SB2646 SD2

PART I

GENERAL PURPOSE

SECTION 1. In 1978, voters approved article XI, section 3, of the Constitution of the State of Hawaii, which sets out the framework for state policies to promote agriculture and the conservation of productive agricultural lands in the State. Article XI, section 3, reads as follows:

"The State shall conserve and protect agricultural lands, promote diversified agriculture, increase agricultural self sufficiency and assure the availability of agriculturally suitable lands. The legislature shall provide standards and criteria to accomplish the foregoing.

Lands identified by the State as important agricultural lands needed to fulfill the purposes above shall not be reclassified by the State or rezoned by its political subdivisions without meeting the standards and criteria established by the legislature and approved by a two-thirds vote of the body responsible for the reclassification or rezoning action."

To address the issue of important agricultural lands, Act 183, Session Laws of Hawaii 2005 (Act 183), was enacted. Act 183 establishes standards, criteria, and mechanisms to identify important agricultural lands and implement the intent and purpose of article XI, section 3, of the Hawaii State Constitution.

Act 183 also recognized that while the supply of lands suitable for agriculture is critical, the long-term viability of agriculture also depends on other factors. These factors include:

(1) Commodity prices;

(2) Availability of water for irrigation;

(3) Agricultural research and outreach;

(4) Application of production technologies;

(5) Marketing; and

(6) Availability and cost of transportation services.

The purpose of this Act is to provide incentives and protections to establish and sustain viable agricultural operations on important agricultural lands.

PART II

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

"§235‑ Rental income from agricultural leases on important agricultural lands 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, rental income, including lease rents, in an amount not to exceed $ in any taxable year and received by a taxpayer subject to the taxes imposed by this chapter that are derived from agricultural leases on lands identified and designated as important agricultural lands pursuant to part III, chapter 205, for the taxable year the rental income was realized; provided that:

(1) The minimum length of the initial lease term shall be:

(A) Twenty years; or

(B) Any other lease term length mutually agreeable to lessor and lessee, if the amount of the lease rent is set by an independent appraisal using the lower of the comparable value or agricultural capitalization appraisal methodologies and the lease arrangement, including the amount of lease rent determined by an appraisal, is reviewed and approved by the department of agriculture; and

(2) The lease is in effect and the lessee is continuously and substantially undertaking agribusiness on the leased land, pursuant to chapter 205, as verified by the department of agriculture on a regular basis using a process determined by the department of agriculture; provided that the exclusion shall not apply if the lease is terminated or the department of agriculture determines that the leased land is not continuously and substantially being used for agribusiness.

The taxpayer shall be eligible for the exclusion initially for up to twenty years or for the agreed term, whichever the case may be, so long as the initial exclusion is not longer than the original required minimum lease term provided in subsection (a)(1); provided that the time period may be extended for every year the term of the lease is extended; provided further that the assignment of the original lease to another lessee shall be for the time period remaining on the original lease, unless the terms of the lease are renegotiated.

(b) Each taxpayer who claims the exclusion under this section shall provide annually to the department of agriculture any information determined by the department of agriculture to be necessary to enable an aggregated quantitative and qualitative assessment of the impact of the exclusion. The taxpayer shall provide the information in a manner prescribed by the department of agriculture.

"Agribusiness" means a business licensed for the production, processing, and sale of products from the cultivation of crops, propagation of fish or game, or raising of livestock."

SECTION 3. Section 237-24.75, Hawaii Revised Statutes, is amended to read as follows:

"§237-24.75 Additional exemptions. In addition to the amounts exempt under section 237-24, this chapter shall not apply to:

(1) Amounts received as a beverage container deposit collected under chapter 342G, part VIII;

(2) Amounts received by the operator of the Hawaii convention center for reimbursement of costs or advances made pursuant to a contract with the Hawaii tourism authority under section 201B‑7[[];[ ~~and~~

