HB1752

SECTION 1. The legislature has recognized the importance of promoting innovation and research-based activities through the enactment of several tax credits and programs to promote growth in the technology and other innovation-related industries. The legislature has actively encouraged a range of industries and activities contributing to the creation of a higher-wage, and more knowledge-intensive economy.

The recently issued Report of the 2005-2007 Tax Review Commission (Commission) illustrates that the State does not adequately measure the effectiveness of these programs. The Report states that, "A tax incentive program is a potential 'black hole,' because it is a future benefit of unknown proportions, which is determined by the favored taxpayer's interpretation of what the tax credit should be, and is claimed on a tax return which is confidential." The Commission recommended that the tax credit be replaced with a program that provides grants to qualifying firms.

The legislature has determined that the effectiveness of these incentives be evaluated. The legislature further finds that reliable information must be available to determine whether tax benefits are implemented as intended.

The legislature also recognizes the importance of maintaining taxpayer confidentiality. To ensure accountability in the disposition of public funds, confidentiality must be balanced with transparency. One solution is to protect taxpayer identities for past filings, as was expected by taxpayers, and require public disclosure of the names of individuals benefiting from tax credits in the future.

Evaluations of economic impact and growth are a responsibility of the department of business, economic development, and tourism (DBEDT). Economists whose primary responsibility is to measure economic impact should be conducting economic analyses of existing tax credits, as well as tax credits considered in the future. DBEDT is the agency best equipped to provide this measurement.

To fulfill this function, the director of business, economic development, and tourism will need authorization to access confidential information from the departments of taxation and labor and industrial relations (DLIR) in a timely manner and convenient format. Allowing DBEDT to study tax data and provide its expertise is in the best interest of the public. Moreover, designating certain personnel as tax officials will require them to uphold confidentiality requirements.

The purpose of this Act is to improve the State's ability to measure its progress toward a more productive economy, as well as to assess the effectiveness of measures enacted by the legislature to achieve this goal. Specifically, this Act:

(1) Authorizes disclosure of certain information pertaining to tax incentives to DBEDT;

(2) Requires entities receiving tax credits to provide information to DBEDT;

(3) Requires the DLIR to provide information to DBEDT to analyze the effectiveness of tax incentives; and

(4) Appropriates funds to fulfill the purposes of this Act.

SECTION 2. Section 231-18, Hawaii Revised Statutes, is amended to read as follows:

"§231-18 Federal or other tax officials permitted to inspect returns; reciprocal provisions. Notwithstanding the provisions of any law making it unlawful for any person, officer, or employee of the State to make known information imparted by any tax return or permit any tax return to be seen or examined by any person, it shall be lawful to permit a duly accredited tax official of the United States, any state or territory, any county of this State, or the Multistate Tax Commission to inspect any tax return of any taxpayer, or to furnish to an official, commission, or the authorized representative thereof an abstract of the return or supply the official, commission, or the authorized representative thereof with information concerning any item contained in the return or disclosed by the report of any investigation of the return or of the subject matter of the return for tax purposes only. The Multistate Tax Commission may make the information available to a duly accredited tax official of the United States, any state or territory, or the authorized representative thereof, for tax purposes only. Tax return information may also be provided to the department of business, economic development, and tourism solely for purposes of conducting economic studies to demonstrate the effectiveness, impact, consequence, result, or other measurement of any state tax incentive, including tax credits or exemptions."

SECTION 3. 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 business 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 as follows:

(1) In the year the investment was made, thirty-five per cent;

(2) In the first year following the year in which the investment was made, twenty-five per cent;

(3) In the second year following the investment, twenty per cent;

(4) In the third year following the investment, ten per cent; and

(5) In the fourth year following the investment, ten per cent;

of the investment made by the taxpayer in each qualified high technology business, up to a maximum allowed credit in the year the investment was made, $700,000; in the first year following the year in which the investment was made, $500,000; in the second year following the year in which the investment was made, $400,000; in the third year following the year in which the investment was made, $200,000; and in the fourth year following the year in which the investment was made, $200,000.

