SB898 HD2

SECTION 1. The legislature renewed its commitment to the growth and development of high technology businesses in Hawaii under Act 221, Session Laws of Hawaii 2001 (Act 221), which expanded tax incentives for qualified high technology businesses to provide a direct means of addressing the urgent need for venture financing.

In providing these expanded incentives, the legislature's purpose was to:

(1) Nurture and grow the high-technology sector of Hawaii's economy;

(2) Establish a clean industry with a relatively low need for land, energy, and other physical resources; and

(3) Provide Hawaii's residents with highly-skilled, living-wage jobs.

However, there is a need for more information that would allow the legislature to evaluate whether the incentives in Act 221 have been successful. The 2005-2007 Tax Review Commission stated that definitive results on the costs and benefits of the high technology business investment tax credit could not be calculated because of the inability to gather current data on the credits. Specifically, data after tax year 2003 was unavailable on the amount of the tax credits claimed and the employment statistics of qualified high technology businesses that were assisted by the credit. It appears that the appropriate information is being filed with the department of taxation, but the department has not been able to issue the desired reports.

Reports by the department of taxation and the department of business, economic development, and tourism on the effectiveness of the credits were confusing and inconsistent. All parties agree that better information is needed to evaluate the true costs and benefits associated with the tax incentives and to determine the best means of ensuring that the incentives achieve their intended objectives.

The purpose of this Act is to increase the transparency of, and allow a more accurate evaluation of, Hawaii's high-technology tax incentives by requiring:

(1) The department of taxation to make an initial report to the legislature by October 1, 2007, of summary statistics on all currently available information and data collected from high technology businesses;

(2) Qualified high technology businesses benefiting from the high technology business investment and research activities tax credits to submit employment information to the department of taxation for taxable years beginning after December 2006; and

(3) The department of taxation to annually report summary statistics and an evaluation of the effectiveness of the tax credits to the legislature by September 1^st of 2008, and September 1^st of each year thereafter,

and by appropriating funds for these purposes.

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

"§235- High technology; other reporting requirements. (a) A qualified high technology business claiming a tax credit under section 235-110.9 or 235-110.91, or receiving an investment for which the credit under section 235-110.9 may be claimed, shall complete and file a complete annual survey with the director of taxation on forms prepared and prescribed by the department. The annual survey shall be filed before March 31 of each year following the year in which:

(1) An investment in the qualified high technology business was made; or

(2) Qualified research and development activity was conducted.

The department may adjust the due date of the annual survey by rule.

(b) The annual survey shall include the following information for the time period or periods specified by the department:

(1) The taxpayer's net income tax liability;

(2) Whether the credit was assigned under section 235-110.9 or 235-110.91 and who assigned the credit; and

(3) Information about the employment positions in the qualified high technology business in the state, including:

(A) The total number of positions;

(B) The number of these positions filled by Hawaii residents;

(D) The number of new positions filled by Hawaii residents;

(E) Full-time, part-time, and temporary positions as a percentage of total employment;

(F) Of the total number of positions, the number of positions falling within the following wage bands:

(i) Less than $30,000;

(ii) $30,000 or greater, but less than $60,000; or

(iii) $60,000 or greater; provided that a wage band containing fewer than three individuals may be combined with another wage band;

and

(G) For each of the wage bands in subparagraph (F), the number of positions that have employer-provided medical, dental, and retirement benefits.

The department may request additional information necessary to measure the results of the tax credit program, to be submitted at the same time as the survey. In preparing the survey, the department shall ensure that qualified high technology businesses are not subject to duplicative reporting requirements. The department shall define "full-time position", "part-time position", "temporary position", and "new position" by rule.

(c) If a qualified high technology business fails to file a complete annual survey under this section with the department by the due date or any extension thereof, the qualified high technology business otherwise entitled to the tax credit shall be assessed a penalty of $1,000 per month for each month the annual survey is not filed, up to a maximum of three months. If a complete annual survey has not been filed three months after the due date or any extension thereof, the qualified high technology business otherwise entitled to the tax credit shall not be eligible to claim or assign the credit under section 235-110.9 or 235-110.91, as the case may be, for the taxable year prior to the year in which the person failed to timely file a complete annual survey.

(d) The department shall use information collected under this section or under other requirements of the department to prepare the report required under section 231-3.4(b).

(e) The reporting requirements under this section shall only be applicable to qualified high technology businesses and shall not apply to individual investors.

(f) The department shall adopt rules pursuant to chapter 91 to implement this section."

SECTION 3. Section 231-3.4, Hawaii Revised Statutes, is amended to read as follows:

"[[]§231-3.4[]] Publication of reports. (a) The department of taxation shall publish reports on the following:

(1) Hawaii income patterns--individuals;

(2) Hawaii income patterns--corporations, proprietorships, and partnerships; and

(3) Tax credits.

The department shall make each of these reports available in both paper form and commonly accessible electronic forms for a reasonable fee.

(b) The department shall, no later than October 1, 2007, and annually thereafter, prepare and submit to the legislature a report pertaining to qualified high technology businesses and related tax incentives provided under sections 235‑7.3, 235-9.5, 235‑110.51, 235-110.9, and 235-110.91.

In preparing the report, the department shall include summary descriptive statistics on the aforementioned sections; provided that no fewer than three taxpayers shall be included in any category.

Reports prepared after October 1, 2007, shall also:

(1) Identify each qualified high technology business receiving credits under section 235-110.9 or 235-110.91; and

(2) Evaluate the effectiveness of the tax credits under sections 235-110.9 and 235-110.91. The department shall measure the effect of the tax credits on:

(A) Job creation;

(B) The number of jobs created in the state;

(D) The diversification of the state's economy;

(E) The movement of firms;

(F) The introduction of new products;

(G) Growth in research and development investment;

(H) The consolidation of firms operating in the state; and

(I) Other factors as the department determines.

The department's initial report shall be based on all information currently available to the department. Reports prepared after October 1, 2007, shall be submitted to the legislature no later than September 1 of the current year. All reports shall be public, and the department shall make reports available in both paper form and commonly accessible electronic forms for a reasonable fee.

[~~(b)~~] (c) The department shall explore and implement all reasonable methods of covering the costs of publication and distribution of the reports, including but not limited to:

(1) Setting reasonable fees that will cover the costs of producing and distributing the reports in paper and electronic form; and

(2) Negotiating licensing fees with commercial information providers for rights to carry the reports on-line or in other electronic storage methods."

SECTION 4. Section 235-110.9, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (b) to read:

"(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. By claiming the credit, a qualified high technology business consents to the public disclosure of the taxpayer's name and the taxpayer's status as a claimant of the credit under this section."

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

(d) If at the close of any taxable year in the [~~five year~~] 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[;],

the credit claimed under this section shall be recaptured. The recapture shall be equal to [~~ten~~] one hundred per cent of the amount of the total tax credit claimed under this section in the preceding [~~two~~] five 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.

Every qualified high technology business that claims a credit or receives an investment for which a credit may be claimed under this section shall also submit the annual survey required by section 235- to the director of taxation.

(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[.], and any survey required under section 235- . 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."

SECTION 5. Section 235-110.91, Hawaii Revised Statutes, is amended by amending subsections (c) to (e) to read as follows:

"(c) There shall be allowed to each qualified high technology 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. By claiming the credit, the taxpayer consents to the public disclosure of the taxpayer's name and the taxpayer's status as a claimant of the credit under this section.

(d) Every qualified high technology business, before March 31 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.

Every qualified high technology business shall also submit the annual survey required by section 235- to the director of taxation.

(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[.], and the survey required under section 235- . The taxpayer shall file the certificate with the taxpayer's tax return with the department."

SECTION 6. 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 2007-2008, and the same sum, or so much thereof as may be necessary for fiscal year 2008-2009, for additional resources as may be necessary to prepare the reports required under section 3 pertaining to qualified high technology businesses and related tax incentives provided under sections 235‑7.3, 235-9.5, 235‑110.51, 235-110.9, and 235-110.91, Hawaii Revised Statutes.

The sums appropriated shall be expended by the department of taxation for the purposes of this Act.

SECTION 7. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 8. This Act shall take effect on July 1, 2020.

THE SENATE	S.B. NO.	898
TWENTY-FOURTH LEGISLATURE, 2007		S.D. 1
STATE OF HAWAII		H.D. 2