Report Title:

Taxes; High Tech Amendments

 

Description:

Adds new tax benefits for high tech industries and amends current benefits to improve them. (SB648 HD2)

 

THE SENATE

S.B. NO.

648

TWENTY-FIRST LEGISLATURE, 2001

S.D. 2

STATE OF HAWAII

H.D. 2


 

A BILL FOR AN ACT

 

relating to taxation.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. Through Act 178, Session Laws of Hawaii (SLH) 1999, and Act 297, SLH 2000, the legislature and administration provided a platform to encourage the continued growth and development of high technology businesses and associated industries in Hawaii. These legislative efforts have resulted in growing interest in Hawaii as a "New Economy" marketplace. Additional incentives must now be put in place to set Hawaii apart as a tech-friendly place to do business for both technical and non-technical businesses.

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

"§235- Technology infrastructure renovation tax credit. (a) 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.

(b) The amount of the credit shall be four per cent of the renovation costs incurred during the taxable year for each commercial building located in Hawaii, and shall not include the renovation costs for which another credit was claimed under this chapter for the taxable year.

(c) In the case of a partnership, S corporation, estate, trust, or any developer of a commercial building, the tax credit allowable is for renovation 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 pursuant to section 235-110.7(a).

(d) If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the renovation cost for which the deduction is taken.

(e) The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income.

(f) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year.

(g) If the tax credit under this section exceeds the taxpayer’s income tax liability, the excess of credit over liability shall be carried forward until exhausted.

(h) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2000, and shall not be available for taxable years beginning after December 31, 2010.

(i) As used in this section:

"Net income tax liability" means income tax liability reduced by all other credits allowed under this chapter.

"Renovation costs" means costs incurred after December 31, 2000, to plan, design, install, construct, and purchase equipment to provide the commercial building with technology-enabled infrastructure.

"Technology-enabled infrastructure" means:

(1) High speed telecommunications systems that provide internet access, direct satellite communications access, and videoconferencing facilities;

(2) Physical security systems that identify and verify valid entry to secure spaces, detect invalid entry or entry attempts, and monitor activity in these spaces;

(3) Environmental systems to include heating, ventilation, air conditioning, fire detection and suppression, and other life safety systems; and

(4) Backup and emergency electric power systems.

(j) No taxpayer that claims a credit under this section shall claim a credit under chapter 235D."

SECTION 3. Chapter 237, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:

"§237-   Exemption for internet service providers. (a) This chapter shall not apply to the gross income or gross proceeds derived from the provision of internet access. For purposes of this section:

"Internet" means the same as under section 231-8.6.

"Internet access" means a service or license that enables users to access content, information, electronic mail, or other services or licenses offered over the internet, and may also include access to proprietary content, information, and other services or licenses as part of a package of services or licenses offered to users.

(b) This section shall apply to gross income or gross proceeds received after June 30, 2001.

§237- Exemption for qualified high technology office building. (a) All gross income received by any person for the planning, design, and construction of a qualified high technology office building shall be exempt from the general excise tax.

(b) As used in this section:

"Qualified high technology office building" means an office building that has been certified as provided in subsection (c) and that has:

(1) High speed telecommunications systems that provide

internet access, direct satellite communications

access, and videoconferencing facilities;

(2) Physical security systems that identify and verify valid entry to secure spaces, detect invalid entry or entry attempts, and monitor activity in these spaces;

(3) Environmental systems to include ventilation, air conditioning, fire detection and suppression, and other life safety systems;

(4) Backup and emergency electric power systems;

(5) At least twenty-five thousand square feet of floor space at each floor level;

(6) Column spans of at least thirty feet;

(7) Floor heights of at least fourteen feet;

(8) Floor load capacity of at least one hundred pounds per square feet;

(9) Electrical power averaging at least seven and-a-half watts per useable square feet of tenant space;

(10) Riser rooms of at least five square feet for each floor;

(11) Air conditioning systems that can accommodate twenty-four-hour usage and be able to offer supplemental air conditioning for data and network rooms; and

(12) Fiber-ready capacity with multiple conduits to accommodate multiple telecommunication carriers.

"Riser rooms" means rooms to accommodate a vertical backbone system of multiple conduits to allow for cabling from multiple carrier companies.

(c) The director of taxation, the director of the department of business, economic development, and tourism, and the special advisor to the governor for technology development shall certify that the building qualifies as a qualified high technology office building based on the plans and designs submitted with respect to the building.

(d) The exemption provided in this section shall be in lieu of any other credit under any chapter or tax exemption or credit under chapter 209E with respect to the planning, design, and construction of the qualified high technology building.

(e) This section shall be operative for gross receipts or gross income received after June 30, 2001, but not after December 31, 2009."