(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. Every claim, including amended 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) If at the close of any taxable year in the five year period in subsection (a):

(1) The business no longer qualifies as a qualified high technology business;

(2) The business or an interest in the business has been sold by the taxpayer investing in the qualified high technology business; [or]

(3) The taxpayer has withdrawn the taxpayer's investment wholly or partially from the qualified high technology business; or

(4) The business fails to file the registration statement as required under subsection (g),

the credit claimed under this section shall be recaptured. The recapture shall be equal to ten per cent of the amount of the total tax credit claimed under this section in the preceding two taxable years. The amount of the credit recaptured shall apply only to the investment in the particular qualified high technology business that meets the requirements of paragraph (1), (2), or (3). The recapture provisions of this subsection shall not apply to a tax credit claimed for a qualified high technology business that does not fall within the provisions of paragraph (1), (2), or (3). The amount of the recaptured tax credit determined under this subsection shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs under this subsection.

(e) Every taxpayer, before March 31 of each year in which an investment in a qualified high technology business was made in the previous taxable year, shall submit a written, certified statement to the director of taxation identifying:

(1) Qualified investments, if any, expended in the previous taxable year; and

(2) The amount of tax credits claimed pursuant to this section, if any, in the previous taxable year.

(f) The department shall:

(1) Maintain records of the names and addresses of the taxpayers claiming the credits under this section and the total amount of the qualified investment costs upon which the tax credit is based;

(2) Verify the nature and amount of the qualifying investments;

(3) Total all qualifying and cumulative investments that the department certifies; and

(4) Certify the amount of the tax credit for each taxable year and cumulative amount of the tax credit.

Upon each determination made under this subsection, the department shall issue a certificate to the taxpayer verifying information submitted to the department, including qualifying investment amounts, the credit amount certified for each taxable year, and the cumulative amount of the tax credit during the credit period. The taxpayer shall file the certificate with the taxpayer's tax return with the department.

The director of taxation may assess and collect a fee to offset the costs of certifying tax credits claims under this section. All fees collected under this section shall be deposited into the tax administration special fund established under section 235-20.5.

(g) Each qualified high technology business that has received an investment for which a credit may be claimed under this section shall file a registration statement with the department of business, economic development, and tourism on or before July 1, of each year. The annual registration statement shall pertain to the activities of the qualified high technology business from January 1 through December 31 of the preceding calendar year, including:

(1) The name of the qualified high technology business;

(2) The number of employees and wages paid, including whether the employee is full-time, part-time, or seasonal;

(3) Total gross sales;

(4) The amount of investments for which a credit under this section may be claimed;

(5) The total amount of tax credits claimed and unclaimed, including whether the source was from Hawaii or out-of-state;

(6) Number of trademarks, patents, and copyrights applied for and obtained;

(7) Information on costs incurred in Hawaii;

(8) Information on the company's general business operations, including the industrial classification under which the company does business; and

(9) Any other information specifically related to the measurement of the impact of the tax credit and that the department of business, economic development, and tourism deems relevant.

Notwithstanding any other law to the contrary, an annual registration statement submitted under this section shall be a public document.

Failure to file the annual registration statement required by this subsection in a timely manner will result in credit recapture as provided in subsection (d).

[~~(g)~~] (h) As used in this section:

"Investment tax credit allocation ratio" means, with respect to a taxpayer that has made an investment in a qualified high technology business, the ratio of:

(1) The amount of the credit under this section that is, or is to be, received by or allocated to the taxpayer over the life of the investment, as a result of the investment; to

(2) The amount of the investment in the qualified high technology business.

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

(1) More than fifty per cent of its total business activities are qualified research; and provided further that the business conducts more than seventy-five per cent of its qualified research in this [~~State;~~] state; or

(2) More than seventy-five per cent of its gross income is derived from qualified research; and provided further that this income is received from:

(A) Products sold from, manufactured in, or produced in this [~~State;~~] state; or

(B) Services performed in this [~~State.~~] state.

"Qualified research" means the same as defined in section 235-7.3.

