Clarifies tax benefits or incentives available to qualified high technology businesses; appropriates moneys for the new economy transition program. (SD1)

A BILL FOR AN ACT

PART I

SECTION 1. Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§237-   Exemption for sale of net operating loss by qualified high technology business. Effective January 1, 2001, there shall be exempted from the measure of taxes imposed by this chapter all of the value or gross income derived from the sale of a net operating loss by a qualified high technology business defined in section 235-111.5 or by any partner, member, or shareholder of a qualified high technology business in the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations.

This section shall be repealed on December 31, 2005."

SECTION 2. Section 201-3, Hawaii Revised Statutes, is amended to read as follows:

"§201-3 Specific research and promotional functions of the department. Without prejudice to its general functions and duties, the department of business, economic development, and tourism shall have specific functions in the following areas:

The department shall be the central agency to coordinate film permit activities in the State."

SECTION 3. 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 165 (with respect to losses) of the Internal Revenue Code shall be operative for purposes of this chapter. Section 165 as operative for this chapter shall also apply to losses sustained from the sale of stocks issued through the exercise of the stock options or warrants granted by a qualified high technology business defined in section 235-9.5.

[(d)] (e) 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)] (f) 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.

(g) 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)] (h) 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)] (i) In 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)] (j) 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)] (k) 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)] (l) 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)] (m) 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)] (n) 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)] (o) 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 4. Section 235-2.45, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

"(e) Section 704 of the Internal Revenue Code (with respect to a partner's distributive share) shall be operative for purposes of this chapter; except that [[]section 704(b)(2)[]] shall not apply to [allocations]:

SECTION 5. Section 235-9.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-9.5 Stock options from qualified high technology businesses exempt from taxation. (a) Notwithstanding any law to the contrary, all income [received] earned and proceeds derived from the sale of stock [options] issued through the exercise of stock options or warrants from a qualified high technology business by an employee, officer, or director, 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 from taxation under this chapter.

(b) For the purposes of this section:

"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 6. Section 235-111.5, Hawaii Revised Statutes, is amended by amending subsections (a), (b), and (c) to read as follows:

"(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[;], computed at the corporate rate pursuant to section 235-71; 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. In the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations, each partner, member, or shareholder may sell its share of the entity's total net operating loss. 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:

as certified and documented by a licensed certified public accountant].

In the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations, the application for the sale of unused net operating losses shall only be approved to the extent that all partners, members, or shareholders certify that they have not received a tax benefit from the losses.

(c) As used in this section[, "net]:

"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.

"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:

"Surrendered tax benefit" means the tax liability saved if the net operating loss carryforward could have been used by the qualified high technology business."

PART II

SECTION 7. The legislature finds that the use of technology, particularly the Internet, is becoming businesses' best marketing tool and their greatest source of competition. The greatest risk for Hawaii businesses that do not participate in a technology-based economy is that they will be left behind.

While some businesses participate in the new economy and make use of system modernization and skills training, most businesses lack sufficient time and resources to learn about the information-technology revolution. As a result, these businesses are prevented from using technology to increase productivity, to work faster and more efficiently, to create a more flexible, less hierarchical style of doing business, and from being as competitive as they could be.

The legislature finds that the new economy transition (NET) program, a concept patterned after the agricultural extension programs, is available to help Hawaii businesses transition to the new economy and foster collaborative partnerships. The NET program serves as a conduit for technology education and advisory services, using many of the excellent resources offered by the State, the private sector, and other organizations. The result is a valuable partnership between business and government.

The greatest asset of the NET program is the outreach component, whereby a program technician, instead of a business, initiates the dialogue to identify the unique obstacles of the business and to determine the process to overcome those obstacles. Solutions include educational seminars on the benefits of applying technology to existing business processes, advisory services to develop planning and the implementation of technology business plans, a menu of training courses offered by qualified providers, interactive tools or a technology showcase, or simply distributing information materials.

Businesses benefit from the NET program because of a greater access to technology programs and sources of funding, increased productivity and efficiency, and the ability to compete both locally and globally. Government benefits from the NET program because of increased participation in the new economy, greater employment opportunities, higher tax revenue, increased global competitiveness, and a more highly skilled work force.

