SB2941 HD1.DOC

SECTION 1. Research and development is the core of innovation. Without innovation, there would be no technology industry and the subsequent growth of our economy would be stunted with no new products, services, or processes. Research and development is the critical first step in the product development cycle. During the research and development stage, ideas and theories are tested to determine feasibility. Due to the increasingly interconnected and competitive global economy, fostering and encouraging innovation is essential to a comprehensive economic strategy for the State. The key to developing more jobs and more prosperity is the creation and development of new products, services, and processes.

Innovation is essential for creating new jobs in high technology and traditional sectors. In recent years, innovation has led to new jobs in many different sectors as diverse as defense or dual-use, software and information technology, life sciences and biotechnology, and clean energy. At the same time, innovations ripple through the economy, creating jobs for workers building advanced infrastructure, including clean energy solutions, installing broadband networks, and utilizing new devices and products in the service industries such as health care and tourism.

The Internal Revenue Code provides support for scientific experimentation through a tax credit at twenty per cent of the cost of the qualified research. Hawaii has previously allowed the same credit against state taxes at an average program cost to the State of approximately $11,000,000 per year over the last nine years, and in 2006, provided funding to over four hundred companies. This tax credit has been a great source of support for local companies, especially to the research and development companies that are still in the start-up and early stages, and is seen as helping to level the playing field of our high-cost State as Hawaii companies compete with their national and international competitors. It has also been useful in providing support for early-stage research and development companies that are not yet profitable and have few sources of funding. Further, the refundable element is helping to attract new technology companies to Hawaii.

Additionally, the legislature finds that the aerospace industry offers great potential for sustainable long-term economic growth that will help drive investment to Hawaii and create high paying, sustainable, green jobs both now and in the future. Development of an aerospace high technology park on the island of Hawaii will create an environment that will attract major aerospace and lunar transportation companies that will have access to an analog research site providing these companies the ability to test equipment and technologies in environments identical to those in outer space, such as on the moon and near earth objects, as well as access to the University of Hawaii and to each other.

To ensure the smooth development of an aerospace high technology park, the State must make it clear that the activities in the park are considered a permitted use of the agricultural zoning district that includes the location of the proposed park, precluding the need to obtain variances or other exceptions from the appropriate government entities.

The purpose of this Act is to:

(1) Extend the income tax credit for qualified research activities for an additional five years and to add extensive reporting requirements related to the tax credit;

(2) Allow for aerospace high technology to be considered a permitted land use in an agricultural land use district; and

(3) Extend the land lease for the high technology development corporation.

SECTION 2. Section 235-110.91, Hawaii Revised Statutes, is amended to read as follows:

"§235-110.91 Tax credit for 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,~~] 2017, 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).~~] (n).

(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 high technology business subject to the tax imposed by this chapter an income tax credit for qualified research activities equal to fifty per cent of 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 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.

(e) The department of taxation 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 of taxation 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 of taxation shall issue a certificate to the taxpayer verifying information submitted to the department[,] of taxation 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 of taxation.

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 high technology business" means [~~the same as in section 235-110.9.~~] a business employing or owning capital or property or maintaining an office in the State; provided that more than fifty per cent of its total business activities are qualified research and more than fifty per cent of its qualified research is in this State.

"Qualified research" [~~under~~] means the same as in 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 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) A qualified high technology business that claims a tax credit under this section shall complete and file with the director of taxation through the department of taxation website, an annual survey on electronic forms prepared and prescribed by the department of taxation. The annual survey shall be filed before June 30 of each calendar year following the calendar year in which the credit may be claimed under this section. The department of taxation may adjust the due date of the annual survey by rule.

A qualified high technology business that claims a tax credit under this section and fails to file the survey by the due date shall be assessed a fine of not more than $1,000 for each month of failure to file and shall forfeit the credit under this section.

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

(1) Identification of the industry sector or sectors in which the qualified high technology business conducts business, as set forth in paragraphs (2) to (8) of the definition of "qualified research" in section 235‑7.3(c);

(2) Qualified expenditures, if any, expended in the previous taxable year;

(3) Revenue and expense data;

(4) Hawaii employment and wage data, including the numbers of full- and part-time employees retained, new jobs, temporary positions, external services procured by the business, and payroll taxes;

(5) Filed intellectual property, including invention disclosures, provisional patents, and patents issued or granted; and

(6) Federal and state income tax returns and documents related to deductions for tax credits for research activities.

The department of taxation shall request information in each of these categories sufficient to measure the effectiveness of the tax credit. The department of taxation may request any additional information necessary to measure the effectiveness of the tax credit, such as information related to patents. In preparing the survey and requesting any additional information, the department of taxation shall ensure that qualified high technology businesses are not subject to duplicative reporting requirements.

(k) The department of taxation shall use information collected under this section and through other reporting requirements of the department of taxation to prepare summary descriptive statistics by category. The information shall be reported at the aggregate level to prevent compromising identities of qualified high technology business investors or other confidential information. The department of taxation shall also identify each qualified high technology business that is the beneficiary of tax credits claimed under this section. The department of taxation shall report the information required under this subsection to the legislature by September 1 of each year.

(l) The department of taxation shall use the information collected to study the effectiveness of the tax credit under this section. The department of taxation shall report on the amount of tax credits claimed and total taxes paid by qualified high technology businesses, the number of qualified high technology businesses in each industry sector, jobs created, external services and materials procured by the businesses, compensation levels, qualified research activities, and other factors as the department determines to the legislature by December 1 of each year.

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

[~~(j)~~] (n) This section shall not apply to taxable years beginning after December 31, [~~2010.~~] 2016."

SECTION 3. Section 205-4.5, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) Within the agricultural district, all lands with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class A or B shall be restricted to the following permitted uses:

(1) Cultivation of crops, including crops for bioenergy, flowers, vegetables, foliage, fruits, forage, and timber;

(2) Game and fish propagation;

(3) Raising of livestock, including poultry, bees, fish, or other animal or aquatic life that are propagated for economic or personal use;

(4) Farm dwellings, employee housing, farm buildings, or activities or uses related to farming and animal husbandry. "Farm dwelling", as used in this paragraph, means a single-family dwelling located on and used in connection with a farm, including clusters of single-family farm dwellings permitted within agricultural parks developed by the State, or where agricultural activity provides income to the family occupying the dwelling;

(5) Public institutions and buildings that are necessary for agricultural practices;

(6) Public and private open area types of recreational uses, including day camps, picnic grounds, parks, and riding stables, but not including dragstrips, airports, drive-in theaters, golf courses, golf driving ranges, country clubs, and overnight camps;

(7) Public, private, and quasi-public utility lines and roadways, transformer stations, communications equipment buildings, solid waste transfer stations, major water storage tanks, and appurtenant small buildings such as booster pumping stations, but not including offices or yards for equipment, material, vehicle storage, repair or maintenance, treatment plants, corporation yards, or other similar structures;

(8) Retention, restoration, rehabilitation, or improvement of buildings or sites of historic or scenic interest;

(9) Roadside stands for the sale of agricultural products grown on the premises;

(10) Buildings and uses, including mills, storage, and processing facilities, maintenance facilities, and vehicle and equipment storage areas that are normally considered directly accessory to the above-mentioned uses and are permitted under section 205-2(d);

(11) Agricultural parks;

(12) Plantation community subdivisions, which as used in this chapter means an established subdivision or cluster of employee housing, community buildings, and agricultural support buildings on land currently or formerly owned, leased, or operated by a sugar or pineapple plantation; provided that the existing structures may be used or rehabilitated for use, and new employee housing and agricultural support buildings may be allowed on land within the subdivision as follows:

(A) The employee housing is occupied by employees or former employees of the plantation who have a property interest in the land;

(B) The employee housing units not owned by their occupants shall be rented or leased at affordable rates for agricultural workers; or

(C) The agricultural support buildings shall be rented or leased to agricultural business operators or agricultural support services;

(13) Agricultural tourism conducted on a working farm, or a farming operation as defined in section 165-2, for the enjoyment, education, or involvement of visitors; provided that the agricultural tourism activity is accessory and secondary to the principal agricultural use and does not interfere with surrounding farm operations; and provided further that this paragraph shall apply only to a county that has adopted ordinances regulating agricultural tourism under section 205-5;

(14) Wind energy facilities, including the appurtenances associated with the production and transmission of wind generated energy; provided that the wind energy facilities and appurtenances are compatible with agriculture uses and cause minimal adverse impact on agricultural land;

(15) Biofuel processing facilities, including the appurtenances associated with the production and refining of biofuels that is normally considered directly accessory and secondary to the growing of the energy feedstock; provided that biofuels processing facilities and appurtenances do not adversely impact agricultural land and other agricultural uses in the vicinity.

