Adds new tax benefits for high tech industries and amends current benefits to improve them. (HB175 HD1)

A BILL FOR AN ACT

SECTION 1. Through Act 178, Session Laws of Hawaii 1999, and Act 297, Session Laws of Hawaii 2000, the legislature and administration provided a platform to encourage the continued growth and development of high technology businesses and associated industries in Hawaii. These legislative efforts have resulted in growing interest in Hawaii as a "New Economy" marketplace. Additional incentives must now be put in place to set Hawaii apart as a tech-friendly place to do business for both technical and non-technical businesses.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding three new sections to be appropriately designated and to read as follows:

"§235- Tax credit for net operating loss. (a) There shall be allowed to each qualified high technology business subject to the taxes imposed by this chapter an income tax credit which shall be deductible from its net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. For the purposes of this section, "net income tax liability" means net income tax liability reduced by all other nonrefundable credits allowed under this chapter.

(b) The amount of the tax credit shall be the tax benefit of any unused net operating loss incurred for the taxable year computed by multiplying the maximum tax rate applicable to corporations under section 235-71.

(c) If the tax credit claimed by a taxpayer exceeds the amount of the taxpayer’s net income tax liability, the excess of the tax credit over the net income tax liability shall be refunded to the taxpayer; provided that no refund on account of the tax credit shall be made for amounts less than $1.

(d) In the case of a partnership, S corporation, estate, or trust, or any other entity treated as a pass through entity for income tax purposes, the tax credit shall be claimed at the entity level and refund made to the entity for the taxable year. The net income tax liability for the entity shall be computed as if the entity were a corporation taxable under section 235-71 and the refund due shall be computed on the same basis.

(e) All claims including any amended claims for the tax credit shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to properly claim the credit within this time limitation shall constitute a waiver of the right to claim the credit.

(f) If the tax credit is taken under this section, no deduction shall be taken for any net operating losses otherwise allowed under this chapter.

(g) "Qualified high technology business" means the same as in section 235-7.3

(h) This section shall apply to net operating losses incurred for taxable years beginning on or after December 31, 1998, but not after December 31, 2010. For refunds claimed for taxable years beginning in 1999 and 2000, the twelve-month limitation on refunds provided under subsection (e) shall not apply and taxpayers may claim the refund for those taxable years no later than December 31, 2001; provided that no sale of net operating losses under previous law was made with respect to losses incurred in taxable years 1999 or 2000.

§235- Technology infrastructure renovation and construction tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter an income tax credit which shall be deductible from the taxpayer’s net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(b) The amount of the credit shall be four per cent of the renovation or construction costs incurred during the taxable year for each commercial building located in Hawaii, and shall not include the renovation or construction costs for which another credit was claimed under this chapter for the taxable year.

(c) In the case of a partnership, S corporation, estate, trust, or any developer of a commercial building, the tax credit allowable is for renovation or construction costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

(d) If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the renovation or construction cost for which the deduction is taken.

(e) The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income.

(f) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year.

(g) If the tax credit under this section exceeds the taxpayer’s income tax liability, the excess of credit over liability shall be refunded to the taxpayer; provided that no refunds or payment on account of the tax credits allowed by this section shall be made for amounts less than $1. All claims for a tax credit under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(h) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2000, and shall not be available for taxable years beginning after December 31, 2010.

(i) As used in this section:

"Net income tax liability" means income tax liability reduced by all other credits allowed under this chapter.

"Renovation or construction costs" means costs incurred after December 31, 2000, for plans, designs, and construction and for the purchase and installation of equipment to provide an existing commercial building with technology-enabled infrastructure or to develop a new commercial building with technology-enabled infrastructure.

"Technology-enabled infrastructure" means:

(j) No taxpayer that claims a credit under this section shall claim a credit under chapter 235D.

§235- Tax credit for worthless debts of qualified high technology business. (a) There shall be allowed to each individual taxpayer subject to the taxes imposed by this chapter an income tax credit which shall be deductible from the individual's taxpayer’s net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(b) The tax credit shall be the amount of the debt of any qualified high technology business ascertained to be worthless in the taxable year under section 166 of the Internal Revenue Code; provided that the tax credit shall be limited to one hundred per cent of the debt so ascertained to be worthless up to $100,000, and fifty per cent of the debt in excess of $100,000, for each qualified high technology business.