The purpose of this Part is to help Hawaii businesses transition to a technology-based economy by appropriating funds for the NET program that promotes the partnering of business and government.

SECTION 8. There is appropriated out of the general revenues of the State of Hawaii the sum of $1, or so much thereof as may be necessary for fiscal year 2001-2002, and the sum of $1, or so much thereof as may be necessary for fiscal year 2002-2003, for the NET program.

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

PART III

SECTION 9. The legislature finds that today's technology allows us to dramatically cut administrative transaction costs and time.

The legislature shall require conversion from hard copy to electronic copy of all legislative documents and all reports received by the legislature from state agencies, including budget material, by the end of this year to reduce transactions in administration.

The administration shall process all bill payments electronically in order to encourage productivity and efficiency. Electronic bill payment shall be in full operation by January 1, 2002.

The legislature shall have electronic access to the administration's financial information.

PART IV

SECTION 10. The legislature finds that the State has established a number of technology parks throughout the islands. The Mililani technology enterprise center is located in the county of Honolulu. Maui county is the home of the Maui research and technology park. Hawaii county is the site of the Hawaii ocean science and technology park. The West Kauai technology center at Waimea is located in Kauai. In addition, the natural energy laboratory of Hawaii authority operates a research and technology park on the Big Island focusing on deep ocean water resources. The legislature finds that these existing technology parks, whatever their origins, are creating great benefit for the people of the State and should continue to be supported.

The legislature further finds that it is in the best interest of the State to complete infrastructure work on technology parks that have already been established before embarking on creating new technology parks, which will require additional appropriations. The purpose of this Part is to require that all infrastructure work be completed on existing technology parks in the State that are subject to legislative appropriations before moneys can be allocated for the construction of new technology parks.

SECTION 11. The governor shall not allocate any funds for the planning, design, acquisition, or construction of any new research or technology park in the State until the construction of all infrastructure has been completed at all existing research and technology parks in the State that are subject to legislative appropriations.

SECTION 12. This Part shall take effect upon its approval and shall be repealed upon the issuance of a written proclamation by the governor to the effect that construction of all infrastructure has been completed at all existing research and technology parks in the State that are subject to legislative appropriations.

PART V

SECTION 13. The director of finance is authorized to issue general obligation bonds in the sum of $          , or so much thereof as may be necessary, is appropriated for fiscal year 2001-2002 for the purpose of extending the community-based economic development loan and grant program to information technology for distressed rural areas.

SECTION 14. The appropriation made for the capital improvement project authorized by this Part shall not lapse at the end of the fiscal year for which the appropriation is made; provided that all moneys from the appropriation unencumbered as of June 30, 2004, shall lapse as of that date.

PART VI

SECTION 15. The legislature finds that Hawaii's high technology industry is growing. Hawaii based companies are venturing and succeeding in several areas of high technology including telecommunications, electronic commerce, networking infrastructure and hardware, software development, and biotechnology. The reach of high technology is beyond its industry. It also improves the efficiency and effectiveness of other industries in Hawaii as well.

Although there is progress in Hawaii's high technology industry, the legislature finds that focus and cohesiveness of the State's efforts to promote Hawaii's high technology industry is required to ensure long-lasting success. The purpose of this Part is to bring together industry, government, and educational leaders to develop clear goals and an implementation plan to further develop Hawaii's high technology industry.

SECTION 16. (a) There is created a joint legislative high technology task force. The task force shall:

(b) By July 1, 2001, members of the task force shall be chosen by the respective chairs of the senate committee on economic development and technology and the house committee on economic development and business concerns. The task force shall consist of at least one representative from each of the following groups: high technology trade organizations, business organizations, high technology legal professionals, high technology educational institutions, University of Hawaii, department of business and economic development, department of commerce and consumer affairs, and Hawaii, Honolulu, Kauai, and Maui counties, etc.

(c) The high technology task force shall submit a report of findings and recommendations, including recommended legislation, to the legislature no later than twenty days prior to the convening of the regular session of 2002.

SECTION 17. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 18. This Act shall take effect upon its approval; provided that: