SB1920 SD1

PART I

SECTION 1. The purpose of this part is to improve the organizational framework of the statutes relating to tax provisions concerning motion pictures, digital media, and film production. This part is intended to simplify the statutory structure through recodification and the renaming of certain provisions, where necessary, and not to effect any substantive changes to the current tax provisions, except for the amount of the motion picture, digital media, and film production tax credit allowed. In particular, the sunset provisions for the performing arts investment tax credit and the tax credit for performing arts research activities remain the same as in current law – December 31, 2010.

It is time for Hawaii to take full advantage of its natural constituency with the countries of the Pacific rim and the rising tide of global popular culture in all its forms (including video games, animation, and indigenous films) leveraging Hawaii's inherent strengths.

Digital entertainment, in the form of computer animated films and video games, not only dominates the entertainment business today (e.g., top box office hits like Finding Nemo and Happy Feet), but it is a globally-distributed economy. Technology means that companies can grow where people want to live, not where they have to work. Today's biggest hits come from outside Hollywood — from Emeryville (Pixar), Australia and New Zealand (Happy Feet and Lord of the Rings), and upstate New York (Ice Age). The $25 billion video game industry is based wherever the talent is; not where the historic infrastructure is. In the competition for artistic talent, Hawaii offers the perfect place to raise a family and the perfect lifestyle for the artists in the creative digital field.

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

"Part . MOTION PICTURE, DIGITAL MEDIA, AND FILM PRODUCTION

§235-A Performing arts 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 business as royalties and other income derived from any patents, copyrights, and trade secrets:

(1) Owned by the individual or qualified business; and

(2) Developed and arising out of a qualified business.

(b) This exclusion shall extend to:

(1) The authors of performing arts products, or any parts thereof, without regard to the application of the work-for-hire doctrine under United States copyright law;

(2) The authors of performing arts products, or any parts thereof, under the work-for-hire doctrine under United States copyright law; and

(3) The assignors, licensors, and licensees of any copyright rights in performing arts products, or any parts thereof.

"Performing arts products" means:

(1) Audio files, video files, audiovideo files, computer animation, and other entertainment products perceived by or through the operation of a computer; and

(2) Commercial television and film products for sale or license, and reuse or residual fee payments from these products.

"Qualified business" means a business engaged in producing performing arts products that conducts more than fifty per cent of its activities in qualified research.

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code; and

(2) Performing arts products.

§235-B Performing arts investment tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter a performing arts 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 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 business;

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

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

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 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 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 April 1 of each year in which an investment in a qualified 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;

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

(3) The number of total hires versus the number of local hires by category (i.e., department) and by country.

The department of taxation shall use the information from the statements submitted each year under this subsection to prepare a report published by May 1 of each year presenting the information received under this subsection. The information shall be presented in the aggregate and shall be available to the public.

(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) As used in this section:

"Investment tax credit allocation ratio" means, with respect to a taxpayer that has made an investment in a qualified 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 business.

"Qualified business" means a business engaged in producing performing arts products, employing or owning capital or property, or maintaining an office, in this 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; 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; or

(B) Services performed in this State.

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

"Performing arts products" means the same as defined in section 235-A.

(h) 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 performing arts 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) Persons eligible for a tax credit under section 235-D may claim a tax credit under this section but not under section 235‑110.9. Persons not eligible for a tax credit under 235-D shall not claim any tax credit under this section. Any person that has:

(1) Claimed the tax credit under section 235-110.9; and

(2) Not exhausted the right to claim the tax credit for the five-year period provided thereunder,

shall be eligible to continue to claim the tax credit, without reduction or requalification, for the remainder of the five-year period pursuant to this section if the taxpayer qualifies for a credit under section 235-D.

(j) This section shall not apply to taxable years beginning after December 31, 2010.

§235-C Tax credit for performing arts 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, 2011, its provisions shall remain in effect for purposes of the income tax law of the State as modified by this section, as provided for in subsection (j).

(b) All references to Internal Revenue Code sections within sections 41 and 280C(c) of the Internal Revenue Code shall be operative for purposes of this section.

(c) There shall be allowed to each qualified business subject to the tax imposed by this chapter an income tax credit for 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) Every qualified business, before April 1 of each year in which qualified research and development activity was conducted in the previous taxable year, shall submit a written, certified statement to the director of taxation identifying:

(1) Qualified expenditures, 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.

(e) 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 research and development activity costs upon which the tax credit is based;

(2) Verify the nature and amount of the qualifying costs or expenditures;

(3) Total all qualifying and cumulative costs or expenditures 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 the qualifying costs or expenditure 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 credit 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.

(f) As used in this section:

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

"Qualified business" means the same as in section 235-B.

"Qualified research" under section 41(d)(1) of the Internal Revenue Code shall not include research conducted outside of the State.

(g) If the tax credit for qualified performing arts 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.

(h) 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 properly claim the credit shall constitute a waiver of the right to claim the credit.

(i) The director of taxation may adopt any rules under chapter 91 and forms necessary to carry out this section.

(j) Persons eligible to claim a tax credit under section 235-D may claim a tax credit under this section but not under section 235‑110.91. Persons not eligible for a tax credit under section 235‑D shall not claim a tax credit under this section. Any person that has:

(1) Claimed the tax credit under section 235-110.91; and

(2) Not exhausted the right to claim the tax credit provided thereunder,

shall be eligible to continue to claim the tax credit, without reduction or requalification, pursuant to this section, if the taxpayer is eligible to claim a credit under section 235-D.

(k) This section shall not apply to taxable years beginning after December 31, 2010."

SECTION 3. 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:

(1) Owned by the individual or qualified high technology business; and

(2) Developed and arising out of a qualified high technology business.

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

~~(1)~~ ~~The authors of performing arts products, or any parts thereof, without regard to the application of the work-for-hire doctrine under United States copyright law;~~

~~(2)~~ ~~The authors of performing arts products, or any parts thereof, under the work-for-hire doctrine under United States copyright law; and~~

~~(3)~~ ~~The assignors, licensors, and licensees of any copyright rights in performing arts products, or any parts thereof.~~

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

[~~"Performing arts products" means:~~

~~(1)~~ ~~Audio files, video files, audiovideo files, computer animation, and other entertainment products perceived by or through the operation of a computer; and~~

~~(2)~~ ~~Commercial television and film products for sale or license, and reuse or residual fee payments from these products.~~]

"Qualified high technology business" means a business that conducts more than fifty per cent of its activities in qualified research.

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code;

(2) The development and design of computer software for ultimate commercial sale, lease, license or to be otherwise marketed, for economic consideration. With respect to the software's development and design, the business shall have substantial control and retain substantial rights to the resulting intellectual property;

(3) Biotechnology;

[~~(4)~~ ~~Performing arts products;~~

~~(5)~~] (4) Sensor and optic technologies;

[~~(6)~~] (5) Ocean sciences;

[~~(7)~~] (6) Astronomy; or

[~~(8)~~] (7) Nonfossil fuel energy-related technology."

SECTION 4. Section 235-17, Hawaii Revised Statutes, is amended as follows:

1. By renumbering the section, inserting it into the new part of chapter 235, Hawaii Revised Statutes, established under section 2 of this Act, and amending subsection (a) to read:

"[~~§235‑17~~] §235-D Motion picture, digital media, and film production income tax credit. (a) Any law to the contrary notwithstanding, 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. The amount of the credit shall be:

(1) [~~Fifteen~~] Twenty per cent of the qualified production costs incurred by a qualified production in any county of the State with a population of over seven hundred thousand; or

(2) [~~Twenty~~] Twenty-five per cent of the qualified production costs incurred by a qualified production in any county of the State with a population of seven hundred thousand or less.

A qualified production occurring in more than one county may prorate its expenditures based upon the amounts spent in each county, if the population bases differ enough to change the percentage of tax credit.

In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for qualified production 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 by rule.

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code of 1986, as amended, no tax credit shall be allowed for those costs for which the deduction is taken.

The basis for eligible property for depreciation of accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed."

2. By amending subsection (h) to read:

"(h) Every taxpayer claiming a tax credit under this section for a qualified production shall, no later than ninety days following the end of each taxable year in which qualified production costs were expended, submit a written, sworn statement to the department of business, economic development, and tourism, identifying:

(1) All qualified production costs as provided by subsection (a), if any, incurred in the previous taxable year;

(2) The amount of tax credits claimed pursuant to this section, if any, in the previous taxable year; [~~and~~]

(3) The number of total hires versus the number of qualified local hires by category (i.e., department) and by county[.]; and

(4) Evidence of educational or workforce development efforts, including but not limited to:

(A) Teacher training, mentorship, and internship opportunities by industry professionals and Hawaii-based productions for "below-the-line" local technical crews; and

(B) Participation in a statewide advisory council to develop the training, mentorship, and internship opportunity programs to produce qualified workers entering film and television production and creative media industries.

The department of business, economic development, and tourism shall use the information from the statements submitted under this section to prepare a report, published biannually, no later than June 30 and December 31, presenting information identifying tax credit recipients and the aggregate total value of the credits received under this subsection. The information shall be available to the public in both print and electronic form."

3. By amending subsection (j) to read:

"(j) Total tax credits claimed per qualified production shall not exceed [~~$8,000,000.~~] $ ."

PART II

SECTION 5. The purpose of this part is to streamline the administration of the Hawaii television development special fund.