(c) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. If the tax credit under this section exceeds the taxpayer’s income tax liability, the excess of credit over liability shall be refunded to the taxpayer; provided that no refunds or payment on account of the tax credits allowed by this section shall be made for amounts less than $1. All claims for a tax credit under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2000, and shall not be available for taxable years beginning after December 31, 2010.

(e) As used in this section, "qualified high technology business" means the same as under section 235-7.3."

SECTION 3. Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated

"§237-   Exemption for internet service providers. (a) This chapter shall not apply to the gross income or gross proceeds derived from the provision of internet access. For purposes of this section:

(b) This section shall apply to gross income or gross proceeds received after June 30, 2001."

SECTION 4. Chapter 239, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§239-   Exemption for provision of internet access. (a) This chapter shall not apply to the gross income derived from the provision of internet access. For purposes of this section:

(b) This section shall apply to gross income received after June 30, 2001."

SECTION 5. Chapter 241, Hawaii Revised Statutes, is amended by adding two sections to be appropriately designated and to read as follows:

"§241-   Credit for worthless debts of qualified high technology business. (a) Each taxpayer subject to the tax under this chapter may claim a credit under this section against the tax liability for the taxable year.

(b) The tax credit shall be the amount of the debt of any qualified high technology business ascertained to be worthless and charged off on the books of the taxpayer within the taxable year; provided that the tax credit shall be limited to one hundred per cent of the debt so charged off up to $100,000, and fifty per cent of the debt in excess of $100,000, for each qualified high technology business.

(c) If the tax credit under this section exceeds the taxpayer’s tax liability under this chapter, as reduced by all other credits allowed under this chapter, the excess of the tax credit over liability may be used as a credit against all the taxpayer’s tax liability in subsequent years until exhausted.

(d) The tax credit under this section shall be in addition to the adjustment provided in section 241-4(b)(3) for debts ascertained to be worthless and charged off on the books of the taxpayer in the taxable year.

(e) "Qualified high technology business" means the same as in section 235-7.3.

(f) This section shall apply to worthless debts charged off after June 30, 2001, but shall not apply to worthless debts charged off after December 31, 2010.

§241-   Tax credit for research activities. The tax credit for research activities provided under section 235-110.91 shall be operative for this chapter. This section shall be operative on July 1, 2001, but not after December 31, 2010."

SECTION 6. Chapter 431, Hawaii Revised Statutes, is amended by adding two new sections to article 7 to be appropriately designated and to read as follows:

"§431:7-   Capital goods excise tax credit. The capital goods excise tax credit provided under section 235-110.7 shall be operative for this chapter and may be claimed against the tax imposed under section 431:7-202. This section shall be operative for tangible personal property placed in service after June 30, 2001.

§431:7-   Tax credit for research activities. The tax credit for research activities provided under section 235-110.91 shall be operative for this chapter and may be claimed against the tax imposed under section 431:7-202. This section shall be operative on July 1, 2001, but not after December 31, 2010."

SECTION 7. Section 235-2.4, Hawaii Revised Statutes, is amended to read as follows:

"§235-2.4 Operation of certain Internal Revenue Code provisions; sections 63 to 530. (a) Section 63 (with respect to taxable income defined) of the Internal Revenue Code shall be operative for the purposes of this chapter, except that the standard deduction amount in section 63(c) of the Internal Revenue Code shall instead mean:

Section 63(c)(4) shall not be operative in this State. Section 63(c)(5) shall be operative, except that the limitation on basic standard deduction in the case of certain dependents shall be the greater of $500 or such individual's earned income. Section 63(f) shall not be operative in this State.

The standard deduction amount for nonresidents shall be calculated pursuant to section 235-5.

(b) Section 72 (with respect to annuities; certain proceeds of endowment and life insurance contracts) of the Internal Revenue Code shall be operative for purposes of this chapter and be interpreted with due regard to section 235-7(a), except that the ten per cent additional tax on early distributions from retirement plans in section 72(t) shall not be operative for purposes of this chapter.

(c) Section 121 (with respect to exclusion of gain from sale of principal residence) of the Internal Revenue Code shall be operative for purposes of this chapter, except that for the election under section 121(f), a reference to section 1034 treatment means a reference to section 235-2.4(n) in effect for taxable year 1997.

(d) Section 219 (with respect to retirement savings) of the Internal Revenue Code shall be operative for the purpose of this chapter. For the purpose of computing the limitation on the deduction for active participants in certain pension plans for state income tax purposes, adjusted gross income as used in section 219 as operative for this chapter means federal adjusted gross income.

(e) Section 220 (with respect to medical savings accounts) of the Internal Revenue Code shall be operative for the purpose of this chapter, but only with respect to medical services accounts that have been approved by the Secretary of the Treasury of the United States.

(f) Section 265 (with respect to expenses and interest relating to tax-exempt income) of the Internal Revenue Code shall be operative for purposes of this chapter; except that it shall not apply to expenses for royalties and other income derived from any patents, copyrights, and trade secrets from an individual or a qualified high technology business defined in section 235-7.3. Such expenses shall be deductible.

[(f)] (g) Section 408A (with respect to Roth Individual Retirement Accounts) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purposes of determining the aggregate amount of contributions to a Roth Individual Retirement Account or qualified rollover contribution to a Roth Individual Retirement Account from an individual retirement plan other than a Roth Individual Retirement Account, adjusted gross income as used in section 408A as operative for this chapter means federal adjusted gross income.

[(g)] (h) n administering the provisions of sections 410 to 417 (with respect to special rules relating to pensions, profit sharing, stock bonus plans, etc.), sections 418 to 418E (with respect to special rules for multiemployer plans), and sections 419 and 419A (with respect to treatment of welfare benefit funds) of the Internal Revenue Code, the department of taxation shall adopt rules under chapter 91 relating to the specific requirements under such sections and to such other administrative requirements under those sections as may be necessary for the efficient administration of sections 410 to 419A.

In administering sections 401 to 419A (with respect to deferred compensation) of the Internal Revenue Code, Public Law 93-406, section 1017(i), shall be operative for the purposes of this chapter.

In administering section 402 (with respect to the taxability of beneficiary of employees' trust) of the Internal Revenue Code, the tax imposed on lump sum distributions by section 402(e) of the Internal Revenue Code shall be operative for the purposes of this chapter and the tax imposed therein is hereby imposed by this chapter at the rate determined under this chapter.

[(h)] (i) Section 468B (with respect to special rules for designated settlement funds) of the Internal Revenue Code shall be operative for the purposes of this chapter and the tax imposed therein is hereby imposed by this chapter at a rate equal to the maximum rate in effect for the taxable year imposed on estates and trusts under section 235-51.

[(i)] (j) Section 469 (with respect to passive activities and credits limited) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purpose of computing the offset for rental real estate activities for state income tax purposes, adjusted gross income as used in section 469 as operative for this chapter means federal adjusted gross income.

[(j)] (k) Sections 512 to 514 (with respect to taxation of business income of certain exempt organizations) of the Internal Revenue Code shall be operative for the purposes of this chapter as provided in this subsection.

"Unrelated business taxable income" means the same as in the Internal Revenue Code, except that in the computation thereof sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall apply, and in the determination of the net operating loss deduction there shall not be taken into account any amount of income or deduction that is excluded in computing the unrelated business taxable income. Unrelated business taxable income shall not include any income from a prepaid legal service plan.

For a person described in section 401 or 501 of the Internal Revenue Code, as modified by section 235-2.3, the tax imposed by section 235-51 or 235-71 shall be imposed upon the person's unrelated business taxable income.

[(k)] (l) Section 521 (with respect to cooperatives) and subchapter T (sections 1381 to 1388, with respect to cooperatives and their patrons) of the Internal Revenue Code shall be operative for the purposes of this chapter as to any cooperative fully meeting the requirements of section 421-23, except that Internal Revenue Code section 521 cooperatives need not be organized in Hawaii.

[(l)] (m) Sections 527 (with respect to political organizations) and 528 (with respect to certain homeowners associations) of the Internal Revenue Code shall be operative for the purposes of this chapter and the taxes imposed in each such section are hereby imposed by this chapter at the rates determined under section 235-71.

[(m)] (n) Section 530 (with respect to education individual retirement accounts) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purpose of determining the maximum amount that a contributor could make to an education individual retirement account for state income tax purposes, modified adjusted gross income as used in section 530 as operative for this chapter means federal modified adjusted gross income as defined in section 530."

