OPx=1>
 

REPORT TITLE:
High Technology


DESCRIPTION:
Expands and clarifies high technology business incentives
provisions.  (SD1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2948
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO HIGH TECHNOLOGY.



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

 1      SECTION 1.  Section 235-2.4, Hawaii Revised Statues, is
 
 2 amended to read as follows:
 
 3      "§235-2.4  Operation of certain Internal Revenue Code
 
 4 provisions[.]; sections 63 to 530.  (a)  Section 63 (with respect
 
 5 to taxable income defined) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter, except that the
 
 7 standard deduction amount in section 63(c) of the Internal
 
 8 Revenue Code shall instead mean:
 
 9      (1)  $1,900 in the case of:
 
10           (A)  A joint return as provided by section 235-93; or
 
11           (B)  A surviving spouse (as defined in section 2(a) of
 
12                the Internal Revenue Code);
 
13      (2)  $1,650 in the case of a head of household (as defined
 
14           in section 2(b) of the Internal Revenue Code);
 
15      (3)  $1,500 in the case of an individual who is not married
 
16           and who is not a surviving spouse or head of household;
 
17           or
 
18      (4)  $950 in the case of a married individual filing a
 
19           separate return.
 
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 1      Section 63(c)(4) shall not be operative in this State.
 
 2 Section 63(c)(5) shall be operative, except that the limitation
 
 3 on basic standard deduction in the case of certain dependents
 
 4 shall be the greater of $500 or such individual's earned income.
 
 5 Section 63(f) shall not be operative in this State.
 
 6      The standard deduction amount for nonresidents shall be
 
 7 calculated pursuant to section 235-5.
 
 8      (b)  Section 72 (with respect to annuities; certain proceeds
 
 9 of endowment and life insurance contracts) of the Internal
 
10 Revenue Code shall be operative for purposes of this chapter and
 
11 be interpreted with due regard to section 235-7(a), except that
 
12 the ten per cent additional tax on early distributions from
 
13 retirement plans in section 72(t) shall not be operative for
 
14 purposes of this chapter.
 
15      (c)  Section 121 (with respect to the exclusion of gain from
 
16 the sale of principal residence) of the Internal Revenue Code
 
17 shall be operative for purposes of this chapter, except that for
 
18 the election under section 121(f), a reference to section 1034
 
19 treatment means a reference to section 235-2.4(n) in effect for
 
20 taxable year 1997.
 
21      (d)  Section 219 (with respect to retirement savings) of the
 
22 Internal Revenue Code shall be operative for the purpose of this
 
23 chapter.  For the purpose of computing the limitation on the
 
 
 
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 1 deduction for active participants in certain pension plans for
 
 2 state income tax purposes, adjusted gross income as used in
 
 3 section 219 as operative for this chapter means federal adjusted
 
 4 gross income.
 
 5      (e)  Section 220 (with respect to medical savings accounts)
 
 6 of the Internal Revenue Code shall be operative for the purpose
 
 7 of this chapter, but only with respect to medical services
 
 8 accounts that have been approved by the Secretary of the Treasury
 
 9 of the United States.
 
10      (f)  Section 408A (with respect to Roth Individual
 
11 Retirement Accounts) of the Internal Revenue Code shall be
 
12 operative for the purposes of this chapter.  For the purposes of
 
13 determining the aggregate amount of contributions to a Roth
 
14 Individual Retirement Account or qualified rollover contribution
 
15 to a Roth Individual Retirement Account from an individual
 
16 retirement plan other than a Roth Individual Retirement Account,
 
17 adjusted gross income as used in section 408A as operative for
 
18 this chapter means federal adjusted gross income.
 
19      (g)  In administering the provisions of sections 410 to 417
 
20 (with respect to special rules relating to pensions, profit
 
21 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
22 respect to special rules for multiemployer plans), and sections
 
23 419 and 419A (with respect to treatment of welfare benefit funds)
 
 
 
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 1 of the Internal Revenue Code, the department of taxation shall
 
 2 adopt rules under chapter 91 relating to the specific
 
 3 requirements under such sections and to such other administrative
 
 4 requirements under those sections as may be necessary for the
 
 5 efficient administration of sections 410 to 419A.
 
 6      In administering sections 401 to 419A (with respect to
 
 7 deferred compensation) of the Internal Revenue Code, Public Law
 
 8 93-406, section 1017(i), shall be operative for the purposes of
 
 9 this chapter.
 