[~~(h)~~] (i) Common law principles, including the doctrine of economic substance and business purpose, shall apply to any investment. There exists a presumption that a transaction satisfies the doctrine of economic substance and business purpose to the extent that the special allocation of the high technology business tax credit has an investment tax credit ratio of 1.5 or less of credit for every dollar invested.

Transactions for which an investment tax credit allocation ratio greater than 1.5 but not more than 2.0 of credit for every dollar invested and claimed may be reviewed by the department for applicable doctrines of economic substance and business purpose.

Businesses claiming a tax credit for transactions with investment tax credit allocation ratios greater than 2.0 of credit for every dollar invested shall substantiate economic merit and business purpose consistent with this section.

[~~(i)~~] (j) This section shall not apply to taxable years beginning after December 31, 2010."

SECTION 4. Section 383-95, Hawaii Revised Statutes, is amended to read as follows:

"§383-95 Disclosure of information. (a) Except as otherwise provided in this chapter, information obtained from any employing unit or individual pursuant to the administration of this chapter and determinations as to the benefit rights of any individual shall be held confidential and shall not be disclosed or be open to public inspection in any manner revealing the individual's or employing unit's identity. Any claimant (or the claimant's legal representative) shall be supplied with information from the records of the department to the extent necessary for the proper presentation of the claimant's claim in any proceeding under this chapter. Subject to such restrictions as the director may by rule prescribe, and costs incurred in furnishing the information are reimbursed to the department and all safeguards are established as are necessary to ensure that information furnished by the department is used only for authorized purposes, the information and determinations may be made available to:

(1) Any federal or state agency charged with the administration of an unemployment compensation law or the maintenance of a system of public employment offices;

(2) The Bureau of Internal Revenue of the United States Department of Treasury;

(3) Any federal, state, or municipal agency charged with the administration of a fair employment practice or anti-discrimination law;

(4) Any other federal, state, or municipal agency if the director deems that the disclosure to the agency serves the public interest; and

(5) Any federal, state, or municipal agency if the disclosure is authorized under section 303 of the Social Security Act and section 3304 of the Internal Revenue Code of 1986, as amended.

(b) Information obtained in connection with the administration of the employment service may be made available to persons or agencies for purposes appropriate to the operation of a public employment service.

(c) Upon requests therefor the department shall furnish to any agency of the United States charged with the administration of public works or assistance through public employment, and may furnish to any state agency similarly charged, the name, address, ordinary occupation and employment status of each recipient of benefits and the recipient's rights to further benefits under this chapter.

(d) The department may request the comptroller of the currency of the United States to cause an examination of the correctness of any return or report of any national banking association rendered pursuant to this chapter, and may in connection with the request transmit any of the report or return to the comptroller of the currency of the United States as provided in section 3305(c) of the federal Internal Revenue Code.

(e) Upon request, the department shall furnish to the director of business, economic development, and tourism, the name, address, county, private or public sector classification, number of employees, total wages paid, and the assigned North American Industrial Classification Code pertaining to each employing unit in the state, for the calendar quarters and calendar years in the format requested. The information shall be used solely for the purposes of analyzing the effectiveness of state tax incentives and state tax credits. The director shall be authorized to publish the results of the analysis in a form that does not identify any individual taxpayer."

SECTION 5. There is appropriated out of the general revenues of the State of Hawaii the sum of $250,000 or so much thereof as may be necessary for fiscal year 2007-2008 and $415,000 or so much thereof as may be necessary for fiscal year 2008-2009 for the purposes of this Act; provided that $150,000 shall be allocated to two permanent full-time equivalent (2.0 FTE) economist positions in the department of business, economic development, and tourism.

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

SECTION 6. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 7. This Act shall take effect on July 1, 2007; provided that section 3 of this Act shall apply to qualified high technology businesses that received an investment on or after July 1, 2007, that qualified for a tax credit under section 235-110.9, Hawaii Revised Statutes, regardless of whether the credit was claimed.

INTRODUCED BY:	_____________________________

HOUSE OF REPRESENTATIVES	H.B. NO.	1752
TWENTY-FOURTH LEGISLATURE, 2007
STATE OF HAWAII