SECTION 8. Section 235-7.3, Hawaii Revised Statutes, is amended to read as follows:

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

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

[(b)] (c) For the purposes of this section:

"Incubator services" means fiscal, management, and software expertise; hardware and connectivity; office space; and related tools and services provided to new and early-stage entities in a common facility where more than fifty per cent of the entities are qualified high technology businesses.

"Performing arts products" means:

"Qualified high technology business" means a business [conducting:] that:

"Qualified research" means:

(8) Non-fossil fuel energy related technology."

SECTION 9. Section 235-9.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-9.5 Stock options from qualified high technology businesses [exempt] excluded from taxation. (a) Notwithstanding any law to the contrary, all income [received from stock options] earned and proceeds derived from stock options or stock, including stock issued through the exercise of stock options or warrants, from a qualified high technology business or from a holding company of a qualified high technology business by an employee, officer, or director[,] of the qualified high technology business, or investor who qualifies for the credit under section 235-110.9, that would otherwise be taxed as ordinary income or as capital gains to those persons [is exempt] shall be excluded from taxation under this chapter. Income earned and proceeds derived from stock options or stock includes income from:

(b) For the purposes of this section:

"Holding company of a qualified high technology business" means a corporation or other entity that possesses at least eighty per cent of the total voting power of the stock or other interest in the qualified high technology business and has a value of at least eighty per cent of the total value of the stock or other interest in the qualified high technology business.

"Qualified high technology business" means [a business conducting more than fifty per cent of its activities in qualified research. The term "qualified high technology business" does not include:

"Qualified research" means:

SECTION 10. Section 235-110.7, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

"(e) As used in this section, the definition of section 38 property (with respect to investment in depreciable tangible personal property) as defined by section 48(a)(1)(A), (a)(1)(B), (a)(3), (a)(4), (a)(7), (a)(8), (a)(10)(A), (b), (c), (f), (l), (m), and (s) of the Internal Revenue Code of 1954, as amended as of December 31, 1984, is operative for the purposes of this section only.

As used in this section:

"Cost" means (1) the actual invoice price of the tangible personal property, or (2) the basis from which depreciation is taken under section 167 (with respect to depreciation) or from which a deduction may be taken under section 168 (with respect to accelerated cost recovery system) of the Internal Revenue Code of 1954, as amended, whichever is less.

"Eligible depreciable tangible personal property" is section 38 property as defined by the operative provisions of section 48 and having a depreciable life under section 167 or for which a deduction may be taken under section 168 of the federal Internal Revenue Code of 1954, as amended.

"Placed in service" means the earliest of the following taxable years:

"Purchase" means an acquisition of property.

"Tangible personal property" means tangible personal property which is placed in service within Hawaii after December 31, 1987, and the purchase or importation of which resulted in a transaction which was subject to the imposition and payment of tax at the rate of four per cent, except that for the period January 1, 1993, through December 31, 2002, and if the county general excise and use tax surcharge is in effect the tax rate shall be four and one-half per cent, under chapter 237 or 238. "Tangible personal property" does not include tangible personal property which is an integral part of a building or structure or tangible personal property used in a foreign trade zone, as defined under chapter 212. "Tangible personal property" includes computer software."

SECTION 11. Section 235-110.9, Hawaii Revised Statutes, is amended to read as follows:

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

of the investment made by the taxpayer in each qualified high technology business, up to a maximum allowed credit [of $500,000 for the taxable year for the investment made by the taxpayer in a qualified high technology business.] in the year the investment was made, $1,750,000; in the first year following the year in which the investment was made, $1,250,000; in the second year following the year in which the investment was made, $1,000,000; in the third year following the year in which the investment was made, $500,000; and in the fourth year following the year in which the investment was made, $500,000.

If as of the close of the second, third, or fourth year following the year in which the investment was made, the qualified high technology business no longer qualifies as such, the taxpayer's tax under this chapter for the second, third, or fourth year, as the case may be, shall be increased by the amount of the tax credit taken in the previous year.