10      In administering section 402 (with respect to the taxability
 
11 of beneficiary of employees' trust) of the Internal Revenue Code,
 
12 the tax imposed on lump sum distributions by section 402(e) of
 
13 the Internal Revenue Code shall be operative for the purposes of
 
14 this chapter and the tax imposed therein is hereby imposed by
 
15 this chapter at the rate determined under this chapter.
 
16      (h)  Section 468B (with respect to special rules for
 
17 designated settlement funds) of the Internal Revenue Code shall
 
18 be operative for the purposes of this chapter and the tax imposed
 
19 therein is hereby imposed by this chapter at a rate equal to the
 
20 maximum rate in effect for the taxable year imposed on estates
 
21 and trusts under section 235-51.
 
22      (i)  Section 469 (with respect to passive activities and
 
23 credits limited) of the Internal Revenue Code shall be operative
 
 
 
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 1 for the purposes of this chapter.  For the purpose of computing
 
 2 the offset for rental real estate activities for state income tax
 
 3 purposes, adjusted gross income as used in section 469 as
 
 4 operative for this chapter means federal adjusted gross income.
 
 5      (j)  Sections 512 to 514 (with respect to taxation of
 
 6 business income of certain exempt organizations) of the Internal
 
 7 Revenue Code shall be operative for the purposes of this chapter
 
 8 as provided in this subsection.
 
 9      "Unrelated business taxable income" means the same as in the
 
10 Internal Revenue Code, except that in the computation thereof
 
11 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
12 apply, and in the determination of the net operating loss
 
13 deduction there shall not be taken into account any amount of
 
14 income or deduction which is excluded in computing the unrelated
 
15 business taxable income.  Unrelated business taxable income shall
 
16 not include any income from a prepaid legal service plan.
 
17      For a person described in section 401 or 501 of the Internal
 
18 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
19 section 235-51 or 235-71 shall be imposed upon the person's
 
20 unrelated business taxable income.
 
21      (k)  Section 521 (with respect to cooperatives) and
 
22 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
23 and their patrons) of the Internal Revenue Code shall be
 
 
 
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 1 operative for the purposes of this chapter as to any cooperative
 
 2 fully meeting the requirements of section 421-23, except that
 
 3 Internal Revenue Code section 521 cooperatives need not be
 
 4 organized in Hawaii.
 
 5      (l)  Sections 527 (with respect to political organizations)
 
 6 and 528 (with respect to certain homeowners associations) of the
 
 7 Internal Revenue Code shall be operative for the purposes of this
 
 8 chapter and the taxes imposed in each such section are hereby
 
 9 imposed by this chapter at the rates determined under section
 
10 235-71.
 
11      (m)  Section 530 (with respect to education individual
 
12 retirement accounts) of the Internal Revenue Code shall be
 
13 operative for the purposes of this chapter.  For the purpose of
 
14 determining the maximum amount that a contributor could make to
 
15 an education individual retirement account for state income tax
 
16 purposes, modified adjusted gross income as used in section 530
 
17 for this chapter means federal modified adjusted gross income as
 
18 defined in section 530.
 
19      [(n)] §235-2.45  Operation of certain Internal Revenue Code
 
20 provisions; sections 641 to 7518.  (a)  Section 641 (with respect
 
21 to imposition of tax) of the Internal Revenue Code shall be
 
22 operative for the purposes of this chapter subject to the
 
23 following:
 
 
 
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 1      (1)  The deduction for exemptions shall be allowed as
 
 2           provided in section 235-54(b).
 
 3      (2)  The deduction for contributions and gifts in
 
 4           determining taxable income shall be limited to the
 
 5           amount allowed in the case of an individual, unless the
 
 6           contributions and gifts are to be used exclusively in
 
 7           the State.
 
 8      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
 9           Code as applied by section 641 of the Internal Revenue
 
10           Code is hereby imposed by this chapter at the rate and
 
11           amount as determined under section 235-51 on estates
 
12           and trusts.
 
13      [(o)] (b)  Section 667 (with respect to treatment of amounts
 
14 deemed distributed by trusts in preceding years) of the Internal
 
15 Revenue Code shall be operative for the purposes of this chapter
 
16 and the tax imposed therein is hereby imposed by this chapter at
 
17 the rate determined under this chapter; except that the reference
 
18 to tax-exempt interest to which section 103 of the Internal
 
19 Revenue Code applies in section 667(a) of the Internal Revenue
 
20 Code shall instead be a reference to tax-exempt interest to which
 
21 section 235-7(b) applies.
 
