REPORT TITLE:
New Economy


DESCRIPTION:
Allows qualified high technology businesses to sell their unused
net operating loss carryover to any other taxpayer.  Expands the
income tax exclusion for royalties and other income from high
technology businesses.  Allows partnership investors the
flexibility of allocating the high technology business investment
tax credit among partners without regard to their proportionate
interests in their partnership investment vehicle.  Makes the
high-technology business investment tax credit and the tax credit
for increasing research activities refundable to the taxpayer or
allowing the credits to be used against the taxpayer's income tax
liability in subsequent years until exhausted.  Conforms the
state tax credit for increasing research activities with the
federal tax credit.  Allows the board of trustees of the
employees' retirement system (ERS) to invest ten percent of ERS
funds in qualified high technology businesses.  Appropriates
funds for education, workforce development, and University of
Hawaii research and training.  Promotes Hawaii, through a
coordinated statewide effort, as an Internet and server-friendly
place to conduct electronic commerce, including entering into
appropriate public-private sector business partnerships.  Creates
the maka`ainana technology program for small individual
investors.  (SD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2901
HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 2
TWENTIETH LEGISLATURE, 2000                                S.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO THE NEW ECONOMY.


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

 1      SECTION 1.  The "New Economy" is an economy based on
 
 2 knowledge and ideas.  It is an economy where the keys to job
 
 3 creation and higher standards of living are innovative ideas and
 
 4 technology embedded in services and manufactured products.  It is
 
 5 an economy where risk, uncertainty, and constant change are the
 
 6 rule rather than the exception.  It is an economy in a world of
 
 7 innovation where there is rapid convergence of technology,
 
 8 telecommunications, and media.  As a result, partnerships, such
 
 9 as MSNBC and AOL-Time Warner, become staples of this rapidly
 
10 moving industry.
 
11      Hawaii is competing in this New Economy.  Hawaii offers
 
12 great advantages not available in other areas of the world:
 
13 unparalleled quality of life, rich and diverse cultures, and an
 
14 educated populace.  In 1999, the twentieth legislature, the
 
15 educational system, and the administration partnered to
 
16 demonstrate their commitment of support for an aggressive
 
17 development of high technology resources.  Act 178, Session Laws
 
18 of Hawaii 1999, called for the integration of technology with
 
19 some of Hawaii's industries, the increase of technology
 
20 professionals through work force development programs, and the
 

 
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 1 creation of economic incentives for businesses to increase high
 
 2 technology research activities.
 
 3      Since geographic location and isolation are no longer
 
 4 detrimental factors when competing in a global market, the
 
 5 legislature believes that it must continue the effort started in
 
 6 1999.  The purpose of this Act is to encourage the continued
 
 7 growth and development of high technology businesses and
 
 8 associate industries relying on these in Hawaii by:
 
 9      (1)  Clarifying tax credits to encourage research and
 
10           development for intellectual properties;
 
11      (2)  Providing for the continued funding for Act 178,
 
12           Session Laws of Hawaii 1999;
 
13      (3)  Creating partnerships with the tourist industry to
 
14           market and promote Hawaii's emerging technology
 
15           industries and Hawaii as an ideal location to conduct
 
16           e-business; and
 
17      (4)  Effectively developing the growth indicators of the New
 
18           Economy.
 
19                       PART I.  INCOME TAXES
 
20      SECTION 2.  The purpose of this Part is to:
 
21      (1)  Allow qualified high technology businesses to sell
 
22           their unused net operating loss carryover to any other
 
23           taxpayer;
 

 
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 1      (2)  Amend the high technology-related definitions in the
 
 2           income tax law by:
 
 3           (A)  Consolidating all of the high-technology
 
 4                definitions in chapter 235, Hawaii Revised
 
 5                Statutes, into section 235-1, Hawaii Revised
 
 6                Statutes;
 
 7           (B)  Repealing the corresponding definitions from the
 
 8                high technology tax credit sections;
 
 9           (C)  Adding new definitions of "computer data" and
 
10                computer program"; and
 
11           (D)  Amending the definition of "qualified high
 
12                technology business" to mean a business that
 
13                conducts a majority, rather than one hundred per
 
14                cent, of its activities in performing qualified
 
15                research in Hawaii, or receives a majority, rather
 
16                than one hundred per cent, of its gross income
 
17                derived from qualified research;
 
18      (3)  Amend the income tax exclusion for royalties and other
 
19           income from high technology businesses established by
 
20           section 22 of Act 178, Session Laws of Hawaii 1999, by
 
21           expanding that exclusion to include royalties derived
 
22           from any patent, copyright, or trade secret for any
 
23           individual or other person who owns the patent or
 

 
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 1           copyright;
 
 2      (4)  Amend the section relating to operation of certain
 
 3           Internal Revenue Code provisions to allow partnership
 
 4           investors the flexibility of allocating the high
 
 5           technology business investment tax credit in section
 
 6           235-110.9, Hawaii Revised Statutes, among partners
 
 7           without regard to their proportionate interests in
 
 8           their partnership investment vehicle;
 
 9      (5)  Amend the high-technology business investment tax
 
10           credit under section 235-110.9, Hawaii Revised
 
11           Statutes, and the tax credit for increasing research
 
12           activities under section 235-110.91, Hawaii Revised
 
13           Statutes, by making the credit refundable to the
 
14           taxpayer in addition to allowing the credit to be used
 
15           against the taxpayer's income tax liability in
 
16           subsequent years until exhausted; and
 
17      (6)  Conform the tax credit for increasing research
 
18           activities under section 235-110.91, Hawaii Revised
 
19           Statutes, to that provided under the Internal Revenue
 
20           Code, thereby increasing the tax credit from 2.5 per
 
21           cent to twenty per cent to match the federal rate.
 
22      SECTION 3.  Chapter 235, Hawaii Revised Statutes, is amended
 
23 by adding a new section to be appropriately designated and to
 

 
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 1 read as follows:
 
 2      "235-    High technology; sale of unused net operating loss
 
 3 carryover.  (a)  A qualified high technology business as defined
 
 4 in section 235-1 may apply to the department of taxation to sell
 
 5 its unused net operating loss carryover to another taxpayer.  If
 
 6 approved by the department of taxation, a qualified high
 
 7 technology business may sell its unused net operating loss
 
 8 carryover to another taxpayer in an amount equal to at least
 
 9 seventy-five per cent of the dollar value of the net operating
 
10 loss carryover.  The net operating loss carryover purchased by
 
11 the buyer shall be claimed in the year the sale is approved by
 
12 the department.  Any use of the purchased net operating loss
 
13 carryover for tax carryback or carryforward purposes shall comply
 
14 with applicable law.  The income from the sale of the net
 
15 operating loss carryover received by the seller qualified high
 
16 technology business shall be reported on its tax return in the
 
17 taxable year received but shall not be considered taxable income.
 