SECTION 4. Chapter 239, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§239-   Exemption for provision of internet access. (a) This chapter shall not apply to the gross income derived from the provision of internet access. For purposes of this section:

"Internet" means the same as under section 231-8.6.

"Internet access" means a service or license that enables users to access content, information, electronic mail, or other services or licenses offered over the internet, and may also include access to proprietary content, information, and other services or licenses as part of a package of services or licenses offered to users.

(b) This section shall apply to gross income received after June 30, 2001."

SECTION 5. Chapter 241, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

§241-   Tax credit for research activities. The tax credit for research activities provided under section 235-110.91 shall be operative for this chapter. This section shall be operative on July 1, 2001, but not after December 31, 2010."

SECTION 6. Chapter 431, Hawaii Revised Statutes, is amended by adding two new sections to article 7 to be appropriately designated and to read as follows:

"§431:7-   Capital goods excise tax credit. The capital goods excise tax credit provided under section 235-110.7 shall be operative for this chapter and may be claimed against the tax imposed under section 431:7-202. This section shall be operative for tangible personal property placed in service after June 30, 2001.

§431:7-   Tax credit for research activities. The tax credit for research activities provided under section 235-110.91 shall be operative for this chapter and may be claimed against the tax imposed under section 431:7-202. This section shall be operative on July 1, 2001, but not after December 31, 2010."

SECTION 7. Section 235-7.3, Hawaii Revised Statutes, is amended to read as follows:

"§235-7.3 Royalties derived from patents, copyrights, or trade secrets excluded from gross income. (a) In addition to the exclusions in section 235-7, there shall be excluded from gross income, adjusted gross income, and taxable income, amounts received by an individual or a qualified high technology business as royalties and other income derived from any patents, copyrights, and trade secrets:

(1) Owned by the individual or qualified high technology business; and

(2) Developed and arising out of a qualified high technology business.

(b) With respect to performing arts products, this exclusion shall extend to:

(1) The authors of performing arts products, or any parts thereof, without regard to the application of the work-for-hire doctrine under U.S. copyright law;

(2) The authors of performing arts products, or any parts thereof, under the work-for-hire doctrine under U.S. copyright law; and

(3) The assignors, licensors, and licensees of any copyright rights in performing arts products, or any parts thereof.

(c) For purposes of this section:

"Performing arts products" means:

(1) Audio files, video files, audiovideo files, computer animation, and other entertainment products perceived by or through the operation of a computer; and

(2) Commercial television and film products for sale or license, and reuse or residual fee payments from these products.

"Qualified high technology business" means a business [conducting:] that conducts more than fifty per cent of its activities in qualified research[. The term "qualified high technology business" does not include:

(1) Any trade or business involving the performance of services in the field of law, architecture, accounting, actuarial science, consulting, athletics, financial services, or brokerage services;

(2) Any banking, insurance, financing, leasing, rental, investing, or similar business; any farming business, including the business of raising or harvesting trees; any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 611 (with respect to allowance of deduction for depletion), 613 (with respect to basis for percentage depletion), or 613A (with respect to limitation on percentage depleting in cases of oil and gas wells) of the Internal Revenue Code;

(3) Any business operating a hotel, motel, restaurant, or similar business; and

(4) Any trade or business involving a hospital, a private office of a licensed health care professional, a group practice of licensed health care professionals, or a nursing home].

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code;

(2) The development and design of computer software using fourth generation or higher software development tools or native programming languages to design and construct unique and specific code to create applications and design databases of sale or license;

(3) Biotechnology; [or]

(4) Performing arts products[.];

(5) Sensor and optic technologies;

(6) Ocean sciences;

(7) Astronomy; or

(8) Nonfossil fuel energy-related technology."

SECTION 8. Section 235-9.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-9.5 Stock options from qualified high technology businesses [exempt] excluded from taxation. (a) Notwithstanding any law to the contrary, all income [received from stock options] earned and proceeds derived from stock options or stock, including stock issued through the exercise of stock options or warrants, from a qualified high technology business or from a holding company of a qualified high technology business by an employee, officer, or director[,] of the qualified high technology business, or investor who qualifies for the credit under section 235-110.9, that would otherwise be taxed as ordinary income or as capital gains to those persons [is exempt] shall be excluded from taxation under this chapter. Income earned and proceeds derived from stock options or stock includes income from:

(1) Dividends from stock or stock received through the exercise of stock options or warrants;

(2) The receipt or the exercise of stock options or warrants; or

(3) The sale of stock options or stock, including stock issued through the exercise of stock options or warrants.

Similar rules shall apply to options to acquire equity interests and to equity interests themselves with regard to entities other than corporations.