22      [(p)] (c)  Section 685 (with respect to treatment of
 
23 qualified funeral trusts) of the Internal Revenue Code shall be
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 operative for purposes of this chapter, except that the tax
 
 2 imposed under this chapter shall be computed at the tax rates
 
 3 provided under section 235-51, and no deduction for the exemption
 
 4 amount provided in section 235-54(b) shall be allowed.  The cost-
 
 5 of-living adjustment determined under section 1(f)(3) of the
 
 6 Internal Revenue Code shall be operative for the purpose of
 
 7 applying section 685(c)(3) under this chapter.
 
 8      (d)  Section 704 of the Internal Revenue Code (with respect
 
 9 to a partner's distributive share) shall be operative for
 
10 purposes of this chapter; except that subsection (b)(2) shall not
 
11 apply to allocations of the hightechnology business investment
 
12 tax credit allowed by section 235-110.9.
 
13      [(q)] (e)  Section 1212 (with respect to capital loss
 
14 carrybacks and carryforwards) of the Internal Revenue Code shall
 
15 be operative for the purposes of this chapter; except that for
 
16 the purposes of this chapter the capital loss carryback
 
17 provisions of section 1212 shall not be operative and the capital
 
18 loss carryforward allowed by section 1212(a) shall be limited to
 
19 five years.
 
20      [(r)] (f)  Subchapter S (sections 1361 to 1379) (with
 
21 respect to tax treatment of S corporations and their
 
22 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
23 operative for the purposes of this chapter as provided in part
 
 
 
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 1 VII.
 
 2      [(s)] (g)  Section 6015 (with respect to relief from joint
 
 3 and several liability on joint return) of the Internal Revenue
 
 4 Code is operative for purposes of this chapter.
 
 5      [(t)] (h)  Subchapter C (sections 6221 to 6233) (with
 
 6 respect to tax treatment of partnership items) of chapter 63 of
 
 7 the Internal Revenue Code shall be operative for the purposes of
 
 8 this chapter.
 
 9      [(u)] (i)  Subchapter D (sections 6240 to 6255) (with
 
10 respect to simplified audit procedures for electing large
 
11 partnerships) of the Internal Revenue Code shall be operative for
 
12 the purposes of this chapter, with due regard to chapter 232
 
13 relating to tax appeals.
 
14      [(v)] (j)  Section 6511(h) (with respect to running of
 
15 periods of limitation suspended while taxpayer is unable to
 
16 manage financial affairs due to disability) of the Internal
 
17 Revenue Code shall be operative for purposes of this chapter,
 
18 with due regard to section 235-111 relating to the limitation
 
19 period for assessment, levy, collection, or credit.
 
20      [(w)] (k)  Section 7518 (with respect to capital
 
21 construction fund for commercial fishers) of the Internal Revenue
 
22 Code shall be operative for the purposes of this chapter.
 
23 Qualified withdrawals for the acquisition, construction, or
 
 
 
Page 10                                                    2948
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 reconstruction of any qualified asset which is attributable to
 
 2 deposits made before the effective date of this section shall not
 
 3 reduce the basis of the asset when withdrawn.  Qualified
 
 4 withdrawals shall be treated on a first-in-first-out basis."
 
 5      SECTION 2.  Section 235-7.3, Hawaii Revised Statutes, is
 
 6 amended to read as follows:
 
 7      "[[]235-7.3[]]  Royalties and other income from high
 
 8 technology business excluded from gross income.(a)  In addition
 
 9 to the exclusions in section 235-7, there shall be excluded from
 
10 gross income, adjusted gross income, and taxable income, amounts
 
11 received by an individual or a qualified high technology business
 
12 as royalties and other income derived from patents, trade
 
13 secrets, and copyrights:
 
14      (1)  Owned by the individual or qualified high technology
 
15           business; and
 
16      (2)  Developed and arising out of a qualified high
 
17           technology business.
 
18      (b)  For the purposes of this section:
 
19      "Computer data" means any representation of information,
 
20 knowledge, facts, concepts, or instructions that is being
 
21 prepared or has been prepared and is intended to be processed, is
 
22 being processed, or has been processed in a computer or computer
 
23 network.  "Computer data" includes works in the performing arts
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 such as audio files, video files, audiovisual files, computer
 
 2 animation, and other entertainment products which are perceived
 
 3 by or through the operation of a computer.
 
 4      "Computer program" means an ordered set of computer data
 
 5 representing coded instructions or statements, which, when
 
 6 executed by a computer, causes the computer to perform one or
 
 7 more computer operations.
 
 8      "Computer software" means computer data, a computer program,
 
 9 or a set of computer programs, procedures, or associated
 
10 documentation concerned with the operation and function of a
 
11 computer system, and includes both systems and application
 
12 programs and subdivisions, such as assemblers, compilers,
 
13 routines, generators, and utility programs.
 
14      "Qualified high technology business" means a business
 
15 performing qualified research.  The term "qualified high
 
16 technology business" does not include:
 
17      (1)  Any trade or business involving the performance of
 
18           services in the field of law, architecture, accounting,
 
19           actuarial science, [performing arts,] consulting,
 
20           athletics, financial services, or brokerage services;
 
21      (2)  Any banking, insurance, financing, leasing, rental,
 
22           investing, or similar business; any farming business,
 
23           including the business of raising or harvesting trees;
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           any business involving the production or extraction of
 
 2           products of a character with respect to which a
 
 3           deduction is allowable under section 611 (with respect
 
 4           to allowance of deduction for depletion), 613 (with
 
 5           respect to basis for percentage depletion), or 613A
 
 6           (with respect to limitation on percentage depleting in
 
 7           cases of oil and gas wells) of the Internal Revenue
 
 8           Code;
 
 9      (3)  Any business operating a hotel, motel, restaurant, or
 
10           similar business; and
 
11      (4)  Any trade or business involving a hospital, a private
 
12           office of a licensed health care professional, a group
 
13           practice of licensed health care professionals, or a
 
14           nursing home.
 
15      "Qualified research" means:
 
16      (1)  The same as in section 41(d) of the Internal Revenue
 
17           Code; or
 
18      (2)  Developing, designing, modifying, programming, and
 
19           licensing computer software."
 
20      SECTION 3.  Section 235-9.5, Hawaii Revised Statutes, is
 
21 amended to read as follows:
 
22      "[[]§235-9.5[]]  Stock options from qualified high
 
23 technology businesses exempt from taxation.(a)  Notwithstanding
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1 any law to the contrary, all income received from stock options
 
 2 from a qualified high technology business by an employee that
 
 3 would otherwise be taxed as ordinary income or as capital gains
 
 4 to those employees is exempt from taxation under this chapter.
 
 5      (b)  For the purposes of this section:
 
 6      "Computer data" means any representation of information,
 
 7 knowledge, facts, concepts, or instructions that is being
 
 8 prepared or has been prepared and is intended to be processed, is
 
 9 being processed, or has been processed in a computer or computer
 
10 network.  "Computer data" includes works in the performing arts
 
11 such as audio files, video files, audiovisual files, computer
 
12 animation, and other entertainment products which are perceived
 
13 by or through the operation of a computer.
 
14      "Computer program" means an ordered set of computer data
 
15 representing coded instructions or statements, which, when
 
16 executed by a computer, causes the computer to perform one or
 
17 more computer operations.
 
18      "Computer software" means computer data, a computer program,
 
19 or a set of computer programs, procedures, or associated
 
20 documentation concerned with the operation and function of a
 
21 computer system, and includes both systems and application
 
22 programs and subdivisions, such as assemblers, compilers,
 
23 routines, generators, and utility programs.
 
 
 
Page 14                                                    2948
                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      "Qualified high technology business" means a business
 
 2 performing qualified research.  The term "qualified high
 
 3 technology business" does not include:
 
 4      (1)  Any trade or business involving the performance of
 
 5           services in the field of law, architecture, accounting,
 
 6           actuarial science, [performing arts,] consulting,
 
 7           athletics, financial services, or brokerage services;
 
 8      (2)  Any banking, insurance, financing, leasing, rental,
 
 9           investing, or similar business; any farming business,
 
10           including the business of raising or harvesting trees;
 
11           any business involving the production or extraction of
 
12           products of a character with respect to which a
 
13           deduction is allowable under section 611 (with respect
 
14           to allowance of deduction for depletion), 613 (with
 
15           respect to basis for percentage depletion), or 613A
 
16           (with respect to limitation on percentage depleting in
 
17           cases of oil and gas wells) of the Internal Revenue
 
18           Code;
 
19      (3)  Any business operating a hotel, motel, restaurant, or
 
20           similar business; and
 
21      (4)  Any trade or business involving a hospital, a private
 
22           office of a licensed health care professional, a group
 
23           practice of licensed health care professionals, or a
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1           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      SECTION 4.  Section 235-110.9, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "[[]§235-110.9[]]  [High-technology] High technology
 