18 The total amount of unused net operating losses sold annually
 
19 pursuant to this section shall not exceed $          .
 
20      (b)  No application for the sale of unused net operating
 
21 losses shall be approved if the seller is a qualified high
 
22 technology business that:
 
23      (1)  Has demonstrated positive net income in any of the two
 

 
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 1           previous full years of ongoing operations as determined
 
 2           on its financial statements;
 
 3      (2)  Has demonstrated a ratio in excess of one hundred ten
 
 4           per cent or greater of operating revenues divided by
 
 5           operating expenses in any of the two previous full
 
 6           years of operations as determined on its financial
 
 7           statements; or
 
 8      (3)  Is directly or indirectly at least fifty per cent owned
 
 9           or controlled by another corporation that has
 
10           demonstrated positive net income in any of the two
 
11           previous full years of ongoing operations as determined
 
12           on its financial statements or is part of a
 
13           consolidated group of affiliate corporations, as filed
 
14           for federal income tax purposes, that in the aggregate
 
15           has demonstrated positive net income in any of the two
 
16           previous full years of ongoing operations as determined
 
17           on its combined financial statements.
 
18      (c)  The department of taxation shall adopt rules pursuant
 
19 to chapter 91 to implement this section, which shall include the
 
20 following:
 
21      (1)  Procedure and criteria for the approval or disapproval
 
22           of applications filed by qualified high technology
 
23           businesses selling unused net operating losses; and
 

 
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 1      (2)  Criteria to provide for the equitable apportionment of
 
 2           qualified sales allowed annually under this section to
 
 3           eligible applicants."
 
 4      SECTION 4.  Section 235-1, Hawaii Revised Statutes, is
 
 5 amended by adding six new definitions to be appropriately
 
 6 inserted and to read as follows:
 
 7      ""Computer data" means any representation of information,
 
 8 knowledge, facts, concepts, or instructions that is being
 
 9 prepared or has been prepared and is intended to be processed, is
 
10 being processed, or has been processed in a computer or computer
 
11 network.  "Computer data" includes works in the performing arts
 
12 such as audio files, video files, audiovisual files, computer
 
13 animation, and other entertainment products that are perceived by
 
14 or through the operation of a computer.
 
15      "Computer program" means an ordered set of computer data
 
16 representing coded instructions or statements, that, when
 
17 executed by a computer, causes the computer to perform one or
 
18 more computer operations.
 
19      "Computer software" means computer data, a computer program,
 
20 or a set of computer programs, procedures, or associated
 
21 documentation concerned with the operation and function of a
 
22 computer system, and includes both systems and application
 
23 programs and subdivisions, such as assemblers, compilers,
 

 
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 1 routines, generators, and utility programs.
 
 2      "Investment" means a nonrefundable investment, at risk, as
 
 3 that term is used in section 465 (with respect to deductions
 
 4 limited to amount at risk) of the Internal Revenue Code, in a
 
 5 qualified high technology business, of cash that is transferred
 
 6 to the qualified high technology business, the transfer of which
 
 7 is in connection with a transaction in exchange for stock,
 
 8 interests in partnerships, joint ventures, or other entities,
 
 9 licenses (exclusive or nonexclusive), rights to use technology,
 
10 marketing rights, warrants, options, or any items similar to
 
11 those included in this definition, including but not limited to
 
12 options or rights to acquire any of the items included in this
 
13 definition.  The nonrefundable investment is entirely at risk of
 
14 loss where repayment depends upon the success of the qualified
 
15 high technology business.  If the money invested is to be repaid
 
16 to the taxpayer, no repayment except for dividends or interest
 
17 shall be made for at least three years from the date the
 
18 investment is made.  The annual amount of any dividend and
 
19 interest payment to the taxpayer shall not exceed twelve per cent
 
20 of the amount of the investment.
 
21      "Qualified high technology business" means a business,
 
22 employing or owning capital or property, or maintaining an
 
23 office, in this State that:
 

 
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 1      (1)  Conducts a majority of its activities in performing
 
 2           qualified research in this State; or
 
 3      (2)  Receives a majority of its gross income derived from
 
 4           qualified research; provided that the income is
 
 5           received from:
 
 6           (A)  Products sold from, manufactured in, or produced
 
 7                in the State; or
 
 8           (B)  Services performed in this State.
 
 9      The term "qualified high technology business" does not
 
10 include:
 
11      (1)  Any trade or business involving the performance of
 
12           services in the field of law, architecture, accounting,
 
13           actuarial science, consulting, athletics, financial
 
14           services, or brokerage services;
 
15      (2)  Any banking, insurance, financing, leasing, rental,
 
16           investing, or similar business; any farming business,
 
17           including the business of raising or harvesting trees;
 
18           any business involving the production or extraction of
 
19           products of a character with respect to which a
 
20           deduction is allowable under section 611 (with respect
 
21           to allowance of deduction for depletion), 613 (with
 
22           respect to basis for percentage depletion), or 613A
 
23           (with respect to limitation on percentage depleting in
 

 
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 1           cases of oil and gas wells) of the Internal Revenue
 
 2           Code;
 
 3      (3)  Any business operating a hotel, motel, restaurant, or
 
 4           similar business; and
 
 5      (4)  Any trade or business involving a hospital, a private
 
 6           office of a licensed health care professional, a group
 
 7           practice of licensed health care professionals, or a
 
 8           nursing home.
 
 9      "Qualified research" means:
 
10      (1)  The same as in section 41(d) of the Internal Revenue
 
11           Code; or
 
12      (2)  Developing, designing, modifying, programming, and
 
13           licensing computer software;
 
14 except that it shall not include research conducted outside the
 
15 State."
 
16      SECTION 5.  Section 235-2.4, Hawaii Revised Statutes, is
 
17 amended to read as follows:
 
18      "235-2.4  Operation of certain Internal Revenue Code
 
19 provisions[.]; sections 63 to 530.  (a)  Section 63 (with respect
 
20 to taxable income defined) of the Internal Revenue Code shall be
 
21 operative for the purposes of this chapter, except that the
 
22 standard deduction amount in section 63(c) of the Internal
 
23 Revenue Code shall instead mean:
 

 
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 1      (1)  $1,900 in the case of:
 
 2           (A)  A joint return as provided by section 235-93; or
 
 3           (B)  A surviving spouse (as defined in section 2(a) of
 
 4                the Internal Revenue Code);
 
 5      (2)  $1,650 in the case of a head of household (as defined
 
 6           in section 2(b) of the Internal Revenue Code);
 
 7      (3)  $1,500 in the case of an individual who is not married
 
 8           and who is not a surviving spouse or head of household;
 
 9           or
 
10      (4)  $950 in the case of a married individual filing a
 
11           separate return.
 
12      Section 63(c)(4) shall not be operative in this State.
 
13 Section 63(c)(5) shall be operative, except that the limitation
 
14 on basic standard deduction in the case of certain dependents
 
15 shall be the greater of $500 or such individual's earned income.
 
16 Section 63(f) shall not be operative in this State.
 
17      The standard deduction amount for nonresidents shall be
 
18 calculated pursuant to section 235-5.
 
19      (b)  Section 72 (with respect to annuities; certain proceeds
 
20 of endowment and life insurance contracts) of the Internal
 
21 Revenue Code shall be operative for purposes of this chapter and
 
22 be interpreted with due regard to section 235-7(a), except that
 
23 the ten per cent additional tax on early distributions from
 

 
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 1 retirement plans in section 72(t) shall not be operative for
 
 2 purposes of this chapter.
 
 3      (c)  Section 121 (with respect to exclusion of gain from
 
 4 sale of principal residence) of the Internal Revenue Code shall
 
 5 be operative for purposes of this chapter, except that for the
 
 6 election under section 121(f), a reference to section 1034
 
 7 treatment means a reference to section 235-2.4(n) in effect for
 
 8 taxable year 1997.
 
 9      (d)  Section 219 (with respect to retirement savings) of the
 
10 Internal Revenue Code shall be operative for the purpose of this
 
11 chapter.  For the purpose of computing the limitation on the
 
12 deduction for active participants in certain pension plans for
 
13 state income tax purposes, adjusted gross income as used in
 
14 section 219 as operative for this chapter means federal adjusted
 
15 gross income.
 
16      (e)  Section 220 (with respect to medical savings accounts)
 
17 of the Internal Revenue Code shall be operative for the purpose
 
18 of this chapter, but only with respect to medical services
 
19 accounts that have been approved by the Secretary of the Treasury
 
20 of the United States.
 
21      (f)  Section 408A (with respect to Roth Individual
 
22 Retirement Accounts) of the Internal Revenue Code shall be
 
23 operative for the purposes of this chapter.  For the purposes of
 

 
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 1 determining the aggregate amount of contributions to a Roth
 
 2 Individual Retirement Account or qualified rollover contribution
 
 3 to a Roth Individual Retirement Account from an individual
 
 4 retirement plan other than a Roth Individual Retirement Account,
 
 5 adjusted gross income as used in section 408A as operative for
 
 6 this chapter means federal adjusted gross income.
 
 7      (g)  In administering the provisions of sections 410 to 417
 
 8 (with respect to special rules relating to pensions, profit
 
 9 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
10 respect to special rules for multiemployer plans), and sections
 
11 419 and 419A (with respect to treatment of welfare benefit funds)
 
12 of the Internal Revenue Code, the department of taxation shall
 
13 adopt rules under chapter 91 relating to the specific
 
14 requirements under such sections and to such other administrative
 
15 requirements under those sections as may be necessary for the
 
16 efficient administration of sections 410 to 419A.
 
17      In administering sections 401 to 419A (with respect to
 
18 deferred compensation) of the Internal Revenue Code, Public Law
 
19 93-406, section 1017(i), shall be operative for the purposes of
 
20 this chapter.
 
21      In administering section 402 (with respect to the taxability
 
22 of beneficiary of employees' trust) of the Internal Revenue Code,
 
23 the tax imposed on lump sum distributions by section 402(e) of
 

 
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 1 the Internal Revenue Code shall be operative for the purposes of
 
 2 this chapter and the tax imposed therein is hereby imposed by
 
 3 this chapter at the rate determined under this chapter.
 
 4      (h)  Section 468B (with respect to special rules for
 
 5 designated settlement funds) of the Internal Revenue Code shall
 
 6 be operative for the purposes of this chapter and the tax imposed
 
 7 therein is hereby imposed by this chapter at a rate equal to the
 
 8 maximum rate in effect for the taxable year imposed on estates
 
 9 and trusts under section 235-51.
 
10      (i)  Section 469 (with respect to passive activities and
 
11 credits limited) of the Internal Revenue Code shall be operative
 
12 for the purposes of this chapter.  For the purpose of computing
 
13 the offset for rental real estate activities for state income tax
 
14 purposes, adjusted gross income as used in section 469 as
 
15 operative for this chapter means federal adjusted gross income.
 
16      (j)  Sections 512 to 514 (with respect to taxation of
 
17 business income of certain exempt organizations) of the Internal
 
18 Revenue Code shall be operative for the purposes of this chapter
 
19 as provided in this subsection.
 
20      "Unrelated business taxable income" means the same as in the
 
21 Internal Revenue Code, except that in the computation thereof
 
22 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
23 apply, and in the determination of the net operating loss
 

 
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 1 deduction there shall not be taken into account any amount of
 
 2 income or deduction which is excluded in computing the unrelated
 
 3 business taxable income.  Unrelated business taxable income shall
 
 4 not include any income from a prepaid legal service plan.
 
 5      For a person described in section 401 or 501 of the Internal
 
 6 Revenue Code, as modified by section 235-2.3, the tax imposed by
 
 7 section 235-51 or 235-71 shall be imposed upon the person's
 
 8 unrelated business taxable income.
 
 9      (k)  Section 521 (with respect to cooperatives) and
 
10 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
11 and their patrons) of the Internal Revenue Code shall be
 
12 operative for the purposes of this chapter as to any cooperative
 
13 fully meeting the requirements of section 421-23, except that
 
14 Internal Revenue Code section 521 cooperatives need not be
 
15 organized in Hawaii.
 
16      (l)  Sections 527 (with respect to political organizations)
 
17 and 528 (with respect to certain homeowners associations) of the
 
18 Internal Revenue Code shall be operative for the purposes of this
 
19 chapter and the taxes imposed in each such section are hereby
 
20 imposed by this chapter at the rates determined under section
 
21 235-71.
 
