Report Title:

Motion Picture, Digital Media, and Film Production Tax Credit

Description:

Increases the existing 4% tax credit on Hawaii production expenditures up to 15% for productions on Oahu and 20% for productions on the Neighbor Islands. Expands the definition of qualified productions to include commercials and digital media productions. Prohibits qualification for both the production expenditure tax credit and the investment tax credit. Caps claims at $8,000,000 per production. (SD1)

HOUSE OF REPRESENTATIVES

H.B. NO.

1590

TWENTY-THIRD LEGISLATURE, 2005

H.D. 2

STATE OF HAWAII

S.D. 1


 

A BILL FOR AN ACT

 

RELATING TO the Hawaii film and digital media industry.

 

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

SECTION 1. The legislature finds that, although Hawaii has recently experienced a resurgence in the digital media, television, and film industry production, it could attract many more projects and, consequently, more revenue for the State. Although the level of production expenditures in 2004 is estimated to be $146,000,000, this increase results from just three Hawaii-based network television series that were produced in Hawaii.

Having more productions take place in Hawaii would bring more direct and indirect tax revenue to the State. Currently, approximately $13,000,000 in direct tax revenues are generated by the $100,000,000 per year spent on production. If annual production expenditures increased to $300,000,000, the State would gain over $39,000,000 in direct and indirect tax revenues.

Unfortunately, Hawaii is still a more expensive place to film due to the cost of shipping necessary equipment to and from the mainland, cost of housing and per diem for mainland cast and crew, and an overall higher cost of living in the islands. The expense of filming in Hawaii affects the State's ability to compete with other locations. Countries such as Canada, Australia, and New Zealand have the benefit of favorable monetary exchange rates as well as the resources of an entire country to support their industry and, as such, offer very attractive incentives to producers.

The legislature further finds that there has been a dramatic increase in the number of jurisdictions passing legislation to attract film productions through tax credits and other financial incentives. In the past six months alone, New York, Pennsylvania, and South Carolina have passed legislation establishing production expenditure tax credits. These states join a substantial list of other regions that already have production expenditure tax credits in place, such as Florida, Illinois, Louisiana, Missouri, New Mexico, Oklahoma, Canada, and Australia. Recognizing the significant economic impact and benefit to the local workforce generated by such incentives, these states offer tax credits and wage rebates equal to ten to fifty per cent of production expenditures.

One successful example of such an incentive is New Mexico's fifteen per cent production expenditure tax credit and fifty per cent wage reimbursement program. Since the credit took effect in 2003, there has been nearly a ten-fold increase in the number of productions as well as the level of production expenditure in the state (from one film spending $8,800,000 to ten films spending $79,100,000). In fact, Hawaii lost Adam Sandler's upcoming film, "The Longest Yard" to New Mexico because of its inability to compete on incentives. In Santa Fe, where the bulk of the shooting took place, four hundred fifty crewmembers rented two hundred cars and three hundred hotel rooms for ninety days. These crewmembers also frequented local stores and restaurants. More importantly, the production created jobs and training for local New Mexican film workers.

Attracting more productions to Hawaii also brings significant benefits to tourism. Production companies utilize an existing visitor industry infrastructure to support and run their productions by booking hotel rooms, renting cars, and purchasing airfare. Cast and crewmembers brought over from the mainland United States are ideal tourists in that they stay for a longer period of time and tend to spend more money. They shop at local stores, dine at local restaurants, visit local attractions, and often bring their families. Their stays in Hawaii help to offset low visitor counts, as evidenced by the post-September 11, 2001 period when significant numbers of production personnel filled otherwise vacant hotel rooms.

The State also gains exposure and "free" advertising each time a production featuring Hawaii or Hawaiian scenery is broadcast or shown. As an example, one minute of advertising on network television can cost an average of $250,000. If ten minutes out of two network television shows filmed in Hawaii qualified as positive "promotional" airtime, then the State receives the benefit of over $5,000,000 in "free" advertising each week. In the same way that "Miami Vice" drew a substantial number of tourists to Miami, films and television shows that showcase Hawaii have the potential to increase Hawaiian tourism.

The legislature also recognizes that Hawaii has a uniquely talented performing arts community that produces rich, unique, and diverse music forms. While Hawaiian and world music continue to enjoy increased popularity throughout the United States and elsewhere, the legislature finds that Hawaii's performing artists and music industry are an underutilized asset. Hawaii's Mountain Apple Company recording executives have pointed to the fact that over thirty-five of the one hundred most popular international downloads from Apple's I-Tunes site in 2003 were by Hawaiian musical recording artists. To increase economic activity in the State, increase the visibility of Hawaii's talented musicians, and preserve and protect Hawaii's cultural treasures, the legislature finds that the Hawaii recording industry should be included in all tax incentive packages for the performing arts industry.

