2012-0991 SB2111 SD1 SMA

PART I

SECTION 1. The legislature finds that the film and digital media industry in Hawaii is an important component of a diversified economy and that its financial impact can be strengthened significantly if existing incentives for the industry are enhanced. The legislature further finds that the industry has a strong desire to hire locally and invest in the training and workforce development of island-based personnel.

The purpose of this Act is to encourage the use of Hawaii as a site for filming, for the digital production of films, and to develop and sustain the workforce and infrastructure for film, digital media, and entertainment production.

PART II

SECTION 2. The purpose of this part is to:

(1) Increase the motion picture, digital media, and film production income tax credit to twenty-five per cent of qualified expenditures for any county with a population over 700,000 and thirty per cent of qualified expenditures for all other counties, and increase the total tax credit cap to $16,000,000; and

(2) Strengthen incentives for hiring greater numbers of residents and to support training and opportunities for those residents.

SECTION 3. Section 235-17, Hawaii Revised Statutes, is amended to read as follows:

"§235‑17 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-five per cent of the qualified [~~production costs~~] expenditures incurred by a qualified production in any county of the State with a population of over seven hundred thousand; or

(2) [~~Twenty~~] Thirty per cent of the qualified [~~production costs~~] expenditures 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~~] expenditures 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. Notwithstanding any provision to the contrary, the credit may be recovered directly by the entity that incurred the qualified expenditures.

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.

(b) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. For the purposes 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, the excess of credits over liability shall be refunded to the taxpayer; provided that no refunds or payment on account of the tax credits allowed by this section shall be made for amounts less than $1. All claims, including any amended claims, for tax credits 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) To qualify for this tax credit, a production shall:

(1) Meet the definition of a qualified production specified in subsection [~~(l);~~] (p);

(2) Have qualified [~~production costs~~] expenditures totaling at least $200,000[;] for a qualified production, or $50,000 for a qualified digital media project;

(3) Provide [~~the State, at a minimum, a shared-card, end-title screen credit, where applicable;~~] marketing materials promoting the State as a tourist destination or film and digital media production destination, when appropriate, at no cost to the State, which shall, at a minimum, include placement of a "Filmed in Hawaii" or "Produced in Hawaii" logo in the end credits; and

(4) Provide evidence [~~of reasonable efforts to hire local talent and crew; and~~

~~(5)~~ Provide evidence of financial or in-kind contributions or educational or workforce development efforts, in partnership with related local industry labor organizations, educational institutions, or both, toward the furtherance of the local film and television and digital media industries.] that for the first two years of the production, at least fifty per cent, and thereafter, at least sixty per cent, of the positions that make up the production cast and below-the-line production crew, or, in the case of digital media projects, at least seventy-five per cent of the positions, are filled by legal residents of this State, whose residency is demonstrated by a valid Hawaii driver's license or other state-issued identification confirming residency, or students enrolled full-time in a film-and-entertainment-related course of study at an institution of higher education in the State.

(e) On or after July 1, 2006, no qualified [~~production cost~~] expenditure that has been financed by investments for which a credit was claimed by any taxpayer pursuant to section 235-110.9 is eligible for credits under this section.

(f) To receive the tax credit, the taxpayer shall first prequalify the production for the credit by registering with the department of business, economic development, and tourism during the development or preproduction stage. Failure to comply with this provision may constitute a waiver of the right to claim the credit.

(g) The director of taxation shall prepare forms as 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.

(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~~] expenditures were expended, submit a written, sworn statement to the department of business, economic development, and tourism, identifying:

(1) All qualified [~~production costs~~] expenditures 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 local hires~~] An estimate of the full-time equivalent positions for legal residents of this State created by each production, by category (i.e., department), and by county.

(i) The department of business, economic development, and tourism shall:

(1) Maintain records of the names of the taxpayers and qualified productions thereof claiming the tax credits under subsection (a);

(2) Obtain and total the aggregate amounts of all qualified [~~production costs~~] expenditures per qualified production and per qualified production per taxable year; and

(3) Provide a letter to the director of taxation specifying the amount of the tax credit per qualified production for each taxable year that a tax credit is claimed and the cumulative amount of the tax credit for all years claimed.

Upon each determination required under this subsection, the department of business, economic development, and tourism shall issue a letter to the taxpayer, regarding the qualified production, specifying the qualified [~~production costs~~] expenditures and the tax credit amount qualified for in each taxable year a tax credit is claimed. The taxpayer for each qualified production shall file the letter with the taxpayer's tax return for the qualified production to the department of taxation. Notwithstanding the authority of the department of business, economic development, and tourism under this section, the director of taxation may audit and adjust the tax credit amount to conform to the information filed by the taxpayer.

(j) Total tax credits claimed per qualified production shall not exceed [~~$8,000,000.~~] $16,000,000.

(k) The director of taxation may revoke or modify any written decision qualifying, certifying, or otherwise granting eligibility for tax credits under this section if it is discovered that the taxpayer submitted any false statement, representation, or certification in any application, record, report, plan, or other document filed in an attempt to receive tax credits under this section. The director shall immediately notify the department of business, economic development, and tourism of any revoked or modified orders affecting previously granted tax credits. Additionally, the taxpayer shall notify the department of business, economic development, and tourism of any change in its tax credit claimed.

(l) A determination by the director of taxation that a taxpayer received tax credits pursuant to this section to which the taxpayer was not entitled is grounds for forfeiture of previously claimed and received tax credits. The taxpayer is responsible for returning forfeited tax credits to the director of taxation, and the funds shall be deposited in the general fund.

(m) A taxpayer that submits fraudulent information under this section shall be liable to reimburse the reasonable costs and fees associated with the review, processing, investigation, and prosecution of the fraudulent claim. A taxpayer that obtains a credit payment under this section through a claim that is fraudulent shall be liable for reimbursement of the credit amount plus a penalty in an amount double the credit amount; provided that the penalty shall be in addition to any criminal penalty to which the taxpayer is liable for the same acts.

(n) No later than December 31 of each year, the department of business, economic development, and tourism shall provide a report for the previous fiscal year to the governor and the legislature that outlines the return on investment and economic benefits of the tax credits to the State. The report shall also include an estimate of the full-time equivalent positions for legal residents of this State created by each production that received tax credits under this section and information relating to the distribution of productions receiving credits, by county and by type of production.

[~~(k)~~] (o) Qualified productions shall comply with subsections (d), (e), (f), and (h).

[~~(l)~~] (p) For the purposes of this section:

"Commercial":

(1) Means an advertising message that is filmed using film, videotape, or digital media, for dissemination via television broadcast or theatrical distribution;

(2) Includes a series of advertising messages if all parts are produced at the same time over the course of six consecutive weeks; and

(3) Does not include an advertising message with Internet‑only distribution.

"Digital media" means production methods and platforms directly related to the creation of cinematic imagery and content, specifically using digital means, including but not limited to digital cameras, digital sound equipment, and computers, to be delivered via film, videotape, interactive game platform, or other digital distribution media [~~(excluding Internet-only distribution)~~].

"Legal resident" shall have the same meaning as "resident" in section 235-1.

"Post production" means production activities and services conducted after principal photography is completed, including but not limited to editing, film and video transfers, duplication, transcoding, dubbing, subtitling, credits, closed captioning, audio production, special effects (visual and sound), graphics, and animation.

"Production" means a series of activities that are directly related to the creation of visual and cinematic imagery to be delivered via film, videotape, or digital media and to be sold, distributed, or displayed as entertainment or the advertisement of products for mass public consumption, including but not limited to scripting, casting, set design and construction, transportation, videography, photography, sound recording, interactive game design, and post production.

"Production expenditures" means the costs of tangible and intangible property used for, and services performed primarily and customarily in, production, including preproduction and post production, but excluding costs for development, marketing, and distribution, including but not limited to:

(1) Wages, salaries, or other compensation paid to legal residents of this State, including amounts paid through payroll service companies, for technical and production crews, directors, producers, and performers;

(2) Net expenditures for sound stages, backlots, production editing, digital effects, sound recordings, sets, and set construction;

(3) Net expenditures for rental equipment, including but not limited to cameras and grip or electrical equipment;

(4) Up to $300,000 of the costs of newly purchased computer software and hardware unique to the project, including servers, data processing, and visualization technologies, which are located in and used exclusively in the State for the production of digital media; and

(5) Expenditures for meals, travel, and accommodations. For purposes of this definition, the term "net expenditures" means the actual amount of money a qualified production spent for equipment or other tangible personal property, after subtracting any consideration received for reselling or transferring the item after the qualified production ends, if applicable.

"Qualified digital media project" means a production of interactive entertainment that is produced for distribution in commercial or educational markets, including a video game or production intended for internet or wireless distribution.

"Qualified expenditures" means production expenditures incurred in this State by a qualified production for:

(1) Goods purchased or leased or services, including but not limited to insurance costs and bonding, payroll services, and legal fees, that are provided by a vendor or supplier in the State that is registered with the State, has a physical location in the State, and employs one or more legal residents of this State; provided that:

(A) Qualified expenditures shall not include rebilled goods or services provided by an in-state company from out-of-state vendors or suppliers; and

(B) When services provided by a vendor or supplier include personal services or labor, only personal services or labor provided by legal residents of this State, evidenced by the required documentation of residency, shall qualify;

(2) Payments to legal residents of this State in the form of salary, wages, or other compensation up to a maximum of $400,000 per resident; provided that a completed declaration of legal residency in this State shall accompany the documentation submitted to the department for reimbursement; and

(3) Other direct production costs specified by the department in consultation with the department of business, economic development, and tourism.

"Qualified expenditures" do not include expenditures incurred before certification, with the exception of those incurred for a commercial, a music video, or the pickup of additional episodes of a high-impact television series within a single season.

"Qualified production":

(1) Means a production, with expenditures in the State, for the total or partial production of a feature-length motion picture, short film, made-for-television movie, commercial, music video, interactive game, television series pilot, single season (up to twenty‑two episodes) of a television series regularly filmed in the State (if the number of episodes per single season exceeds twenty‑two, additional episodes for the same season shall constitute a separate qualified production), television special, single television episode that is not part of a television series regularly filmed or based in the State, national magazine show, or national talk show. For the purposes of subsections (d) and (j), each of the aforementioned qualified production categories shall constitute separate, individual qualified productions[;]. Notwithstanding the foregoing, for purposes of satisfying the criteria of subsection (d), a taxpayer shall claim as part of a qualified production the creation of related content intended for distribution over the Internet, wireless network, or similar methods of distribution; and

(2) Does not include: daily news; public affairs programs; non-national magazine or talk shows; televised sporting events or activities; productions that solicit funds; productions produced primarily for industrial, corporate, institutional, or other private purposes; and productions that include any material or performance prohibited by chapter 712.

["Qualified production costs" means the costs incurred by a qualified production within the State that are subject to the general excise tax under chapter 237 or income tax under this chapter and that have not been financed by any investments for which a credit was or will be claimed pursuant to section 235‑110.9. Qualified production costs include but are not limited to:

~~(1)~~ ~~Costs incurred during preproduction such as location scouting and related services;~~

~~(2)~~ ~~Costs of set construction and operations, purchases or rentals of wardrobe, props, accessories, food, office supplies, transportation, equipment, and related services;~~

~~(3)~~ ~~Wages or salaries of cast, crew, and musicians;~~

~~(4)~~ ~~Costs of photography, sound synchronization, lighting, and related services;~~

~~(5)~~ ~~Costs of editing, visual effects, music, other post-production, and related services;~~

~~(6)~~ ~~Rentals and fees for use of local facilities and locations;~~

~~(7)~~ ~~Rentals of vehicles and lodging for cast and crew;~~

~~(8)~~ ~~Airfare for flights to or from Hawaii, and interisland flights;~~

~~(9)~~ ~~Insurance and bonding;~~

~~(10)~~ ~~Shipping of equipment and supplies to or from Hawaii, and interisland shipments; and~~

~~(11)~~ ~~Other direct production costs specified by the department in consultation with the department of business, economic development, and tourism.~~]"

PART III

SECTION 4. The purpose of this part is to:

(1) Establish a motion picture, digital media, and film production infrastructure tax credit of fifty per cent of qualified infrastructure costs;

(2) Require the expenditure of at least $10,000,000 in qualified infrastructure costs;

(3) Provide for an annual payment to the Hawaii film office equal to one per cent of the tax credit received by the taxpayer; and

(4) Provide for a 100 per cent recapture of the tax credit if the infrastructure project ceases to meet the requirements of a qualified infrastructure project.

SECTION 5. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235‑ Motion picture, digital media, and film production infrastructure 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 fifty per cent of the qualified infrastructure costs incurred by a qualified taxpayer in any county of the State.

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

(d) To qualify for this tax credit, a qualified infrastructure project shall:

(1) Meet the definition of a qualified infrastructure project specified in subsection (m);

(2) Have qualified infrastructure costs totaling at least $10,000,000; and

(3) Provide evidence that for the first two years of the infrastructure project, at least sixty per cent, and thereafter, at least seventy per cent, of the positions are filled by legal residents of this State, whose residency is demonstrated by a valid Hawaii driver's license or other state-issued identification confirming residency, or students enrolled in a construction or related course of study at an educational institution in the State.

(e) To receive the tax credit, the taxpayer shall first prequalify the infrastructure project for the credit by registering with the department of business, economic development, and tourism during the development stage. Failure to comply with this provision may constitute a waiver of the right to claim the credit.

(f) If all or a portion of an infrastructure project is a facility that may be used for other purposes unrelated to production or post-production activities, then the project shall be approved only if a determination is made that the multiple-use facility will support and will be necessary to secure production or post-production activity.

The taxpayer may also request a comfort ruling from the department of taxation regarding the applicability of the tax credit to a specific qualified infrastructure project.

(h) An annual fee for administration of the tax credit shall be payable to the department of business, economic development, and tourism Hawaii film office and shall be submitted with the application for a qualified infrastructure project tax credit. The annual fee shall be equal to one per cent of the tax credit received by the taxpayer under this section. The fee shall become first payable within thirty days of the issuance of the determination letter specified in subsection (k).

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

(1) All qualified infrastructure costs, 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) An estimate of the full-time equivalent positions for legal residents of this State created by each project, by job category and by county.

(j) The department of business, economic development, and tourism shall:

(1) Maintain records of the names of the taxpayers and qualified infrastructure projects thereof claiming the tax credits under subsection (a);

(2) Obtain and total the aggregate amounts of all qualified infrastructure costs per qualified infrastructure project per taxable year; and

(3) Provide a letter to the director of taxation specifying the amount of the tax credit per qualified infrastructure project for each taxable year that a tax credit is claimed and the cumulative amount of the tax credit for all years claimed.

(k) Upon each determination required under this subsection, the department of business, economic development, and tourism shall issue a letter to the taxpayer, regarding the qualified infrastructure project, specifying the qualified infrastructure costs and the tax credit amount qualified for in each taxable year a tax credit is claimed. The taxpayer for each qualified infrastructure project shall file the letter with the taxpayer's tax return for the qualified infrastructure project to the department of taxation. Notwithstanding the authority of the department of business, economic development, and tourism under this section, the director of taxation may audit and adjust the tax credit amount to conform to the information filed by the taxpayer.

(l) No later than December 31 of each year, the department of business, economic development, and tourism shall provide a report for the previous fiscal year to the governor and the legislature that outlines the return on investment and economic benefits of the tax credits to the State. The report shall also include an estimate of the full-time equivalent positions for legal residents of this State created by each qualified infrastructure project that received tax credits under this section and information relating to the distribution of qualified infrastructure projects receiving credits, by county and by type of project.

(m) For the purposes of this section:

"Qualified infrastructure costs" means the total costs incurred by a qualified infrastructure project within the State that are subject to the general excise tax under chapter 237 or income tax under this chapter and that have not been financed by any investments for which a credit was or will be claimed pursuant to section 235-110.9. Qualified infrastructure costs shall not include the cost of purchasing or leasing real property.

"Qualified infrastructure project" means a construction project in the State, for the development, construction, or renovation of a film, video, television, or media production or post-production facility and the immovable property and equipment related thereto, or any other facility that supports and is a necessary component of such infrastructure project.

(n) If at any time the infrastructure project ceases to be a qualified infrastructure project, the credit claimed under this section shall be recaptured. The amount of the recaptured tax credit determined under this subsection shall be added to the taxpayer's tax liability, up to one hundred per cent of the tax credit, for the taxable year in which the recapture occurs under this subsection. The taxpayer shall consent to a tax lien in the amount of the tax credit claimed under this section on the property as a condition to receiving the tax credit under this section."

PART III

SECTION 6. Act 88, Session Laws of Hawaii 2006, is amended by amending section 4 to read as follows:

"SECTION 4. This Act shall take effect on July 1, 2006; provided that[:

~~(1)~~ ~~Section~~] section 2 of this Act shall apply to qualified [~~production costs~~] expenditures incurred on or after July 1, 2006, and before January 1, [~~2016; and~~

~~(2)~~ ~~This Act shall be repealed on January 1, 2016, and section 235-17, Hawaii Revised Statutes, shall be reenacted in the form in which it read on the day before the effective date of this Act.~~] 2012."

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, 2012; provided that:

(1) Section 3 of this Act shall apply to qualified expenditures incurred on or after January 1, 2012, and before January 1, 2027;

(2) Section 5 of this Act shall apply to taxable years beginning after December 31, 2011; and

(3) This Act shall be repealed on January 1, 2027; provided further that section 235-17, Hawaii Revised Statutes, shall be reenacted in the form in which it read on the day before the effective date of Act 88, Session Laws of Hawaii 2006.

THE SENATE	S.B. NO.	2111
TWENTY-SIXTH LEGISLATURE, 2012		S.D. 1
STATE OF HAWAII		Proposed