22      (m)  Section 530 (with respect to education individual
 
23 retirement accounts) of the Internal Revenue Code shall be
 

 
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 1 operative for the purposes of this chapter.  For the purpose of
 
 2 determining the maximum amount that a contributor could make to
 
 3 an education individual retirement account for state income tax
 
 4 purposes, modified adjusted gross income as used in section 530
 
 5 for this chapter means federal modified adjusted gross income as
 
 6 defined in section 530.
 
 7      [(n)] 235-2.45  Operation of certain Internal Revenue Code
 
 8 provisions; sections 641 to 7518.  (a)  Section 641 (with respect
 
 9 to imposition of tax) of the Internal Revenue Code shall be
 
10 operative for the purposes of this chapter subject to the
 
11 following:
 
12      (1)  The deduction for exemptions shall be allowed as
 
13           provided in section 235-54(b).
 
14      (2)  The deduction for contributions and gifts in
 
15           determining taxable income shall be limited to the
 
16           amount allowed in the case of an individual, unless the
 
17           contributions and gifts are to be used exclusively in
 
18           the State.
 
19      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
20           Code as applied by section 641 of the Internal Revenue
 
21           Code is hereby imposed by this chapter at the rate and
 
22           amount as determined under section 235-51 on estates
 
23           and trusts.
 

 
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 1      [(o)] (b)  Section 667 (with respect to treatment of amounts
 
 2 deemed distributed by trusts in preceding years) of the Internal
 
 3 Revenue Code shall be operative for the purposes of this chapter
 
 4 and the tax imposed therein is hereby imposed by this chapter at
 
 5 the rate determined under this chapter; except that the reference
 
 6 to tax-exempt interest to which section 103 of the Internal
 
 7 Revenue Code applies in section 667(a) of the Internal Revenue
 
 8 Code shall instead be a reference to tax-exempt interest to which
 
 9 section 235-7(b) applies.
 
10      [(p)] (c)  Section 685 (with respect to treatment of
 
11 qualified funeral trusts) of the Internal Revenue Code shall be
 
12 operative for purposes of this chapter, except that the tax
 
13 imposed under this chapter shall be computed at the tax rates
 
14 provided under section 235-51, and no deduction for the exemption
 
15 amount provided in section 235-54(b) shall be allowed.  The cost-
 
16 of-living adjustment determined under section 1(f)(3) of the
 
17 Internal Revenue Code shall be operative for the purpose of
 
18 applying section 685(c)(3) under this chapter.
 
19      (d)  Section 704 of the Internal Revenue Code (with respect
 
20 to a partner's distributive share) shall be operative for
 
21 purposes of this chapter; except that subsection (b)(2) shall not
 
22 apply to allocations of the high-technology business investment
 
23 tax credit allowed by section 235-110.9.
 

 
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 1      [(q)] (e)  Section 1212 (with respect to capital loss
 
 2 carrybacks and carryforwards) of the Internal Revenue Code shall
 
 3 be operative for the purposes of this chapter; except that for
 
 4 the purposes of this chapter the capital loss carryback
 
 5 provisions of section 1212 shall not be operative and the capital
 
 6 loss carryforward allowed by section 1212(a) shall be limited to
 
 7 five years[.]; except for qualified high technology businesses as
 
 8 defined in section 235-1, which shall be limited to fifteen
 
 9 years.
 
10      [(r)] (f)  Subchapter S (sections 1361 to 1379) (with
 
11 respect to tax treatment of S corporations and their
 
12 shareholders) of chapter 1 of the Internal Revenue Code shall be
 
13 operative for the purposes of this chapter as provided in part
 
14 VII.
 
15      [(s)] (g)  Section 6015 (with respect to relief from joint
 
16 and several liability on joint return) of the Internal Revenue
 
17 Code is operative for purposes of this chapter.
 
18      [(t)] (h)  Subchapter C (sections 6221 to 6233) (with
 
19 respect to tax treatment of partnership items) of chapter 63 of
 
20 the Internal Revenue Code shall be operative for the purposes of
 
21 this chapter.
 
22      [(u)] (i)  Subchapter D (sections 6240 to 6255) (with
 
23 respect to simplified audit procedures for electing large
 

 
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 1 partnerships) of the Internal Revenue Code shall be operative for
 
 2 the purposes of this chapter, with due regard to chapter 232
 
 3 relating to tax appeals.
 
 4      [(v)] (j)  Section 6511(h) (with respect to running of
 
 5 periods of limitation suspended while taxpayer is unable to
 
 6 manage financial affairs due to disability) of the Internal
 
 7 Revenue Code shall be operative for purposes of this chapter,
 
 8 with due regard to section 235-111 relating to the limitation
 
 9 period for assessment, levy, collection, or credit.
 
10      [(w)] (k)  Section 7518 (with respect to capital
 
11 construction fund for commercial fishers) of the Internal Revenue
 
12 Code shall be operative for the purposes of this chapter.
 
13 Qualified withdrawals for the acquisition, construction, or
 
14 reconstruction of any qualified asset which is attributable to
 
15 deposits made before the effective date of this section shall not
 
16 reduce the basis of the asset when withdrawn.  Qualified
 
17 withdrawals shall be treated on a first-in-first-out basis."
 
18      SECTION 6.  Section 235-7.3, Hawaii Revised Statutes, is
 
19 amended to read as follows:
 
20      "[[]235-7.3[]]  Royalties [and other income from high
 
21 technology business] derived from patents, copyrights, or trade
 
22 secrets excluded from gross income.  [(a)] In addition to the
 
23 exclusions in section 235-7, there shall be excluded from gross
 

 
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 1 income, adjusted gross income, and taxable income, amounts
 
 2 received by an individual or a qualified high technology business
 
 3 as royalties and other income derived from any patents [and],
 
 4 copyrights[:], or trade secrets:
 
 5      (1)  Owned by the individual or qualified high technology
 
 6           business; and
 
 7      (2)  Developed and arising out of a qualified high
 
 8           technology business.
 
 9      [(b)  For the purposes of this section:
 
10      "Computer software" means a set of computer programs,
 
11 procedures, or associated documentation concerned with the
 
12 operation and function of a computer system, and includes both
 
13 systems and application programs and subdivisions, such as
 
14 assemblers, compilers, routines, generators, and utility
 
15 programs.
 
16      "Qualified high technology business" means a business
 
17 performing qualified research.  The term "qualified high
 
18 technology business" does not include:
 
19      (1)  Any trade or business involving the performance of
 
20           services in the field of law, architecture, accounting,
 
21           actuarial science, performing arts, consulting,
 
22           athletics, financial services, or brokerage services;
 
23      (2)  Any banking, insurance, financing, leasing, rental,
 

 
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 1           investing, or similar business; any farming business,
 
 2           including the business of raising or harvesting trees;
 
 3           any business involving the production or extraction of
 
 4           products of a character with respect to which a
 
 5           deduction is allowable under section 611 (with respect
 
 6           to allowance of deduction for depletion), 613 (with
 
 7           respect to basis for percentage depletion), or 613A
 
 8           (with respect to limitation on percentage depleting in
 
 9           cases of oil and gas wells) of the Internal Revenue
 
10           Code;
 
11      (3)  Any business operating a hotel, motel, restaurant, or
 
12           similar business; and
 
13      (4)  Any trade or business involving a hospital, a private
 
14           office of a licensed health care professional, a group
 
15           practice of licensed health care professionals, or a
 
16           nursing home.
 
17      "Qualified research" means:
 
18      (1)  The same as in section 41(d) of the Internal Revenue
 
19           Code; or
 
20      (2)  Developing, designing, modifying, programming, and
 
21           licensing computer software.]"
 
22      SECTION 7.  Section 235-9.5, Hawaii Revised Statutes, is
 
23 amended to read as follows:
 

 
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 1      "[[]235-9.5[]]  Stock options from qualified high
 
 2 technology businesses exempt from taxation.  [(a)]
 
 3 Notwithstanding any law to the contrary, all income received from
 
 4 stock options from a qualified high technology business by an
 
 5 employee that would otherwise be taxed as ordinary income or as
 
 6 capital gains to those employees is exempt from taxation under
 
 7 this chapter.
 
 8      [(b)  For the purposes of this section:
 
 9      "Computer software" means a set of computer programs,
 
10 procedures, or associated documentation concerned with the
 
11 operation and function of a computer system, and includes both
 
12 systems and application programs and subdivisions, such as
 
13 assemblers, compilers, routines, generators, and utility
 
14 programs.
 
15      "Qualified high technology business" means a business
 
16 performing qualified research.  The term "qualified high
 
17 technology business" does not include:
 
18      (1)  Any trade or business involving the performance of
 
19           services in the field of law, architecture, accounting,
 
20           actuarial science, performing arts, consulting,
 
21           athletics, financial services, or brokerage services;
 
22      (2)  Any banking, insurance, financing, leasing, rental,
 
23           investing, or similar business; any farming business,
 

 
Page 23                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           including the business of raising or harvesting trees;
 
 2           any business involving the production or extraction of
 
 3           products of a character with respect to which a
 
 4           deduction is allowable under section 611 (with respect
 
 5           to allowance of deduction for depletion), 613 (with
 
 6           respect to basis for percentage depletion), or 613A
 
 7           (with respect to limitation on percentage depleting in
 
 8           cases of oil and gas wells) of the Internal Revenue
 
 9           Code;
 
10      (3)  Any business operating a hotel, motel, restaurant, or
 
11           similar business; and
 
12      (4)  Any trade or business involving a hospital, a private
 
13           office of a licensed health care professional, a group
 
14           practice of licensed health care professionals, or a
 
15           nursing home.
 
16      "Qualified research" means:
 
17      (1)  The same as in section 41(d) of the Internal Revenue
 
18           Code; or
 
19      (2)  Developing, designing, modifying, programming, and
 
20           licensing computer software.]"
 
21      SECTION 8.  Section 235-110.9, Hawaii Revised Statutes, is
 
22 amended to read as follows:
 
23      "[[]235-110.9[]]  [High-technology] High technology
 

 


 

Page 24                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 business investment tax credit.(a)  There shall be allowed to
 
 2 each taxpayer, subject to the taxes imposed by this chapter, a
 
 3 high technology investment tax credit that shall be deductible
 
 4 from the taxpayer's net income tax liability, if any, imposed by
 
 5 this chapter for the taxable year in which the credit is properly
 
 6 claimed.  The tax credit shall be an amount equal to ten per cent
 
 7 of the investment made by the taxpayer in each qualified high
 
 8 technology business, up to a maximum allowed credit of $500,000
 
 9 for the taxable year for the investment made by the taxpayer in a
 
10 qualified high technology business.
 
11      (b)  The credit allowed under this section shall be claimed
 
12 against the net income tax liability for the taxable year.  For
 
13 the purpose of this section, "net income tax liability" means net
 
14 income tax liability reduced by all other credits allowed under
 
15 this chapter.
 
16      (c)  If the tax credit under this section exceeds the
 
17 taxpayer's income tax liability, the excess of the tax credit
 
18 over liability shall be refunded to the taxpayer or may be used
 
19 as a credit against the taxpayer's income tax liability in
 
20 subsequent years until exhausted[.]; provided that no refund on
 
21 account of the tax credit allowed by this section shall be made
 
22 for amounts less than $1.  All claims, including any amended
 
23 claims, for tax credits under this section shall be filed on or
 

 
Page 25                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 before the end of the twelfth month following the close of the
 
 2 taxable year for which the credit may be claimed.  Failure to
 
 3 comply with the foregoing provision shall constitute a waiver of
 
 4 the right to claim the credit.
 
 5      [(d)  As used in this section:
 
 6      "Computer software" means a set of computer programs,
 
 7 procedures, or associated documentation concerned with the
 
 8 operation and function of a computer system, and includes both
 
 9 systems and application programs and subdivisions, such as
 
10 assemblers, compilers, routines, generators, and utility
 
11 programs.
 
12      "Investment" means a nonrefundable investment, at risk, as
 
13 that term is used in section 465 (with respect to deductions
 
14 limited to amount at risk) of the Internal Revenue Code, in a
 
15 qualified high technology business, of cash that is transferred
 
16 to the qualified high technology business, the transfer of which
 
17 is in connection with a transaction in exchange for stock,
 
18 interests in partnerships, joint ventures, or other entities,
 
19 licenses (exclusive or nonexclusive), rights to use technology,
 
20 marketing rights, warrants, options, or any items similar to
 
21 those included herein, including but not limited to options or
 
22 rights to acquire any of the items included herein.  The
 
23 nonrefundable investment is entirely at risk of loss where
 

 
Page 26                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 repayment depends upon the success of the qualified high
 
 2 technology business.  If the money invested is to be repaid to
 
 3 the taxpayer, no repayment except for dividends or interest shall
 
 4 be made for at least three years from the date the investment is
 
 5 made.  The annual amount of any dividend and interest payment to
 
 6 the taxpayer shall not exceed twelve per cent of the amount of
 
 7 the investment.
 