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

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

(d) As used in this section:

"Qualified high technology business" means a business, employing or owning capital or property, or maintaining an office, in this State [that]:

"Qualified research" means[:

(e) This section shall [not] apply to taxable years beginning after December 31, [2005.] 2000, and not after December 31, 2010."

SECTION 12. Section 235-110.91, Hawaii Revised Statutes, is amended as follows:

1. By amending the title and subsection (a) to read:

"§235-110.91 Tax credit for [increasing] research activities. (a) Section 41 (with respect to the credit for increasing research activities) and section 280C(c) (with respect to certain expenses for which the credit for increasing research activities are allowable) of the Internal Revenue Code shall be operative for the purposes of this chapter as provided in this section[.]; except that references to the base amount shall not apply and credit for all qualified research expenses may be taken without regard to the amount of expenses for previous years. If section 41 of the Internal Revenue Code is repealed or terminated prior to January 1, 2006, its provisions shall remain in effect for purposes of the income tax law of the State as provided for in subsection (h)."

2. By amending subsections (c), (d), and (e) to read:

"(c) There shall be allowed to each taxpayer, subject to the tax imposed by this chapter, an income tax credit for [increased] qualified research activities equal to the credit for research activities provided by section 41 of the Internal Revenue Code[.] and as modified by this section. The credit shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

(d) As used in this section:

"Qualified research" [under section 41(d)(1) of the Internal Revenue Code] means the same as under section 235-7.3, and shall include costs incurred for computer software development whether for internal or external use, or for any use which qualifies under section 41(d) of the Internal Revenue Code, but shall not include research conducted outside of the State.

"Basic research" under section 41(e) of the Internal Revenue Code shall not include research conducted outside of the State.

(e) If the tax credit for [increased] qualified research activities claimed by a taxpayer exceeds the amount of income tax payment due from the taxpayer, the excess of the tax credit over payments due shall be refunded to the taxpayer; provided that no refund on account of the tax credit allowed by this section shall be made for amounts less than $1."

3. By amending subsection (h) to read:

"(h) This section shall [not] apply to taxable years beginning after December 31, [2005.] 2000, but not after December 31, 2010."

SECTION 13. Section 237-23.5, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) This chapter shall not apply to amounts received, charged, or attributable to services furnished by one related entity to another related entity or to imputed or stated interest attributable to loans, advances, or use of capital between related entities.

As used in this subsection:

"Related entities" means:

whether or not the entity is located within or without the State or licensed under this chapter.

"Services" means legal and accounting services, the use of computer software and hardware, information technology services, database management, and those managerial and administrative services performed by an employee, officer, partner, trustee, sole proprietor, member, or manager in the person’s capacity as an employee, officer, partner, trustee, sole proprietor, member, or manager of one of the related entities and shall include overhead costs attributable to those services."

SECTION 14. Section 235-111.5, Hawaii Revised Statutes, is repealed.

["§235-111.5 High technology; sale of unused net operating loss carryover. (a) A qualified high technology business may apply to the department of taxation to sell its unused net operating loss carryover to another taxpayer. If approved by the department of taxation, a qualified high technology business may sell its unused net operating loss carryover to another taxpayer in an amount equal to at least seventy-five per cent of the amount of the surrendered tax benefit; provided that the qualified high technology business may sell no more than $500,000 of its unused net operating loss carryover to another taxpayer per year. The tax benefit purchased by the buyer shall be claimed in the year for which the sale is approved by the department. Any use of the purchased net operating loss carryover for tax carryback or carryforward purposes shall comply with applicable law. The income from the sale of the net operating loss carryover received by the seller shall be reported on its tax return in the taxable year received but shall not be considered taxable income.

(b) No application for the sale of unused net operating losses shall be approved if the seller is a qualified high technology business that:

(c) As used in this section, "net operating loss" means a net operating loss for income tax purposes occurring in the two taxable years preceding the year in which the sale of net operating loss carryover occurs.

(d) This section shall only apply to sales of net operating loss carryovers after December 31, 2000, and before January 1, 2004."]

SECTION 15. It is the intention of the legislature that these amendments be liberally construed. The department of taxation is further given latitude to interpret these amendments in light of industry developments. The legislature does not intend by these amendments to opine on the interpretation taken by any taxpayer or the department of taxation on any issue arising under prior law.

SECTION 16. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 17. This Act shall take effect upon its approval; provided that: