1           financial organization during the term of the
 
 2           management contract or while it is holding any
 
 3           accounts, other than confidential filings or reports
 
 4           that will not become part of the program.  The
 
 5           financial organization shall make available for review
 
 6           by the corporation, the results of any periodic
 
 7           examination of the financial organization by any state
 
 8           or federal banking, insurance, or securities
 
 9           commission, except to the extent that the report or
 
10           reports may not be disclosed under applicable law or
 
11           the rules of the examining agency.
 
12      (f)  The corporation may require an audit to be conducted of
 
13 the operations and financial position of the program manager at
 
14 any time if the corporation has any reason to be concerned about
 
15 the financial position, the recordkeeping practices, or the
 
16 status of accounts of the program manager.
 
17      (g)  During the term of any contract with a program manager,
 
18 the corporation shall conduct an examination of the program
 
19 manager and its handling of accounts.  The examination shall be
 
20 conducted at least biennially if the program manager is not
 
21 otherwise subject to periodic examination by the commissioner of
 
22 financial institutions, the Federal Deposit Insurance
 
23 Corporation, or other similar entity.
 

 
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 1      (h)  If selection of a financial organization as a program
 
 2 manager is not renewed, after the end of the term:
 
 3      (1)  Accounts previously established and held in investment
 
 4           instruments at the financial organization may be
 
 5           terminated;
 
 6      (2)  Additional contributions may be made to the accounts;
 
 7      (3)  No new accounts may be placed with the financial
 
 8           organization; and
 
 9      (4)  Existing accounts held by the financial organization
 
10           shall remain subject to all oversight and reporting
 
11           requirements established by the corporation.
 
12 If the corporation terminates a financial organization as a
 
13 program manager, the corporation shall take custody of accounts
 
14 held by the financial organization and shall seek to promptly
 
15 transfer the accounts to another financial organization that is
 
16 selected as a program manager and into investment instruments as
 
17 similar to the original instruments as possible.
 
18      (i)  The corporation may enter into contracts for the
 
19 services of consultants for rendering professional and technical
 
20 assistance and advice and any other contracts that are necessary
 
21 and proper for the implementation of the program.
 
22      (j)  The program shall only allow contributions from
 
23 individual investors in amounts ranging from a minimum of $1,000
 

 
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 1 to a maximum of $20,000 per investor.  An investor may remove the
 
 2 investor's contribution from the program at any time subject to
 
 3 any applicable federal or state law.  Upon request for removal,
 
 4 subject to the preceding sentence, the program manager shall pay
 
 5 to the investor the value of the contribution at the time of
 
 6 removal.
 
 7      (k)  The program manager shall invest all contributions
 
 8 received from investors in securities not limited to legal
 
 9 investments under state laws relating to the investment of trust
 
10 fund assets by trust companies, including those authorized by
 
11 article 8 of chapter 412.  Contributions shall be used for
 
12 venture capital investment.  Investment may be made in any manner
 
13 the program deems correct, including in a manner similar to a
 
14 mutual fund.  If no venture capital investment is available at
 
15 the time a contribution is made to the program, the program
 
16 manager may invest the contribution in any manner allowed a
 
17 regulated investment company until a venture capital investment
 
18 opportunity occurs.
 
19      (l)  The corporation may adopt any necessary rules under
 
20 chapter 91.
 
21      §211F-  Limitation of liability.  In no case shall the
 
22 corporation, officers or employees of the corporation, or the
 
23 State be liable for the monetary loses of individuals
 

 
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 1 contributing to the program.  In all cases, the program manager
 
 2 shall inform individual contributors of the risk involved in
 
 3 contributing to the program."
 
 4      SECTION 22.  Chapter 235, Hawaii Revised Statutes, is
 
 5 amended by adding a new section to be appropriately designated
 
 6 and to read as follows:
 
 7      "§235-     Tax credit to promote investment in venture
 
 8 capital.  (a)  Any taxpayer who files an individual income tax
 
 9 return for a taxable year may claim an income tax credit under
 
10 this section against the Hawaii state individual net income tax.
 
11      (b)  The tax credit shall be an amount equal to twenty-five
 
12 per cent of the contribution made by the taxpayer during the
 
13 taxable year to a Hawaii technology investment program,
 
14 established pursuant to part    , chapter 211F that has not been
 
15 declared by the strategic development corporation under section
 
16 211F-    to be exempt from taxation of income under this chapter.
 