 8      (e)  For the purposes of this section:
 
 9      "Qualified high technology business" means:
 
10      (1)  A business, employing or owning capital or property, or
 
11           maintaining an office, in this State; and which
 
12      (2)  (A)  Conducts one hundred per cent of its activities in
 
13                performing qualified research in this State; or
 
14           (B)  Receives one hundred per cent of its gross income
 
15                derived from qualified research; provided that the
 
16                income is received from products sold from,
 
17                manufactured, or produced in the State; or
 
18                services performed in this State.
 
19      The term "qualified high technology business" does not
 
20 include:
 
21      (1)  Any trade or business involving the performance of
 
22           services in the field of law, architecture, accounting,
 
23           actuarial science, performing arts, consulting,
 

 
Page 27                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           athletics, financial services, or brokerage services;
 
 2      (2)  Any banking, insurance, financing, leasing, rental,
 
 3           investing, or similar business; any farming business,
 
 4           including the business of raising or harvesting trees;
 
 5           any business involving the production or extraction of
 
 6           products of a character with respect to which a
 
 7           deduction is allowable under section 611 (with respect
 
 8           to allowance of deduction for depletion), 613 (with
 
 9           respect to basis for percentage depletion), or 613A
 
10           (with respect to limitation on percentage depleting in
 
11           cases of oil and gas wells) of the Internal Revenue
 
12           Code;
 
13      (3)  Any business operating a hotel, motel, restaurant, or
 
14           similar business; and
 
15      (4)  Any trade or business involving a hospital, a private
 
16           office of a licensed health care professional, a group
 
17           practice of licensed health care professionals, or a
 
18           nursing home.
 
19      "Qualified research" means:
 
20      (1)  The same as in section 41(d) of the Internal Revenue
 
21           Code; or
 
22      (2)  Developing, designing, modifying, programming, and
 
23           licensing computer software;
 

 
Page 28                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 except that it shall not include research conducted outside the
 
 2 State.]
 
 3      [(f)] (d)  This section shall not apply to taxable years
 
 4 beginning after December 31, 2005."
 
 5      SECTION 9.  Section 235-110.91, Hawaii Revised Statutes, is
 
 6 amended to read as follows:
 
 7      "[[]235-110.91[]]  Tax credit for increasing research
 
 8 activities.(a)  Section 41 (with respect to the credit for
 
 9 increasing research activities) and section 280C(c) (with respect
 
10 to certain expenses for which the credit for increasing research
 
11 activities are allowable) of the Internal Revenue Code shall be
 
12 operative for the purposes of this chapter as provided in this
 
13 section.  If section 41 of the Internal Revenue Code is repealed
 
14 or terminated prior to January 1, 2006, its provisions shall
 
15 remain in effect for purposes of the income tax law of the State
 
16 as provided for in subsection (g).
 
17      (b)  All references to Internal Revenue Code sections within
 
18 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
19 operative for purposes of this section.
 
20      (c)  There shall be allowed to each taxpayer, subject to the
 
21 tax imposed by this chapter, an income tax credit for increased
 
22 research activities [that] equal to the credit for research
 
23 activities provided by section 41 of the Internal Revenue Code.
 

 
Page 29                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 The credit shall be deductible from the taxpayer's net income tax
 
 2 liability, if any, imposed by this chapter for the taxable year
 
 3 in which the credit is properly claimed.
 
 4      [(d)  The tax credit for increased research activities shall
 
 5 be equal to the sum of:
 
 6      (1)  2.5 per cent of the excess (if any) of:
 
 7           (A)  The qualified research expenses for the taxable
 
 8                year; over
 
 9           (B)  The base amount; and
 
10      (2)  2.5 per cent of the basic research payments determined
 
11           under section 41(e)(1)(A) of the Internal Revenue Code.
 
12      (e)  For purposes of this section:
 
13      (1)  The alternative incremental credit in section 41(c)(4)
 
14           of the Internal Revenue Code shall be equal to the sum
 
15           of 12.5 per cent of:
 
16           (A)  1.65 per cent of so much of the qualified research
 
17                expenses for the taxable year as exceeds one per
 
18                cent of the average described in section
 
19                41(c)(1)(B) but does not exceed 1.5 per cent of
 
20                such average;
 
21           (B)  2.2 per cent of so much of those expenses as
 
22                exceeds 1.5 per cent of the average but does not
 
23                exceed two per cent of the average; and
 

 
Page 30                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           (C)  2.75 per cent of so much of those expenses as
 
 2                exceeds two per cent of the average;
 
 3      (2)  The term "qualified research" under section 41(d)(1) of
 
 4           the Internal Revenue Code shall not include research
 
 5           conducted outside of the State; and
 
 6      (3)  The term "basic research" under section 41(e) of the
 
 7           Internal Revenue Code shall not include research
 
 8           conducted outside of the State.
 
 9      (f)  The amount of reduced credit in section 280C(c)(3)(B)
 
10 of the Internal Revenue Code shall be equal to the excess of:
 
11      (1)  The amount of credit determined under section 41(a) (as
 
12           provided for in this section) (without regard to this
 
13           paragraph); over
 
14      (2)  The product of:
 
15           (A)  The amount described in subsection (f)(1); and
 
16           (B)  12.5 per cent of the maximum rate of tax under
 
17                section 11(b)(1) of the Internal Revenue Code.
 
18      (g)] (d)  If the tax credit for increased research
 
19 activities claimed by a taxpayer exceeds the amount of income tax
 
20 payment due from the taxpayer, the excess of the tax credit over
 
21 payments due shall be refunded to the taxpayer or may be used as
 
22 a credit against the taxpayer's income tax liability in
 
23 subsequent years until exhausted[.]; provided that no refund on
 

 
Page 31                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 account of the tax credit allowed by this section shall be made
 
 2 for amounts less than $1.
 
 3      [(h)] (e)  All claims for a tax credit under this section
 
 4 [must] shall be filed on or before the end of the twelfth month
 
 5 following the close of the taxable year for which the credit may
 
 6 be claimed.  Failure to properly claim the credit shall
 
 7 constitute a waiver of the right to claim the credit.
 
 8      [(i)] (f)  The director of taxation may adopt any rules
 
 9 under chapter 91 and forms necessary to carry out this section.
 
10      [(j)] (g)  This section shall not apply to taxable years
 
11 beginning after December 31, 2005."
 
12             PART II.  HIGH TECHNOLOGY INDUSTRY BONDS
 
13      SECTIONS 10 to 14  Reserved.
 
14                    PART III.  VENTURE CAPITAL
 
15      SECTION 15.  The legislature finds that the shortage of
 
16 venture capital in Hawaii makes it difficult for local high
 
17 technology businesses to obtain the necessary financing to
 
18 develop products, enter new markets, and expand on their early
 
19 success.  The purpose of this Part is to allow the board of
 
20 trustees of the employees' retirement system to invest ten per
 
21 cent of employees' retirement system funds in qualified high
 
22 technology businesses as a means of providing venture capital for
 
23 those businesses.
 

 
Page 32                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1      SECTION 16.  Section 88-119, Hawaii Revised Statutes, is
 
 2 amended to read as follows:
 
 3      "88-119  Investments.  (a)  Investments may be made in:
 
 4      (1)  Real estate loans and mortgages.  Obligations (as
 
 5           defined in section 431:6-101) of any of the following
 
 6           classes:
 
 7           (A)  Obligations secured by mortgages of nonprofit
 
 8                corporations desiring to build multirental units
 
 9                (ten units or more) subject to control of the
 
10                government for occupancy by families displaced as
 
11                a result of government action;
 
12           (B)  Obligations secured by mortgages insured by the
 
13                Federal Housing Administration;
 
14           (C)  Obligations for the repayment of home loans made
 
15                under the Servicemen's Readjustment Act of 1944 or
 
16                under Title II of the National Housing Act;
 
17           (D)  Other obligations secured by first mortgages on
 
18                unencumbered improved real estate owned in fee
 
19                simple; provided that the amount of the obligation
 
20                at the time investment is made therein shall not
 
21                exceed eighty per cent of the value of the real
 
22                estate and improvements mortgaged to secure it,
 
23                and except that the amount of the obligation at
 

 
Page 33                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1                the time investment is made therein may exceed
 
 2                eighty per cent but no more than ninety per cent
 
 3                of the value of the real estate and improvements
 
 4                mortgaged to secure it; provided further that the
 
 5                obligation is insured or guaranteed against
 
 6                default or loss under a mortgage insurance policy
 
 7                issued by a casualty insurance company licensed to
 
 8                do business in the State.  The coverage provided
 
 9                by the insurer shall be sufficient to reduce the
 
10                system's exposure to not more than eighty per cent
 
11                of the value of the real estate and improvements
 
12                mortgaged to secure it.  The insurance coverage
 
13                shall remain in force until the principal amount
 
14                of the obligation is reduced to eighty per cent of
 
15                the market value of the real estate and
 
16                improvements mortgaged to secure it, at which time
 
17                the coverage shall be subject to cancellation
 
18                solely at the option of the board of trustees.
 
19                Real estate shall not be deemed to be encumbered
 
20                within the meaning of this subparagraph by reason
 
21                of the existence of any of the restrictions,
 
22                charges, or claims described in section 431:6-308;
 
23           (E)  Other obligations secured by first mortgages of
 

 
Page 34                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1                leasehold interests in improved real estate;
 
 2                provided that:
 
 3                (i)  Each such leasehold interest at such time
 
 4                     shall have a current term extending at least
 
 5                     two years beyond the stated maturity of the
 
 6                     obligation it secures; and
 
 7               (ii)  The amount of the obligation at the time
 
 8                     investment is made therein shall not exceed
 
 9                     eighty per cent of the value of the
 
10                     respective leasehold interest and
 
11                     improvements, and except that the amount of
 
12                     the obligation at the time investment is made
 
13                     therein may exceed eighty per cent but no
 
14                     more than ninety per cent of the value of the
 
15                     leasehold interest and improvements mortgaged
 
16                     to secure it;
 
17                provided further that the obligation is insured or
 
18                guaranteed against default or loss under a
 
19                mortgage insurance policy issued by a casualty
 
20                insurance company licensed to do business in the
 
21                State.  The coverage provided by the insurer shall
 
22                be sufficient to reduce the system's exposure to
 
23                not more than eighty per cent of the value of the
 

 
Page 35                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1                leasehold interest and improvements mortgaged to
 
 2                secure it.  The insurance coverage shall remain in
 
 3                force until the principal amount of the obligation
 
 4                is reduced to eighty per cent of the market value
 
 5                of the leasehold interest and improvements
 
 6                mortgaged to secure it, at which time the coverage
 
 7                shall be subject to cancellation solely at the
 
 8                option of the board of trustees;
 
 9           (F)  Obligations for the repayment of home loans
 
10                guaranteed by the department of Hawaiian home
 
11                lands pursuant to section 214(b) of the Hawaiian
 
12                Homes Commission Act, 1920; and
 
13           (G)  Obligations secured by second mortgages on
 
14                improved real estate for which the mortgagor
 
15                procures a second mortgage on the improved real
 
16                estate for the purpose of acquiring the
 
17                leaseholder's fee simple interest in the improved
 
18                real estate; provided that any prior mortgage does
 
19                not contain provisions that might jeopardize the
 
20                security position of the retirement system or the
 
21                borrower's ability to repay the mortgage loan.
 
22           The board of trustees may retain such real estate,
 
23           including leasehold interests therein, as it may
 

 
Page 36                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           acquire by foreclosure of mortgages or in enforcement
 
 2           of security, or as may be conveyed to it in
 
 3           satisfaction of debts previously contracted; provided
 
 4           that all such real estate, other than leasehold
 
 5           interests, shall be sold within five years after
 
 6           acquiring the same, subject to extension by the
 
 7           governor for additional periods not exceeding five
 
 8           years each, and that all such leasehold interests shall
 
 9           be sold within one year after acquiring the same,
 
10           subject to extension by the governor for additional
 
11           periods not exceeding one year each;
 
12      (2)  Government obligations, etc.  Obligations of any of the
 
13           following classes:
 
14           (A)  Obligations issued or guaranteed as to principal
 
15                and interest by the United States or by any state
 
16                thereof or by any municipal or political
 
17                subdivision or school district of any of the
 
18                foregoing; provided that principal of and interest
 
19                on such obligations are payable in currency of the
 
20                United States; or sovereign debt instruments
 
21                issued by agencies of, or guaranteed by foreign
 
22                governments;
 
23           (B)  Revenue bonds, whether or not permitted by any
 

 
Page 37                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1                other provision hereof, of the State or any
 