The purpose of this Act is to diversify Hawaii's economy by expanding the State's current tax incentive packages for motion picture, television, and film production to include digital media and sound recording to keep pace with national and international competition and to support and build the local workforce and infrastructure needed to grow Hawaii's digital media industry.

SECTION 2. Section 235-110.9, Hawaii Revised Statutes, is amended by adding a new definition to be appropriately inserted and to read as follows:

""Performing arts products" means:

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

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

(3) Commercials; and

(4) Sound recordings."

SECTION 3. Section 235-7.3, Hawaii Revised Statutes, is amended by amending subsection (c) to read as follows:

"(c) For the purposes of this section:

"Performing arts products" means:

(1) Audio files, video files, audiovideo files, computer animation, and other digital media 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 that conducts more than fifty per cent of its activities in qualified research.

"Qualified research" means:

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

(2) The development and design of computer software for ultimate commercial sale, lease, license or to be otherwise marketed, for economic consideration. With respect to the software's development and design, the business shall have substantial control and retain substantial rights to the resulting intellectual property;

(3) Biotechnology;

(4) Performing arts products;

(5) Sensor and optic technologies;

(6) Ocean sciences;

(7) Astronomy; or

(8) Nonfossil fuel energy-related technology."

SECTION 4. Section 235-17, Hawaii Revised Statutes, is amended to read as follows:

"§235-17 Motion picture [and film], television, and digital media production[;] expenditure income tax credit. (a) [There] 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 [up to four] fifteen per cent of the qualified production costs incurred in any county of the State [in the production of motion picture or television films. The director of taxation shall specify by rule a schedule of allowable tax credits based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.] with a population over seven hundred thousand or twenty per cent of the qualified production costs incurred in any county of the State with a population of seven hundred thousand or less. A production occurring in more than one county may prorate its expenditures based on the amounts spent in each county, if the population bases differ enough to change the percentage of tax credit due.

In addition to the tax credit of fifteen or twenty per cent provided in this section, as the case may be, a taxpayer whose production is deemed a qualified production may also receive a wage reimbursement tax credit for         per cent of the wages paid to below the line hires who are Hawaii residents.

In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for qualified production 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 the tax credit shall be determined by rule.

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 tax credit allowable and claimed.

[(b) 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 up to 7.25 per cent effective January 1, 1999, of the costs incurred in the State in the production of motion picture or television films for actual expenditures for transient accommodations. The director of taxation shall specify by rule a schedule of allowable tax credits based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.

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

(c)] (b) The tax 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.

[(d)] (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 tax credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the tax credit.

(d) To qualify for the income tax credit established under this section, a production shall be in compliance with all applicable federal, state, and county statutes, ordinances, rules, and regulations and:

(1) Satisfy the definition of a qualified production as specified in subsection (j);

(2) For a motion picture, film, or other digital media production, spend a minimum of $200,000 in the State;

(3) For a sound recording production, spend a minimum of $20,000 in the State;

(4) Provide the State, at a minimum, a shared-card, end-title credit;

(5) Provide evidence of financial or in-kind contributions or educational or workforce development efforts in partnership with related local industry labor organizations or educational institutions, or both, toward the furtherance of the local film and television and digital media industries;

(6) Keep accurate records of all below the line hires who are Hawaii residents whose wages may qualify for the wage reimbursement tax credit available under subsection (a);

(7) Require any wages attributable to minimum cost thresholds for which the wage reimbursement tax credit available under subsection (a) does not apply to have Hawaii income tax withheld; provided that the wage and tax information is subject to verification by the department of taxation; and

(8) In a given tax year, the taxpayer shall not have received financing for the production for which the tax credit under this section is being claimed by virtue of investments provided in section 235-110.9.

(e) To receive the income tax credit, the taxpayer shall first pre-qualify the production for the tax credit by registering with the Hawaii film office, and by consulting with the respective local labor industry organizations, during the development or pre-production stage. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the tax credit.

[(e)] (f) The director of taxation shall prepare forms as may be necessary to claim a tax credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claim for a tax credit made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91.

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

(1) All costs qualifying under 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 by category (i.e., department) and by county.

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

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

(2) Obtain and total the amounts of all qualified production costs and expenditures; and

(3) Provide a letter to the director of taxation specifying the amount of the tax credit for each taxable year and the cumulative amount of the tax credit.

Upon each determination, the department of business, economic development, and tourism shall issue a letter to the taxpayer for the qualified production specifying the qualifying costs or expenditure amounts and the tax credit amount qualified for each taxable year. The taxpayer for the qualified production shall file the letter with the taxpayer's tax return for the qualified production with the department of taxation. Notwithstanding the department of business, economic development, and tourism's authority under this section, the director of taxation may audit and adjust the tax credit amount to conform to the facts.

(i) Total claims per qualified production shall not exceed $8,000,000. For the purposes of subsection (d) and this subsection, each category of qualified production, as delineated in the definition of that term in subsection (j), shall constitute a separate, individual qualified production. Qualified productions shall be in compliance with subsections (d), (e), and (g).

(j) For the purposes of this section:

"Below-the-line hires" means cast and crew including production, art construction, set dressing, props, camera, sound, stage and studio, electrical, grip, wardrobe, makeup, special effects, laboratory and film, food transportation, locations, editorial and other hires based on industry standard practice.

"Commercials" means advertising messages that are filmed or photographed using film, videotape, or digital media, for dissemination via television broadcast, theatrical distribution, or print media. Advertising messages with Internet-only distribution do not qualify as commercials. A series of advertising messages would qualify as a commercial if all parts are produced at the same time over the course of six weeks.

"Digital media" means production methods and platforms directly related to the creation of cinematic imagery and content specifically utilizing 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 the Internet-only delivery). For the purposes of subsection (d)(3), the term also includes a sound recording that is a commercially and technically satisfactory master recording that results from the fixation of a series of musical, spoken, or other sounds, but not including the sounds accompanying a motion picture or other audio visual work, regardless of the nature of the material objects, such as disks, tapes, or other phonorecords, in which they are embodied.

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

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

"Qualified production" means a production that makes expenditures in the State, and is therefore a Hawaii taxpayer subject to State of Hawaii general excise tax or income tax, for the total or partial production of a feature-length motion picture, short film, made-for-television movie, commercial, music video, sound recording, print advertisement, interactive game, television series pilot, television series up to twenty-two episodes (if the number of episodes per season exceeds twenty-two, additional episodes for the same season shall constitute a separate "qualified production"), television special, or single television episode, provided that it is not part of a television series regularly filmed or based in the State. Ineligible productions are: news programs produced for broadcast on a daily basis; 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 defined in chapter 712-1210.

"Qualified production costs" means the costs incurred by a qualified production within the State that are subject to State of Hawaii general excise tax or income tax and that have not been nor will not be financed by virtue of investments covered in section 235-110.9.

Costs eligible for consideration as "qualified production costs" include but are not limited to:

(1) Costs incurred during pre-production such as location scouting and related services;

(2) Costs of set construction and operations; purchases or rentals of wardrobe, props, and accessories; 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 of local facilities (including location fees) and equipment;

(7) Leasing of vehicles, food, or lodging;

(8) Airfare for flights to or from Hawaii as well as flights between the islands of the State;

(9) Insurance and bonding;

(10) Shipping of equipment and supplies to or from Hawaii and between the islands of the State;

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

SECTION 5. Section 235-110.9, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (e) to read as follows:

"(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.

With respect to businesses claiming the tax credit established under this section that produce performing arts products, the taxpayer shall also provide proof to the director of taxation of the business' educational or in-kind support of Hawaii secondary or post-secondary school performing arts programs, the employment of Hawaii residents, and the use of facilities in the State in the production of the business' qualifying performing arts product."

2. By amending subsection (g) to read as follows:

"(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]:

(A) 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] (B) Seventy-five per cent of its gross income is derived from qualified research; and provided further that this income is received from:

[(A)] (i) Products sold from, manufactured in, or produced in this State; or

[(B)] (ii) Services performed in this State[.]; and

(2) With respect to businesses claiming the tax credit established under this section that produce performing arts products, the taxpayer provides educational or in-kind support of Hawaii secondary or post-secondary school performing arts programs, the employment of Hawaii residents, and the use of facilities in the State in the production of the business' qualifying performing arts product.

"Qualified research" means the same as defined in section 235-7.3."

SECTION 6. The department of business, economic development, and tourism, in consultation with the department of taxation and the county film offices, shall develop an appropriate revenue generation and economic benefit model to determine the economic impact of the enhanced film and digital media tax credits established under this Act.

The department of business, economic development, and tourism shall submit a report to the legislature not later than twenty days prior to the convening of the 2006 regular session that contains the revenue generation and economic benefit model and the projected estimates derived from the model with respect to film or digital media production expenditures and state revenues that were lost or gained in the 2005 calendar year due to the enhanced tax credits established under this Act.

Upon the adjournment sine die of the 2006 regular session of the legislature, the department of business, economic development, and tourism shall annually thereafter submit a report containing the film and digital media production expenditure, revenue projection, and revenue realization information to the legislature not later than twenty days prior to the convening of each regular session until the 2011 regular session. Upon the submission of the report required under this section for the 2011 regular session, the reporting requirement under this section shall be repealed.

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, 2050; provided that:

(1) The amendments to the Hawaii Revised Statutes contained in sections 2, 3, and 4 of this Act shall apply to qualified production costs incurred after December 31, 2004;

(2) The amendments to section 235-110.9, Hawaii Revised Statutes, contained in section 5 of this Act shall apply to taxable years occurring after December 31, 2005; and

(3) This Act shall not apply to taxable years beginning after December 31, 2010.