17 The credit shall not exceed $5,000.
 
18      (c)  If the tax credit claimed by the taxpayer under this
 
19 section exceeds the amount of the income tax payments due from
 
20 the taxpayer, the excess of credit over payments due shall be
 
21 refunded to the taxpayer; provided that the tax credit properly
 
22 claimed by a taxpayer who has no income tax liability shall be
 
23 paid to the taxpayer; and provided that no refunds or payments on
 

 
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 1 account of the tax credit allowed by this section shall be made
 
 2 for amounts less than $1.
 
 3      (d)  If the taxpayer removes the taxpayer's contributions,
 
 4 or any part of the contributions, from the Hawaii technology
 
 5 investment program, the taxpayer shall repay to the department
 
 6 the tax credit taken as follows:
 
 7      If the contributions are removed:          The repayment
 
 8                                              percentage shall be:
 
 9      (1)  One full year after made              100 per cent;
 
10      (2)  Two full years after made              80 per cent;
 
11      (3)  Three full years after made            60 per cent;
 
12      (4)  Four full years after made             40 per cent;
 
13      (5)  Five full years after made             20 per cent;
 
14      Any time after the periods set forth above, zero.
 
15      (e)  The director of taxation shall prepare such forms as
 
16 may be necessary to claim a credit under this section, may
 
17 require proof of the claim for the tax credit, and may adopt
 
18 rules pursuant to chapter 91.
 
19      (f)  All of the provisions relating to assessments and
 
20 refunds under this chapter and under section 231-23(c)(1) shall
 
21 apply to the tax credit under this section.
 
22      (g)  Claims for the tax credit under this section, including
 
23 any amended claims, shall be filed on or before the end of the
 

 
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 1 twelfth month following the taxable year for which the credit may
 
 2 be claimed."
 
 3                 PART VI.  NEW ECONOMY TRUST FUND
 
 4      SECTION 23.  The legislature finds that it is in the public
 
 5 interest to create opportunities for all Hawaii residents by
 
 6 investing in growth in the new economy.  Investments that provide
 
 7 a good public education, job-specific skills training, a research
 
 8 and development infrastructure, innovative economic development
 
 9 efforts that are compatible with the environment, quality
 
10 government, and an improved quality of life will provide a better
 
11 return on the taxpayer's dollar and help support a widely shared
 
12 and sustainable standard of living.
 
13      The legislature further finds that while the State's economy
 
14 is improving, additional funds are needed to provide resources to
 
15 implement initiatives for the new economy.
 
16      The legislature believes that it is critical to:
 
17      (1)  Adopt policies to ensure that Hawaii's businesses will
 
18           have the skilled workers they need to be productive,
 
19           while simultaneously ensuring that Hawaii's workers
 
20           have the skills they need to navigate, adapt, and
 
21           prosper in the new economy;
 
22      (2)  Adopt policies that embrace technological innovation
 
23           and boost the income of Hawaii's residents; and
 

 
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 1      (3)  Implement projects that make government an innovative,
 
 2           customer oriented institution.
 
 3      The purpose of this Part is to create a new economy trust
 
 4 fund and a dedicated source of revenue to implement these
 
 5 initiatives.
 
 6      SECTION 24.  Chapter 36, Hawaii Revised Statutes, is amended
 
 7 by adding a new section to be appropriately designated and to
 
 8 read as follows:
 
 9      "§36-     New economy trust fund.  (a)  There is established
 
10 within the state treasury the new economy trust fund, into which
 
11 shall be deposited the following:
 
12      (1)  All of the proceeds of all settlements, judgments, tax
 
13           closing agreements, and tax compromises received by the
 
14           State after January 1, 2000, to December 31, 2002,
 
15           which otherwise would have accrued to the general fund,
 
16           excepting settlements under chapter 328L and criminal
 
17           forfeitures under chapter 712A;
 
18      (2)  Investment yields from Hawaii strategic development
 
19           corporation;
 
20      (3)  Appropriations by the legislature and any gifts,
 
21           grants, and other funds accepted for the purposes under
 
22           subsection (b).
 