SECTION 6. Section 201-111, Hawaii Revised Statutes, is amended by deleting the definition of "board".

["~~"Board" means the Hawaii television and film development board.~~"]

SECTION 7. Section 201-113, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) The fund shall be used [~~by the board~~] to assist in, and provide incentives for, the production of eligible Hawaii projects that are in compliance with criteria and standards established [~~by the board~~] in accordance with rules adopted [~~by the board~~] pursuant to chapter 91. In particular, [~~the board shall adopt~~] rules shall be adopted to provide for the implementation of the following programs:

(1) A grant program. [~~The board shall adopt rules~~] Rules adopted pursuant to chapter 91 [to] shall provide conditions and qualifications for grants. Applications for grants shall [~~be made to the board and shall~~] contain such information as [~~the board shall require~~] required by rules adopted pursuant to chapter 91. At a minimum, the applicant shall agree to the following conditions:

(A) The grant shall be used exclusively for eligible Hawaii projects;

(B) The applicant shall have applied for or received all applicable licenses and permits;

(C) The applicant shall comply with applicable federal and state laws prohibiting discrimination against any person on the basis of race, color, national origin, religion, creed, sex, age, or physical handicap;

(D) The applicant shall comply with other requirements as the [~~board~~] department may prescribe;

(E) All activities undertaken with funds received shall comply with all applicable federal, state, and county statutes and ordinances;

(F) The applicant shall indemnify and save harmless the State of Hawaii and its officers, agents, and employees from and against any and all claims arising out of or resulting from activities carried out or projects undertaken with funds provided hereunder, and procure sufficient insurance to provide this indemnification if requested to do so by the department;

(G) The applicant shall make available [~~to the board~~] all records the applicant may have relating to the project, to allow the [~~board~~] department to monitor the applicant's compliance with the purpose of this chapter; and

(H) The applicant[~~, to the satisfaction of the board,~~] shall establish that sufficient funds are available for the completion of the project for the purpose for which the grant is awarded; and

(2) A venture capital program. [~~The board shall adopt rules~~] Rules adopted pursuant to chapter 91 [to] shall provide conditions and qualifications for venture capital investments in eligible Hawaii projects. The program may include a written agreement between the borrower and the [~~board,~~] department, as the representative of the State, that as consideration for the venture capital investment made under this part, the borrower shall share any royalties, licenses, titles, rights, or any other monetary benefits that may accrue to the borrower pursuant to terms and conditions established [~~by the board~~] by rule pursuant to chapter 91. Venture capital investments may be made on such terms and conditions as the [~~board~~] department shall determine to be reasonable, appropriate, and consistent with the purposes and objectives of this part."

SECTION 8. Section 201-114, Hawaii Revised Statutes, is amended to read as follows:

"[[]§201-114[]] Inspection of premises and records. The [~~board~~] department shall have the right to inspect, at reasonable hours, the plant, physical facilities, equipment, premises, books, and records of any applicant in connection with the processing of a grant to the applicant."

SECTION 9. Section 201-112, Hawaii Revised Statutes, is repealed.

["~~[§201-112] Hawaii television and film development board.~~ (a) There is established the Hawaii television and film development board. The board shall be attached to the department of business, economic development, and tourism for administrative purposes only. The board shall administer the grant and venture capital investment programs and the Hawaii television and film development special fund established under this part. The board shall also assess and consider the overall viability and development of the television and film industries and make recommendations to appropriate state or county agencies.

(b) The board shall be composed of nine members, four of whom shall be appointed by the governor pursuant to section 26-34, and all of whom shall serve four-year staggered terms. One of the governor's appointments shall be made from a list of nominees submitted by the president of the senate and another appointment shall be made from a list of nominees submitted by the speaker of the house of representatives. The four appointed members shall possess a current working knowledge of the film, television, or entertainment industry. The director of business, economic development, and tourism, and the chairs of the four county film commissions or its equivalent, shall serve as ex officio voting members, who may be represented on the board by designees.

The chairperson and vice chairperson of the board shall be selected by the board by majority vote. Five members shall constitute a quorum, whose affirmative vote shall be necessary for all actions by the board. The members shall serve without compensation but shall be reimbursed for expenses, including travel expenses, necessary for the performance of their duties.

~~(c) The film industry branch development manager shall serve as the executive secretary of the board.~~

~~(d) The board may adopt rules pursuant to chapter 91 to effectuate the purposes of this part.~~"]

PART III

SECTION 10. In codifying the new sections added by sections 2 and 4 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 11. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 12. This Act shall take effect on July 1, 2040, and shall apply to taxable years beginning after December 31, .

THE SENATE	S.B. NO.	1920
TWENTY-FOURTH LEGISLATURE, 2007		S.D. 1
STATE OF HAWAII