STAND. COM. REP. NO. 2989

Honolulu, Hawaii

RE:    H.B. No. 2338

       S.D. 1

Honorable Donna Mercado Kim

President of the Senate

Twenty-Seventh State Legislature

Regular Session of 2014

State of Hawaii

Madam:

     Your Committee on Economic Development, Government Operations and Housing, to which was referred H.B. No. 2338 entitled:

"A BILL FOR AN ACT RELATING TO TAX CREDIT FOR RESEARCH ACTIVITIES,"

begs leave to report as follows:

     The purpose and intent of this measure is to:

     (1)  Clarify that the tax credit for research activities is not available for research conducted outside of the State;

     (2)  Eliminate the requirement that the Department of Taxation certify all research credit claims; and

     (3)  Clarify that failure of the taxpayer to submit the required survey to the Department of Business, Economic Development, and Tourism is a waiver of the right to claim the research credit.

     Your Committee received testimony in support of this measure from the Department of Taxation and High Technology Development Corporation.  Your Committee received comments on this measure from the Tax Foundation of Hawaii.

     Your Committee finds that Act 270, Session Laws of Hawaii 2013, reenacted the Hawaii tax credit for research activities for taxable years from 2013 to 2019.  Act 270 required that a cost be incurred in Hawaii in order to qualify for the tax credit.  However, requiring research costs to be incurred in Hawaii does not necessarily require research to be conducted in Hawaii.  For example, a contract that is negotiated and signed in Hawaii can be classified as incurred in Hawaii, even if the research conducted pursuant to the contract is performed in another state.  This measure clarifies Act 270 so that any qualified research must be conducted in the State in order to qualify for the tax credit.

     Your Committee further finds that this measure eliminates the requirement that the taxpayer obtain a certification from the Department of Taxation concerning its claim for the credit because the certification requirement can create a false impression that by certifying the credit, the Department has audited and validated the taxpayer's claims.  Instead, this measure imposes a substantive penalty for not providing the mandatory survey from the taxpayer to the Department of Business, Economic Development, and Tourism.

     Your Committee has amended this measure by:

     (1)  Inserting an effective date of July 1, 2050, to encourage further discussion; and

     (2)  Making technical amendments for the purposes of clarity and consistency.

     As affirmed by the record of votes of the members of your Committee on Economic Development, Government Operations and Housing that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 2338, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 2338, S.D. 1, and be referred to the Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committee on Economic Development, Government Operations and Housing,

____________________________

DONOVAN M. DELA CRUZ, Chair