10 business investment tax credit.(a)  There shall be allowed to
 
11 each taxpayer, subject to the taxes imposed by this chapter, a
 
12 high technology business investment tax credit that shall be
 
13 deductible from the taxpayer's net income tax liability, if any,
 
14 imposed by this chapter for the taxable year in which the credit
 
15 is properly claimed.  The tax credit shall be an amount equal to
 
16 ten per cent of the investment made by the taxpayer in each
 
17 qualified high technology business, up to a maximum allowed
 
18 credit of $500,000 for the taxable year for the investment made
 
19 by the taxpayer in a qualified high technology business.
 
20      (b)  The credit allowed under this section shall be claimed
 
21 against the net income tax liability for the taxable year.  For
 
22 the purpose of this section, "net income tax liability" means net
 
23 income tax liability reduced by all other credits allowed under
 
 
 
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 1 this chapter.
 
 2      (c)  If the tax credit under this section exceeds the
 
 3 taxpayer's income tax liability, the excess of the tax credit
 
 4 over liability may be used as a credit against the taxpayer's
 
 5 income tax liability in subsequent years until exhausted.  All
 
 6 claims, including any amended claims, for tax credits under this
 
 7 section shall be filed on or before the end of the twelfth month
 
 8 following the close of the taxable year for which the credit may
 
 9 be claimed.  Failure to comply with the foregoing provision shall
 
10 constitute a waiver of the right to claim the credit.
 
11      (d)  [As used in] For the purposes of this section:
 
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 which are perceived
 
19 by or through the operation of a computer.
 
20      "Computer program" means an ordered set of computer data
 
21 representing coded instructions or statements, which, when
 
22 executed by a computer, causes the computer to perform one or
 
23 more computer operations.
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

 
 1      "Computer software" means a set of computer programs,
 
 2 procedures, or associated documentation concerned with the
 
 3 operation and function of a computer system, and includes both
 
 4 systems and application programs and subdivisions, such as
 
 5 assemblers, compilers, routines, generators, and utility
 
 6 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 herein, including but not limited to options or
 
17 rights to acquire any of the items included herein.  The
 
18 nonrefundable investment is entirely at risk of loss where
 
19 repayment depends upon the success of the qualified high
 
20 technology business.  If the money invested is to be repaid to
 
21 the taxpayer, no repayment except for dividends or interest shall
 
22 be made for at least three years from the date the investment is
 
23 made.  The annual amount of any dividend and interest payment to
 
 
 
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 1 the taxpayer shall not exceed twelve per cent of the amount of
 
 2 the investment.
 
 3      [(e)  For the purposes of this section:]
 
 4      "Qualified high technology business" means[:
 
 5      (1)  A] a business, employing or owning capital or property,
 
 6           or maintaining an office, in this State; and which
 
 7      [(2) (A)] (1) Conducts one hundred per cent of its
 
 8                activities in performing qualified research in
 
 9                this State; or
 
10          [(B)] (2) Receives one hundred per cent of its gross
 
11                income derived from qualified research; provided
 
12                that the income is received from products sold
 
13                from, manufactured, or produced in the State; or
 
14                services performed in this State.
 
15      The term "qualified high technology business" does not
 
16 include:
 
17      (1)  Any trade or business involving the performance of
 
18           services in the field of law, architecture, accounting,
 
19           actuarial science, [performing arts,] consulting,
 
20           athletics, financial services, or brokerage services;
 
21      (2)  Any banking, insurance, financing, leasing, rental,
 
22           investing, or similar business; any farming business,
 
23           including the business of raising or harvesting trees;
 
 
 
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 1           any business involving the production or extraction of
 
 2           products of a character with respect to which a
 
 3           deduction is allowable under section 611 (with respect
 
 4           to allowance of deduction for depletion), 613 (with
 
 5           respect to basis for percentage depletion), or 613A
 
 6           (with respect to limitation on percentage depleting in
 
 7           cases of oil and gas wells) of the Internal Revenue
 
 8           Code;
 
 9      (3)  Any business operating a hotel, motel, restaurant, or
 
10           similar business; and
 
11      (4)  Any trade or business involving a hospital, a private
 
12           office of a licensed health care professional, a group
 
13           practice of licensed health care professionals, or a
 
14           nursing home.
 