(b) For the purposes of this section:

"Holding company of a qualified high technology business" means a corporation or other entity that possesses at least eighty per cent of the total voting power of the stock or other interest in the qualified high technology business and has a value of at least eighty per cent of the total value of the stock or other interest in the qualified high technology business.

"Qualified high technology business" means [a business conducting more than fifty per cent of its activities in qualified research. The term "qualified high technology business" does not include:

(1) Any trade or business involving the performance of services in the field of law, architecture, accounting, actuarial science, consulting, athletics, financial services, or brokerage services;

(2) Any banking, insurance, financing, leasing, rental, investing, or similar business; any farming business, including the business of raising or harvesting trees; any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 611 (with respect to allowance of deduction for depletion), 613 (with respect to basis for percentage depletion), or 613A (with respect to limitation on percentage depleting in cases of oil and gas wells) of the Internal Revenue Code;

(3) Any business operating a hotel, motel, restaurant, or similar business; and

(4) Any trade or business involving a hospital, a private office of a licensed health care professional, a group practice of licensed health care professionals, or a nursing home.

"Qualified research" means:

(1) The same as in section 41(d) of the Internal Revenue Code; or

(2) The development and design of computer software using fourth generation or higher software development tools or native programming languages to design and construct unique and specific code to create applications and design databases for sale or license; or

(3) Biotechnology] the same as under section 235-7.3."

SECTION 9. Section 235-110.7, Hawaii Revised Statutes, is amended by amending subsections (d) and (e) to read as follows:

"(d) Sections 47 (with respect to dispositions of section 38 property and the recapture percentages) of the Internal Revenue of 1954, as amended, as of December 31, 1984, and 280F as operative for this chapter (with respect to limitation on investment tax credit and depreciation for luxury automobiles; limitation where certain property used for personal purposes) of the Internal Revenue Code of 1954, as amended, shall be operative for purposes of this section; provided that there should be no recapture of the credit upon disposition of computer hardware and equipment to a nonprofit educational institution in the State of Hawaii.

(e) As used in this section, the definition of section 38 property (with respect to investment in depreciable tangible personal property) as defined by section 48(a)(1)(A), (a)(1)(B), (a)(3), (a)(4), (a)(7), (a)(8), (a)(10)(A), (b), (c), (f), (l), (m), and (s) of the Internal Revenue Code of 1954, as amended as of December 31, 1984, is operative for the purposes of this section only.

As used in this section:

"Cost" means [(1) the actual invoice price of the tangible personal property, or (2)] the basis from which depreciation is taken under section 167 (with respect to depreciation) or from which a deduction may be taken under section 168 (with respect to accelerated cost recovery system) of the Internal Revenue Code of [1954, as amended, whichever is less.] 1986, as amended, to the extent that such basis was subject to tax at the rate of four per cent under chapter 237 or 238.

"Eligible depreciable tangible personal property" is section 38 property as defined by the operative provisions of section 48 and having a depreciable life under section 167 or for which a deduction may be taken under section 168 of the federal Internal Revenue Code of 1954, as amended.

"Placed in service" means the earliest of the following taxable years:

(1) The taxable year in which, under [the]:

(A) [Taxpayer's] The taxpayer's depreciation practice, the period for depreciation; or

(B) [Accelerated] The accelerated cost recovery system, a claim for recovery allowances;

with respect to such property begins; or

(2) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

"Purchase" means an acquisition of property.

"Tangible personal property" means tangible personal property which is placed in service within Hawaii after December 31, 1987, and the purchase or importation of which resulted in a transaction which was subject to the imposition and payment of tax at the rate of four per cent, except that for the period January 1, 1993, through December 31, 2002, and if the county general excise and use tax surcharge is in effect the tax rate shall be four and one-half per cent, under chapter 237 or 238. "Tangible personal property" does not include tangible personal property which is an integral part of a building or structure or tangible personal property used in a foreign trade zone, as defined under chapter 212. "Tangible personal property" includes computer software."

SECTION 10. Section 235-110.9, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (a) to read:

"(a) There shall be allowed to each taxpayer[,] subject to the taxes imposed by this chapter[,] a high technology 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 [an amount equal to ten per cent] 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 [of $500,000 for the taxable year for the investment made by the taxpayer in a qualified high technology business.] in the year the investment was made, $1,750,000; in the first year following the year in which the investment was made, $1,250,000; in the second year following the year in which the investment was made, $1,000,000; in the third year following the year in which the investment was made, $500,000; and in the fourth year following the year in which the investment was made, $500,000.

If as of the close of any taxable year in the five-year period the qualified high technology business no longer qualifies as such, the taxpayer's tax under this chapter for the taxable year shall be increased by the amount of the tax credit taken in the previous two years; provided that with respect to the year in which the investment was made, the increase in the taxpayer's tax shall not exceed twenty-five per cent of the investment for that year."