For the purposes of this paragraph:

"Appurtenances" means operational infrastructure of the appropriate type and scale for economic commercial storage and distribution, and other similar handling of feedstock, fuels, and other products of biofuels processing facilities.

"Biofuel processing facility" means a facility that produces liquid or gaseous fuels from organic sources such as biomass crops, agricultural residues, and oil crops, including palm, canola, soybean, and waste cooking oils; grease; food wastes; and animal residues and wastes that can be used to generate energy;

(16) Agricultural-energy facilities, including appurtenances necessary for an agricultural-energy enterprise; provided that the primary activity of the agricultural-energy enterprise is agricultural activity. To be considered the primary activity of an agricultural-energy enterprise, the total acreage devoted to agricultural activity shall be not less than ninety per cent of the total acreage of the agricultural-energy enterprise. The agricultural-energy facility shall be limited to lands owned, leased, licensed, or operated by the entity conducting the agricultural activity.

As used in this paragraph:

"Agricultural activity" means any activity described in paragraphs (1) to (3) of this subsection.

"Agricultural-energy enterprise" means an enterprise that integrally incorporates an agricultural activity with an agricultural-energy facility.

"Agricultural-energy facility" means a facility that generates, stores, or distributes renewable energy as defined in section 269-91 or renewable fuel including electrical or thermal energy or liquid or gaseous fuels from products of agricultural activities from agricultural lands located in the State.

"Appurtenances" means operational infrastructure of the appropriate type and scale for the economic commercial generation, storage, distribution, and other similar handling of energy, including equipment, feedstock, fuels, and other products of agricultural-energy facilities;

(17) Construction and operation of wireless communication antennas; provided that, for the purposes of this paragraph, "wireless communication antenna" means communications equipment that is either freestanding or placed upon or attached to an already existing structure and that transmits and receives electromagnetic radio signals used in the provision of all types of wireless communications services; provided further that nothing in this paragraph shall be construed to permit the construction of any new structure that is not deemed a permitted use under this subsection;

(18) Agricultural education programs conducted on a farming operation as defined in section 165-2, for the education and participation of the general public; provided that the agricultural education programs are accessory and secondary to the principal agricultural use of the parcels or lots on which the agricultural education programs are to occur and do not interfere with surrounding farm operations. For the purposes of this section, "agricultural education programs" means activities or events designed to promote knowledge and understanding of agricultural activities and practices conducted on a farming operation as defined in section 165-2; [or]

(19) Solar energy facilities that do not occupy more than ten per cent of the acreage of the parcel, or twenty acres of land, whichever is lesser; provided that this use shall not be permitted on lands with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class A[.]; or

(20) Aerospace high technology parks; provided that this paragraph shall apply only to land with soil classified by the land study bureau's detailed land classification as overall (master) productivity rating class C, D, or E; and provided further that the aerospace high technology park has obtained a special permit under section 205-6.

As used in this paragraph:

"Aerospace high technology park" include aerospace, processing, manufacturing, research, or instructional enterprises for aerospace high technology, commercial or experimental rocketry, satellite, lunar, nextgen avionics, solid waste resource recovery systems, enterprises for the development, processing, or transmission of alternative energy, industrial parks as defined in section 206M-1, retail, including food serving establishments, and wholesale, industry, processing, transportation, or manufacturing enterprises the primary purpose of which is to serve or provide products to the aerospace high technology enterprises or their employees.

"Alternative energy" means energy derived other than from the processing of petroleum.

"High technology" includes computer software and hardware, microprocessors, telecommunication devices, and robotics."

SECTION 4. The University of Hawaii shall extend the current land lease agreement with the high technology development corporation, located at 2800 Woodlawn Drive, Manoa, Honolulu, Hawaii, identified as tax map key 2-9-26: por. 3, 37, and 38, on the same terms and for a period no less than twenty-five years from the expiration date of the existing lease.

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, 2112; provided that section 2 shall apply to taxable years beginning after December 31, 2011.

THE SENATE	S.B. NO.	2941
TWENTY-SIXTH LEGISLATURE, 2012		S.D. 2
STATE OF HAWAII		H.D. 1