HB1451 SD1.DOC

SECTION 1. Section 235-110.51, Hawaii Revised Statutes, is amended by amending subsection (h) to read as follows:

"(h) The tax credit allowed under this section shall not be available for taxable years beginning after December 31, [~~2010.~~] 2012."

SECTION 2. 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. For investments made in a qualified high technology business on or after July 1, 2009, the total maximum allowed credits available to all taxpayers for the sum of all of their investments in any single qualified high technology business invested in a single calendar year shall not exceed $3,500,000 for the year in which the investment was made; $2,500,000 for the first year following the year in which the investment was made; $2,000,000 for the second year following the year in which the investment was made; $1,000,000 for the third year following the year in which the investment was made; and $1,000,000 for the fourth year following the year in which the investment was made, for a total of $10,000,000 over that five-year period. The five-year period referenced in this subsection shall only refer to tax credits applicable to investments that were made in qualified high technology businesses on or before December 31, 2012. Under no circumstances shall the reference to the five-year period be interpreted to mean that the eligibility period for claiming tax credits for new investments in qualified high technology businesses is extended beyond December 31, 2012. For purposes of this subsection, "taxpayer" shall mean the taxpayer that is ultimately liable to pay any applicable taxes and shall not include a partnership, limited liability company, or other pass-through entity; provided that any direct or indirect investment made into a qualified high technology business by a partnership, limited liability company, or other pass-through entity shall be deemed to have been made by their respective partners, members, or other beneficial owners who are the taxpayers that are ultimately liable to pay any applicable taxes.

(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 accepting an investment for which the credit allowed under this section may be claimed, a qualified high technology business consents to the public disclosure of the qualified high technology business' name and status as a beneficiary of the credit under this section.

(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)[:], any of the following recapture events occurs:

(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~~] person or entity directly investing in the qualified high technology business; or

(3) The [~~taxpayer~~] person or entity directly investing in the qualified high technology business has withdrawn [~~the taxpayer's~~] its investment wholly or partially from the qualified high technology business;

then 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. In addition, one hundred per cent of the total tax credit that would otherwise be available for the year in which the recapture event occurs, and each year thereafter during the five-year period set forth in subsection (a), shall be disallowed. The amount of the credit recaptured or disallowed 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 and disallowed credit 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) 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; 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 235-7.3.

(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 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) This section shall not apply to taxable years beginning after December 31, [~~2010.~~] 2012.

(j) All claims of high technology business investment tax credits under this section for investments in qualified high technology businesses made after June 30, 2009, shall be made subject to the following aggregate and periodic credit caps and credit allotment procedures:

(1) Aggregate and periodic credit caps for all new investments. The maximum amount of high technology business investment tax credits available under this section shall not exceed the following amounts for the following periods:

(A) $100,000,000 to be claimed over the five-year period set forth in subsection (a) for investments made beginning on July 1, 2009, and through December 31, 2009;

(B) $100,000,000 to be claimed over the five-year period set forth in subsection (a), for investments made during the calendar year beginning on January 1, 2010, January 1, 2011, and January 1, 2012, and through December 31 of each respective calendar year, plus any carryover credits available from unused allotments from the prior calendar years and in subparagraph (A).

(2) Credit allotments. Beginning on July 1, 2009, the department shall allot to qualified high technology businesses up to the maximum amount of high technology business investment tax credits as provided in paragraph (1). A qualified high technology business may apply for an allotment of high technology business investment tax credits in any amount not to exceed an aggregate of $10,000,000 for investments it receives in a single calendar year (to be claimed over the five-year period set forth in subsection (a)) for investments, as defined in section 235-1, made in a qualified high technology business in the same calendar year. A qualified high technology business may apply for an allotment of high technology business investment credits, on a form prescribed by the department, on or after the day on which that qualified high technology business has received the investment for which that allotment is applied for; provided that in order to apply for that allotment, the qualified high technology business shall attest and declare to the department the amount of investment that the qualified high technology business has received for which it is applying for that allotment; provided further that the qualified high technology business submits to the department a copy of the checks, bank deposit receipts, wire transfer confirmations, or other evidence reasonably acceptable to the department to verify that the qualified high technology business has received the investment for which the allotment is being applied for. All allotments issued by the department shall be made on a first to apply basis only. Notices of all allotments and denials thereof shall be certified in writing and delivered to the respective qualified high technology business by the department by email, fax, United States Postal Service, or other means reasonably requested by the qualified high technology business and approved by the department, within one business day of the department's receipt of the application for that allotment. If a qualified high technology business does not receive the full allotment of high technology business investment tax credits applied for, the qualified high technology business may, at an investor's option, refund to that investor all or any portion of that investor's investment for which allotment was applied for. An investor's right to receive a refund of its investment shall not negate or invalidate an investment's status as being nonrefundable or at risk, as required by section 235-1. The department shall post on its website in a manner accessible to the general public the total amount of allotments made, and the total unused allotments of credits remaining available under this subsection, which posting shall be updated by the department within one business day of making any allotment of credits pursuant to this subsection.

(3) Non-transferable nature of allotments. All credit allotments issued by the department shall be non-transferable, non-negotiable, and non-assignable; provided that a statutory conversion in the form of business entity shall not be considered a transfer or assignment.

(4) Credit claims subject to audit. Notwithstanding a credit allotment under this section, every claim for credit shall be subject to audit or review by the department.

(k) To qualify for the high technology business investment tax credit for an investment made on or after July 1, 2009, in a qualified high technology business that constitutes a "drop-down subsidiary", prior to receiving that investment, the qualified high technology business shall be required to obtain a private letter comfort ruling from the department that confirms its status as a qualified high technology business.

For purposes of this subsection, a "drop-down subsidiary" shall mean a qualified high technology business that is more than eighty per cent owned and controlled directly or indirectly, as defined in section 368(c) of the Internal Revenue Code and as stock ownership is applied pursuant to the rules in section 318 (with respect to constructive ownership of stock) of the Internal Revenue Code, by any company or entity that in the previous taxable year either owned assets located in the State of Hawaii worth more than $100,000,000 or earned gross income within the State of Hawaii of more than $50,000,000. This subsection and the ownership and control principles set forth in sections 368(c) and 318 of the Internal Revenue Code shall apply equally whether a drop-down subsidiary is a corporation, partnership, or limited liability company, provided that ownership of more than eighty per cent of either a capital interest or a profits interest of a partnership or limited liability company shall be deemed to be ownership of more than eighty per cent of that partnership or limited liability company for purposes of this subsection."

SECTION 3. Section 235-110.91, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (a) to read:

"(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,~~] 2012, 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)."

2. By amending subsection (j) to read:

"(j) This section shall not apply to taxable years beginning after December 31, [~~2010.~~] 2012."

SECTION 4. Act 206, Session Laws of Hawaii 2007, is amended by amending section 8 to read as follows:

"SECTION 8. This Act shall take effect on July 1, 2007, and shall apply to investments received by a qualified high technology business after June 30, 2007; provided that this Act shall be repealed on January 1, [~~2011,~~] 2013, and [~~sections~~] section 235-20.5 [~~and 235-110.9(b)~~], Hawaii Revised Statutes, shall be reenacted in the form in which [~~they~~] it read on the day before the effective date of this Act."

SECTION 5. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 6. This Act shall take effect on July 1, 2009.

HOUSE OF REPRESENTATIVES	H.B. NO.	1451
TWENTY-FIFTH LEGISLATURE, 2009		H.D. 2
STATE OF HAWAII		S.D. 1