2. By amending subsection (c) and (d) to read:

"(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. 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) As used in this section:

"Qualified high technology business" means a business, employing or owning capital or property, or maintaining an office, in this State [that]:

(1) More than fifty per cent of whose total business activities are qualified research; provided 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; provided that the income is received from:

(A) Products sold from, manufactured in, or produced in the State; or

(B) Services performed in this State[.

The term "qualified high technology business" does not include:

(1) Any trade or business involving the performance of services in the field of law, architecture, accounting, actuarial science, consulting, athletics, financial services, or brokerage services;

(2) Any banking, insurance, financing, leasing, rental, investing, or similar business; any farming business, including the business of raising or harvesting trees; any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 611 (with respect to allowance of deduction for depletion), 613 (with respect to basis for percentage depletion), or 613A (with respect to limitation on percentage depleting in cases of oil and gas wells) of the Internal Revenue Code;

(3) Any business operating a hotel, motel, restaurant, or similar business; and

(4) Any trade or business involving a hospital, a private office of a licensed health care professional, a group practice of licensed health care professionals, or a nursing home.]; or

(3) That provides incubator services as defined under section 235-7.3.

"Qualified research" means[:

(1) The same as in section 41(d) of the Internal Revenue Code;

(2) The development and design of computer software using fourth generation or higher software development tools or native programming languages to design and construct unique and specific code to create applications and design databases for sale or license; or

(3) Biotechnology.] the same as under section 235-7.3."

SECTION 11. Section 235-110.91, Hawaii Revised Statutes, is amended as follows:

1. By amending the title and subsection (a) to read:

"§235-110.91 Tax credit for [increasing] 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, 2006, its provisions shall remain in effect for purposes of the income tax law of the State as provided for in subsection (h)."

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

"(c) There shall be allowed to each taxpayer, subject to the tax imposed by this chapter, an income tax credit for [increased] 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.

(d) As used in this section:

"Qualified research" [under section 41(d)(1) of the Internal Revenue Code] means the same as under section 235-7.3, or for any use which qualifies under section 41(d) of the Internal Revenue Code, but shall not include research conducted outside of the State.

"Basic research" under section 41(e) of the Internal Revenue Code shall not include research conducted outside of the State.

(e) If the tax credit for [increased] 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."

3. By amending subsection (h) to read:

"(h) This section shall [not] apply to taxable years beginning after December 31, [2005.] 2000, but not after December 31, 2010."

SECTION 12. Section 237-23.5, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) This chapter shall not apply to amounts received, charged, or attributable to services furnished by one related entity to another related entity or to imputed or stated interest attributable to loans, advances, or use of capital between related entities.

As used in this subsection:

"Related entities" means:

(1) An affiliated group of corporations within the meaning of section 1504 (with respect to affiliated group defined) of the federal Internal Revenue Code of 1986, as amended;

(2) A controlled group of corporations within the meaning of section 1563 (with respect to definitions and special rules) of the federal Internal Revenue Code of 1986, as amended;

(3) Those entities connected through ownership of at least eighty per cent of the total value and at least eighty per cent of the total voting power of each such entity (or combination thereof), including partnerships, associations, trusts, S corporations, nonprofit corporations, limited liability partnerships, or limited liability companies; and

(4) Any group or combination of the entities described in paragraph (3) constituting a unitary business for income tax purposes;

whether or not the entity is located within or without the State or licensed under this chapter.

"Services" means legal and accounting services, the use of computer software and hardware, information technology services, database management, and those managerial and administrative services performed by an employee, officer, partner, trustee, sole proprietor, member, or manager in the person’s capacity as an employee, officer, partner, trustee, sole proprietor, member, or manager of one of the related entities and shall include overhead costs attributable to those services."

SECTION 13. It is the intention of the legislature that these amendments be liberally construed. The department of taxation is further given latitude to interpret these amendments in light of industry developments. The legislature does not intend by these amendments to opine on the interpretation taken by any taxpayer or the department of taxation on any issue arising under prior law.

SECTION 14. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 15. This Act shall take effect on July 1, 2010; provided that:

(1) Sections 7 and 8 shall apply to taxable years beginning after December 31, 2000;

(2) Section 9 shall apply to tangible personal property placed in service after June 30, 2001;

(3) Section 10 shall apply to taxable years beginning after December 31, 2000, but shall not apply to taxable years after December 31, 2005; provided that a taxpayer may continue to claim the credits if the five-year period to claim the credits commences in taxable years beginning before January 1, 2006; and

(4) Section 12 shall apply to gross income or gross proceeds received after June 30, 2001.