[](3) Amounts received[]] by a professional employment organization from a client company equal to amounts that are disbursed by the professional employment organization for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick leave, health benefits, and similar employment benefits with respect to assigned employees at a client company; provided that this exemption shall not apply to a professional employment organization upon failure of the professional employment organization to collect, account for, and pay over any income tax withholding for assigned employees or any federal or state taxes for which the professional employment organization is responsible. As used in this paragraph, "professional employment organization", "client company", and "assigned employee" shall have the meanings provided in section 373K-1[.]; and

(4) Rental income, including lease rents, in an amount not to exceed $ in any taxable year and derived from agricultural leases on lands identified and designated as important agricultural lands pursuant to part III, chapter 205, for the taxable year the rental income was realized; provided that:

(A) The minimum length of the initial lease term shall be:

(i) Twenty years; or

(ii) Any other lease term length mutually agreeable to lessor and lessee, if the amount of the lease rent is set by an independent appraisal using the lower of the comparable value or agricultural capitalization appraisal methodologies;

(B) The lease is in effect and the lessee is continuously and substantially undertaking agricultural activity on the leased land, pursuant to chapter 205, as verified by the department of agriculture on a regular basis using a process determined by the department of agriculture; provided that the exemption shall not apply if the lease is terminated or the department of agriculture determines that the leased land is not continuously and substantially being used for agricultural activity; and

(C) The taxpayer shall be eligible for the exemption initially for up to twenty years and for every year the term of the lease is extended; provided further that the assignment of the original lease to another lessee shall be for the time period remaining on the original lease, unless the terms of the lease are renegotiated."

SECTION 4. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 for the department of agriculture to collect and analyze data to make an aggregated quantitative and qualitative assessment of the impact of the exclusion of rental income from important agricultural lands from income and general excise taxation.

The sum appropriated shall be expended by the department of agriculture for the purposes of this part.

SECTION 5. The department of agriculture shall submit to the legislature an annual report, no later than twenty days prior to the convening of each regular session, beginning with the regular session of 2010, regarding the quantitative and qualitative assessment of the impact of the exclusion of rental income from important agricultural lands from income and general excise taxation.

PART III

SECTION 6. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235‑ Important agricultural lands real property tax credit. (a) There shall be allowed to each taxpayer, subject to the taxes imposed by this chapter, an important agricultural lands real property 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 credit is properly claimed.

(b) The amount of the credit shall be equal to per cent of the actual amount of county real property taxes paid by the taxpayer during the taxable year in which real property tax was assessed on lands identified and designated as important agricultural lands pursuant to part III, chapter 205.

In the case of a partnership, S corporation, estate, or trust, the amount upon which the credit is computed shall be determined at the entity level.

(c) The tax credit shall be allowed only for the entity incurring the actual cost of the real property tax. If the real property tax is part of the lease rent and not otherwise specified in the lease agreement, the lessor shall provide the lessee with the amount equal to the real property tax included as part of the lease rent and paid by the lessee upon the lessee's request.

(d) If the classification of the important agricultural lands subject to the credit is redesignated at any time, the credit shall no longer be available. Any credit previously claimed by the taxpayer shall be recaptured in total. The amount of the recaptured tax credit shall be equal to one hundred per cent of the aggregate credits previously claimed and added to the taxpayer's tax liability for the taxable year in which the recapture occurs. There shall be no credit allowed in the taxable year the important agricultural lands are redesignated.

(e) If the credit under this section exceeds the taxpayer's tax liabilities owed for the taxable year, the excess of the credits over tax liabilities owed shall be refunded to the taxpayer; provided that the credit properly claimed by the taxpayer who has no income tax liability shall be paid to the taxpayer; and provided further that no refunds or payments on account of the credits allowed by this section shall be made for amounts less than $1.

All claims for a 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.

(f) The director of taxation shall prepare forms that may be necessary to claim a credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section by rule pursuant to chapter 91.

(g) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2008, and shall not be available for taxable years beginning after December 31, 2018.

(h) Taxpayers claiming the credit under this section shall provide prescribed information to the department of agriculture on an annual basis, upon request, that will enable a quantitative and qualitative assessment of the impact of the tax credit to be determined. The assessment shall be available to the public.

The department of agriculture shall determine on an annual basis if the important agricultural land subject to the credit is in productive agricultural use based on a ten year farm plan submitted to and approved by the department."

SECTION 7. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 for the department of agriculture to collect and analyze data to make an aggregated quantitative and qualitative assessment of the full impact of the important agricultural lands tax credit.

The sum appropriated shall be expended by the department of agriculture for the purposes of this part.

PART IV

SECTION 8. Chapter 205, Hawaii Revised Statutes, is amended by adding a new section to part III to be appropriately designated and to read as follows:

"§205‑ Important agricultural land; residential housing. A landowner of lands qualifying under section 205-44 may develop, construct, and maintain residential dwelling units for farmers, employees, and their families; provided that:

(1) The farmers' dwelling units shall be used exclusively by farmers and their immediate family members who actively and currently farm on the designated important agricultural land upon which the dwelling is situated; provided that the immediate family members of a farmer may live in separate dwelling units situated on the same designated land as the farmer's family's dwelling unit;

(2) The employee dwelling units shall be used exclusively by employees and their immediate family members who actively and currently work on the designated important agricultural land upon which the dwelling is situated; provided that the immediate family members of the employee shall not live in separate dwelling units and shall live with the employee;

(3) The total land area upon which the combined total of farmer and employee dwelling units and all appurtenances are situated shall not occupy more than twenty per cent of the total important agricultural land area controlled by the farmer or the employee's employer;

(4) The farmers' and employee dwelling units meet all applicable building code requirements;

(5) Notwithstanding section 205-4.5(a)(12), the landowner shall not plan or develop a residential subdivision on the designated important agricultural land; and

(6) The plans for farmers' and employee dwelling units shall be supported by agricultural plans that are approved by the department of agriculture."

PART V

SECTION 9. Tax incentives are a critical component of the long-term viability of agriculture on important agricultural lands in the State. The legislature finds that it is in the public's interest to assist agricultural businesses in establishing and sustaining viable agricultural operations on important agricultural lands by providing incentives such as income tax credits.

The purpose of this part is to establish an important agricultural land tax credit to establish and sustain viable agricultural operations on important agricultural lands.

SECTION 10. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235‑ Important agricultural lands agricultural business tax credit. (a) There shall be allowed to each taxpayer an important agricultural lands agricultural business 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 tax credit shall be as follows:

(1) In the year the qualified agricultural costs are made, fifty per cent of the qualified agricultural costs up to a maximum of ;

(2) In the first year following the year in which the qualified agricultural costs are made, twenty per cent of the qualified agricultural costs up to a maximum of ;

(3) In the second year following the year in which the qualified agricultural costs are made, ten per cent of the qualified agricultural costs up to a maximum of ;

(4) In the third year following the year in which the qualified agricultural costs are made, ten per cent of the qualified agricultural costs up to a maximum of ; and

(5) In the fourth year following the year in which the qualified agricultural costs are made, ten per cent of the qualified agricultural costs up to a maximum of .

(b) No other credit may be claimed under this chapter for the qualified agricultural costs for which a credit is claimed under this section for the taxable year.

(c) The amount of the qualified agricultural costs eligible to be claimed under this section shall be reduced by the amount of funds received by the taxpayer during the taxable year from the irrigation repair and maintenance special fund under section 167-24.

(d) The cost upon which the tax credit is computed shall be determined at the entity level. In the case of a partnership, S corporation, estate, trust, or other pass through entity, distribution and share of the credit shall be determined pursuant to section 235-110.7(a).

If 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 qualified agricultural cost for which the deduction is taken.

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. No deduction shall be allowed for that portion of otherwise deductible qualified agricultural costs on which a credit is claimed under this section.

(e) If the credit under this section exceeds the taxpayer's net income tax liability for the taxable year, the excess of the credit over liability shall be refunded to the taxpayer; and provided that no refunds or payments on account of the credits allowed by this section shall be made for amounts less than $1.

All claims for a tax credit under this section, including amended claims, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit is claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(f) The director of taxation shall prepare any forms that may be necessary to claim a credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91.