15      "Qualified research" means:
 
16      (1)  The same as in section 41(d) of the Internal Revenue
 
17           Code; or
 
18      (2)  Developing, designing, modifying, programming, and
 
19           licensing computer software;
 
20 except that it shall not include research conducted outside the
 
21 State.
 
22      [(f)] (e)  This section shall not apply to taxable years
 
23 beginning after December 31, 2005."
 
 
 
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 1      SECTION 5.  Section 235-110.91, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "[[]§235-110.91[]]  Tax credit for increasing research
 
 4 activities.(a)  Section 41 (with respect to the credit for
 
 5 increasing research activities) and section 280C(c) (with respect
 
 6 to certain expenses for which the credit for increasing research
 
 7 activities are allowable) of the Internal Revenue Code shall be
 
 8 operative for the purposes of this chapter as provided in this
 
 9 section.  If section 41 of the Internal Revenue Code is repealed
 
10 or terminated prior to January 1, 2006, its provisions shall
 
11 remain in effect for purposes of the income tax law of the State
 
12 as provided for in subsection (h).
 
13      (b)  All references to Internal Revenue Code sections within
 
14 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
15 operative for purposes of this section.
 
16      (c)  There shall be allowed to each taxpayer, subject to the
 
17 tax imposed by this chapter, an income tax credit for increased
 
18 research activities [that] equal to the credit for research
 
19 activities provided by section 41 of the Internal Revenue Code.
 
20 The credit shall be deductible from the taxpayer's net income tax
 
21 liability, if any, imposed by this chapter for the taxable year
 
22 in which the credit is properly claimed.
 
23      (d)  [The tax credit for increased research activities shall
 
 
 
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 1 be equal to the sum of:
 
 2      (1)  2.5 per cent of the excess (if any) of:
 
 3           (A)  The qualified research expenses for the taxable
 
 4                year; over
 
 5           (B)  The base amount; and
 
 6      (2)  2.5 per cent of the basic research payments determined
 
 7           under section 41(e)(1)(A) of the Internal Revenue Code.
 
 8      (e)  For purposes of this section:
 
 9      (1)  The alternative incremental credit in section 41(c)(4)
 
10           of the Internal Revenue Code shall be equal to the sum
 
11           of 12.5 per cent of:
 
12           (A)  1.65 per cent of so much of the qualified research
 
13                expenses for the taxable year as exceeds one per
 
14                cent of the average described in section
 
15                41(c)(1)(B) but does not exceed 1.5 per cent of
 
16                such average;
 
17           (B)  2.2 per cent of so much of those expenses as
 
18                exceeds 1.5 per cent of the average but does not
 
19                exceed two per cent of the average; and
 
20           (C)  2.75 per cent of so much of those expenses as
 
21                exceeds two per cent of the average;
 
22      (2)  The term] For purposes of this section, "qualified
 
23           research" [under section 41(d)(1) of the Internal
 
 
 
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 1           Revenue Code shall not include research conducted
 
 2           outside of the State; and
 
 3      (3)  The term] and "basic research" under section 41(e) of
 
 4           the Internal Revenue Code shall not include research
 
 5           conducted outside of the State.
 
 6      [(f)  The amount of reduced credit in section 280C(c)(3)(B)
 
 7 of the Internal Revenue Code shall be equal to the excess of:
 
 8      (1)  The amount of credit determined under section 41(a) (as
 
 9           provided for in this section) (without regard to this
 
10           paragraph); over
 
11      (2)  The product of:
 
12           (A)  The amount described in subsection (f)(1); and
 
13           (B)  12.5 per cent of the maximum rate of tax under
 
14                section 11(b)(1) of the Internal Revenue Code.
 
15      (g)] (e)  If the tax credit for increased research
 
16 activities claimed by a taxpayer exceeds the amount of income tax
 
17 payment due from the taxpayer, the excess of the tax credit over
 
18 payments due may be used as a credit against the taxpayer's
 
19 income tax liability in subsequent years until exhausted.
 
20      [(h)] (f)  All claims for a tax credit under this section
 
21 must be filed on or before the end of the twelfth month following
 
22 the close of the taxable year for which the credit may be
 
23 claimed.  Failure to properly claim the credit shall constitute a
 
 
 
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                                     S.B. NO.           S.D. 1
                                                        
                                                        

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