23 Expenditures and transfers from the new economy trust fund shall
 

 
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 1 be made by the comptroller.
 
 2      (b)  Moneys in the new economy trust fund shall be used for
 
 3 the following purposes in the following order of priority:
 
 4      (1)  $44,000,000 shall be transferred into the state
 
 5           educational facilities improvement special fund to be
 
 6           expended for school repairs and maintenance, playground
 
 7           equipment upgrades, and other uses as identified by the
 
 8           department of accounting and general services and the
 
 9           department of education;
 
10      (2)  Of the remaining amounts in the new economy trust fund,
 
11           $        shall be used to:
 
12           (A)  Rebuild basic support for learning, which may
 
13                include:
 
14                (i)  In grades K-12, such areas as reading
 
15                     improvement, instructional materials,
 
16                     Hawaiian language and cultural studies, as
 
17                     well as support for schools in such areas as
 
18                     clerical staffing, parent-community networks,
 
19                     business managers, and safety staff; and
 
20               (ii)  In the University of Hawaii system, fully
 
21                     funding personnel requirements, higher
 
22                     utility costs, and repair and maintenance
 
23                     backlogs, which will allow the University to
 

 
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 1                     focus its resources on achieving academic
 
 2                     excellence.
 
 3           (B)  Invest in innovative projects such as Hawaii's
 
 4                "E Academies" and other initiatives that expand
 
 5                access to technology and computers for students
 
 6                and families;
 
 7           (C)  Invest in workforce development initiatives
 
 8                emphasizing skills-building in high quality jobs,
 
 9                advanced technology training, and preparation for
 
10                jobs in such industries as biotechnology, health
 
11                care, information technology, environmental
 
12                science and technology, and telecommunications;
 
13                and
 
14           (D)  Any other projects designated by the legislature.
 
15      (c)  All unobligated, unexpended, and unencumbered moneys
 
16 remaining as of June 30, 2005, in the new economy trust fund
 
17 established in subsection (a), shall revert to the general fund
 
18 of the State.  Upon final disbursement of remaining balances to
 
19 the general fund on June 30, 2005, the new economy trust fund
 
20 shall be terminated.
 
21      (d)  The department of accounting and general services shall
 
22 submit an annual report to the legislature which shall include a
 
23 financial statement of the new economy trust fund no later than
 

 
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 1 twenty days prior to the convening of each regular session."
 
 2                   PART VII.  GENERAL PROVISIONS
 
 3      SECTION 25.  There is appropriated out of the new economy
 
 4 trust fund the sum of $       , or so much thereof as may be
 
 5 necessary for fiscal year 2000-2001, for the purposes of the new
 
 6 economy trust fund.
 
 7      The sum appropriated shall be expended by the department of
 
 8 accounting and general services for the purposes of the new
 
 9 economy trust fund.
 
10      SECTION 26.  There is appropriated out of the general
 
11 revenues of the State of Hawaii the sum of $       , or so much
 
12 thereof as may be necessary for fiscal year 2000-2001, for the
 
13 high technology development corporation.
 
14      The sum appropriated shall be expended by the department of
 
15 business, economic development, and tourism for the purposes of
 
16 this Act.
 
17      SECTION 27.  The governor's special advisor for technology
 
18 development shall submit to the legislature at least twenty days
 
19 prior to the convening of the 2001 regular session a report on
 
20 the initiatives and actions taken in response to this Act, and
 
21 shall work with the responsible agencies to ensure a full and
 
22 accurate accounting of the results of any new initiatives,
 
23 changes in operations, and any problems that should be addressed
 

 
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 1 as a result.
 
 2      SECTION 28.  In codifying the new sections added by this
 
 3 Act, the revisor of statutes shall substitute the appropriate
 
 4 section numbers for the letters used in designating the new
 
 5 sections in this Act.
 
 6      SECTION 29.  Statutory material to be repealed is bracketed.
 
 7 New statutory material is underscored.
 
 8      SECTION 30.  This Act shall take effect upon its approval;
 
 9 provided that:
 
10      (1)  Sections 25 and 26 shall take effect on July 1, 2000;
 
11           and
 
12      (2)  Part I and section 22, upon their approval, shall apply
 
13           to taxable years beginning after December 31, 1999.