(g) Prior to claiming the tax credit under this section, the taxpayer may request a letter from the department of agriculture specifying the qualified agricultural costs in the taxable year the tax credit will be claimed. The taxpayer shall provide to the department of agriculture information required by the department of agriculture prior to the issuance of the letter.

(h) The department of agriculture, in consultation with the department of taxation, shall determine the types of information that are necessary on an annual basis to enable a quantitative and qualitative assessment of the outcomes of the tax credit to be determined. Every taxpayer, no later than the last day of the taxable year following the close of the taxpayer's taxable year in which qualified costs were incurred, shall submit a written statement to and be certified by the department of agriculture.

Any taxpayer failing to submit information to the department of agriculture in the manner prescribed by the department of agriculture prior to the last day of the taxable year following the close of the taxpayer's taxable year in which qualified costs were incurred shall not be eligible to receive the tax credit, and any credit already claimed for that taxable year shall be recaptured in total. The amount of the recaptured tax credit shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs.

Notwithstanding any law to the contrary, a statement submitted under this subsection shall be a public document.

(i) On an annual basis, the department of agriculture, in consultation with the department of taxation, shall submit a report evaluating the effectiveness of the tax credit. The report shall include but not be limited to findings and recommendations to improve the effectiveness of the tax credit to further encourage the development of agricultural businesses.

(j) As used in this section:

"Agricultural business" means any person with a commercial agricultural, silvicultural, or aquacultural facility or operation, including:

(1) The care and production of livestock and livestock products, poultry and poultry products, apiary products, and plant and animal production for nonfood uses;

(2) The planting, cultivating, harvesting, and processing of crops; and

(3) The farming or ranching of any plant or animal species in a controlled salt, brackish, or freshwater environment;

provided that it maintains its principal place of business in the State and more than fifty per cent of the land the agricultural business owns or leases, excluding land classified as conservation land, is important agricultural land.

"Important agricultural lands" means lands identified and designated as important agricultural lands pursuant to chapter 205, part III.

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

"Qualified agricultural costs" means expenditures for:

(1) The plans, design, engineering, construction, renovation, repair, maintenance, and equipment for:

(A) Roads or utilities, primarily for agricultural purposes, for which the majority of the lands serviced by the roads or utilities, excluding lands classified as conservation lands, are important agricultural lands;

(B) Agricultural processing facilities in the State, primarily for agricultural purposes, that process, harvest, treat, wash, handle, or package a majority of crops or livestock from agricultural businesses;

(C) Water wells, reservoirs, dams, water storage facilities, water pipelines, ditches, or irrigation systems in the State, primarily for agricultural purposes, for which the majority of the lands serviced by its water, excluding lands classified as conservation lands, are important agricultural lands; and

(D) Agricultural housing in the State, primarily for agricultural purposes, provided that:

(i) The majority of the housing units are occupied by laborers for agricultural businesses and their immediate family members;

(ii) The housing units are owned by the agricultural business;

(iii) The housing units are in the general vicinity, as determined by the department of agriculture, of agricultural lands owned or leased by the agricultural business; and

(iv) The housing units conform to any other conditions that may be required by the department of agriculture;

(2) Feasibility studies, regulatory processing, and legal and accounting services related to the items under paragraph (1); and

(3) Equipment, primarily for agricultural purposes, used to cultivate, grow, harvest, or process agricultural products by an agricultural business."

SECTION 11. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 to the department of taxation for the costs to administer the important agricultural land agricultural business tax credit.

The sum appropriated shall be expended by the department of taxation for the purposes of this part.

SECTION 12. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 to the department of agriculture for the costs to administer the important agricultural land agricultural business tax credit and for one full-time employee planner position for the department of agriculture.

The sum appropriated shall be expended by the department of agriculture for the purposes of this part.

PART VI

SECTION 13. Financing is also a critical component of the long-term viability of agriculture on important agricultural lands in the State. The legislature finds that it is in the public interest to assist agricultural producers in meeting their financing needs for projects that are located in important agricultural lands.

The purpose of this part is to further the implementation of Act 183 by authorizing the chairperson of the board of agriculture to guarantee loans relating to agricultural projects located on important agricultural lands.

SECTION 14. Chapter 155, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§155‑ Loan guaranty; important agricultural lands; agricultural and aquacultural loans. (a) The chairperson of the board of agriculture may guarantee loans made by commercial lenders, authorized to do business in this State, to agricultural producers for the purpose of developing and implementing agricultural projects; provided that the chairperson of the board of agriculture determines that:

(1) The agricultural projects are located on lands designated as important agricultural lands pursuant to part III of chapter 205;

(2) The commercial lender has completed its due diligence in approving the loan, including ensuring adequate collateral; and

(3) After consultation with the director of finance, the State possesses sufficient funds to provide an appropriate reserve for the loan guaranty and which, in the director of finance's judgment, are in excess of the amounts necessary to meet the immediate requirements of the State and will not impede or hamper the fulfillment of the financial obligations of the State.

The chairperson of the board of agriculture may impose other conditions that the chairperson deems reasonable to implement the loan guaranty.

(b) In addition to the conditions that the chairperson of the board of agriculture may impose under subsection (a), any loan guaranty made pursuant to this section shall meet the following conditions:

(1) For a loan that finances operating costs, the maximum term of the loan shall be ten years;

(2) For a loan that finances capital improvement costs, the maximum term of the loan shall be twenty years;

(3) The interest rate charged on the loan shall be one per cent below the commercial lender's prime rate for as long as the loan guaranty is in effect;

(4) The loan guaranty may be up to eighty-five per cent of the outstanding principal amount of the loan, but shall not include any fees or accrued interest associated with the loan or its collection; and

(5) The principal amount of the loan shall not exceed $2,500,000.

(c) Pursuant to chapter 91 and in consultation with the director of finance, the chairperson of the board of agriculture shall adopt rules to effectuate the purposes of this section.

(d) As used in this section:

"Agricultural producer" means a farmer, cooperative, association, or landowner who derives at least fifty per cent of its gross income from agricultural or aquacultural activities.

"Agricultural project" means a project relating to agricultural or aquacultural operations or capital improvements."

PART VII

SECTION 15. Chapter 205, Hawaii Revised Statutes, is amended by adding a new section to part III to be appropriately designated and to read as follows:

"§205‑ Agricultural processing facilities; permits; priority. (a) Any applicable agency subject to this chapter or title 13 that issues permits shall establish and implement a procedure for the priority processing of permit applications and renewals, at no additional cost to the applicant, for agricultural processing facilities that process crops or livestock from an agribusiness with a majority of the lands held, owned, or used by the agribusiness, identified and designated as important agricultural lands pursuant to this part, excluding lands held, owned, or used by the agribusiness in the conservation district. Any priority permit processing procedure established pursuant to this section shall not imply or provide that any permit application filed under the priority processing procedure shall be automatically approved.

(b) As used in this section, "agribusiness" means a business primarily engaged in the care and production of livestock, livestock products, poultry, poultry products, or apiary, horticultural, or floricultural products, or the planting, cultivating, and harvesting of crops or trees."

SECTION 16. Chapter 321, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§321‑ Agricultural processing facilities; permits; priority. (a) Any applicable agency subject to this chapter or title 19 that issues permits shall establish and implement a procedure for the priority processing of permit applications and renewals, at no additional cost to the applicant, for agricultural processing facilities that process crops or livestock from an agribusiness with a majority of the lands held, owned, or used by the agribusiness, identified and designated as important agricultural lands pursuant to this part, excluding lands held, owned, or used by the agribusiness in the conservation district. Any priority permit processing procedure established pursuant to this section shall not imply or provide that any permit application filed under the priority processing procedure shall be automatically approved.

PART VIII

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

SECTION 18. This Act shall take effect on July 1, 2050; provided that sections 2, 3, 6, and 10 of this Act shall apply to taxable years beginning after December 31, 2050; and provided further that this Act shall be repealed on June 30, 2060, and section 237-24.75, Hawaii Revised Statutes, shall be reenacted in the form in which it read on the day before the effective date of this Act.

THE SENATE	S.B. NO.	2646
TWENTY-FOURTH LEGISLATURE, 2008		S.D. 2
STATE OF HAWAII