 2                municipal or political subdivision thereof,
 
 3                including the board of water supply of the city
 
 4                and county of Honolulu, and street or improvement
 
 5                district bonds of any district or project in the
 
 6                State; and
 
 7           (C)  Obligations issued or guaranteed by any federal
 
 8                home loan bank including consolidated federal home
 
 9                loan bank obligations, the Home Owner's Loan
 
10                Corporation, the Federal National Mortgage
 
11                Association, or the Small Business Administration;
 
12      (3)  Corporate obligations.  Below investment grade or
 
13           nonrated debt instruments, foreign or domestic, in
 
14           accordance with investment guidelines adopted by the
 
15           board of trustees;
 
16      (4)  Preferred and common stocks.  Shares of preferred or
 
17           common stock of any corporation created or existing
 
18           under the laws of the United States or of any state or
 
19           district thereof or of any country;
 
20      (5)  Obligations eligible by law for purchase in the open
 
21           market by federal reserve banks;
 
22      (6)  Obligations issued or guaranteed by the International
 
23           Bank for Reconstruction and Development, the Inter-
 

 
Page 38                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           American Development Bank, the Asian Development Bank,
 
 2           or the African Development Bank;
 
 3      (7)  Obligations secured by collateral consisting of any of
 
 4           the securities or stock listed above and worth at the
 
 5           time the investment is made at least fifteen per cent
 
 6           more than the amount of the respective obligations;
 
 7      (8)  Insurance company obligations.  Contracts and
 
 8           agreements supplemental thereto providing for
 
 9           participation in one or more accounts of a life
 
10           insurance company authorized to do business in Hawaii,
 
11           including its separate accounts, and whether the
 
12           investments allocated thereto are comprised of stocks
 
13           or other securities or of real or personal property or
 
14           interests therein;
 
15      (9)  Interests in real property.  Interests in improved or
 
16           productive real property in which, in the informed
 
17           opinion of the board of trustees, it is prudent to
 
18           invest funds of the system.  For purposes of this
 
19           paragraph, "real property" includes any property
 
20           treated as real property either by local law or for
 
21           federal income tax purposes.  Investments in improved
 
22           or productive real property may be made directly or
 
23           through pooled funds, including common or collective
 

 
Page 39                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           trust funds of banks and trust companies, group or unit
 
 2           trusts, limited partnerships, limited liability
 
 3           companies, investment trusts, title-holding
 
 4           corporations recognized under section 501(c) of the
 
 5           Internal Revenue Code of 1986, as amended, similar
 
 6           entities that would protect the system's interest, and
 
 7           other pooled funds invested on behalf of the system by
 
 8           investment managers retained by the system;
 
 9     (10)  Other securities and futures contracts.  Securities and
 
10           futures contracts in which in the informed opinion of
 
11           the board of trustees it is prudent to invest funds of
 
12           the system, including currency, interest rate, bond,
 
13           and stock index futures contracts and options on such
 
14           contracts to hedge against anticipated changes in
 
15           currencies, interest rates, and bond and stock prices
 
16           that might otherwise have an adverse effect upon the
 
17           value of the system's securities portfolios; covered
 
18           put and call options on securities; and stock; whether
 
19           or not the securities, stock, futures contracts, or
 
20           options on futures are expressly authorized by or
 
21           qualify under the foregoing paragraphs, and
 
22           notwithstanding any limitation of any of the foregoing
 
23           paragraphs (including paragraph (4)); and
 

 
Page 40                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1     (11)  Private placements.  Investments in institutional blind
 
 2           pool limited partnerships or direct investments that
 
 3           make private debt and equity investments in privately
 
 4           held companies[.] including, but not limited to
 
 5           investments in Hawaii qualified high technology
 
 6           businesses or venture capital investments that, in the
 
 7           informed opinion of the board of trustees, are
 
 8           appropriate to invest funds of the system.
 
 9      (b)  Ten per cent of alternative investments may be
 
10 dedicated as venture capital investments by the board of trustees
 
11 in qualified high technology businesses.  Investment under this
 
12 subsection shall be made under the condition that there shall be
 
13 three or more unrelated investors other than the system involved
 
14 in the investment.  The board, in making investments under this
 
15 subsection, may consult with knowledgeable state agencies,
 
16 corporations, and financial institutions before investing assets
 
17 in qualified high technology businesses.
 
18      For the purposes of this subsection:
 
19      "Computer software" means computer data, a computer program,
 
20 or a set of computer programs, procedures, or associated
 
21 documentation concerned with the operation and function of a
 
22 computer system, and includes both systems and application
 
23 programs and subdivisions, such as assemblers, compilers,
 

 
Page 41                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 routines, generators, and utility programs.
 
 2      "Qualified high technology business":
 
 3      (1)  Means a business, employing or owning capital or
 
 4           property, or maintaining an office, in this State that:
 
 5           (A)  Conducts a majority of its activities in
 
 6                performing qualified research in this State; or
 
 7           (B)  Receives a majority of its gross income derived
 
 8                from qualified research; provided that the income
 
 9                is received from:
 
10                (i)  Products sold from, manufactured in, or
 
11                     produced in the State; or
 
12               (ii)  Services performed in this State.
 
13      (2)  Does not include:
 
14           (A)  Any trade or business involving the performance of
 
15                services in the field of law, architecture,
 
16                accounting, actuarial science, consulting,
 
17                athletics, financial services, or brokerage
 
18                services;
 
19           (B)  Any banking, insurance, financing, leasing,
 
20                rental, investing, or similar business; any
 
21                farming business, including the business of
 
22                raising or harvesting trees; any business
 
23                involving the production or extraction of products
 

 
Page 42                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1                of a character with respect to which a deduction
 
 2                is allowable under section 611 (with respect to
 
 3                allowance of deduction for depletion), 613 (with
 
 4                respect to basis for percentage depletion), or
 
 5                613A (with respect to limitation on percentage
 
 6                depleting in cases of oil and gas wells) of the
 
 7                Internal Revenue Code;
 
 8           (C)  Any business operating a hotel, motel, restaurant,
 
 9                or similar business; and
 
10           (D)  Any trade or business involving a hospital, a
 
11                private office of a licensed health care
 
12                professional, a group practice of licensed health
 
13                care professionals, or a nursing home.
 
14      "Qualified research" means:
 
15      (1)  The same as in section 41(d) of the Internal Revenue
 
16           Code; or
 
17      (2)  Developing, designing, modifying, programming, and
 
18           licensing computer software;
 
19 except that it shall not include research conducted outside the
 
20 State.
 
21      "Venture capital investment" means any of the following
 
22 investments in a qualified high technology business:
 
23      (1)  Common or preferred stock and equity securities without
 

 
Page 43                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1           a repurchase requirement for at least five years;
 
 2      (2)  A right to purchase stock or equity securities;
 
 3      (3)  Any debenture or loan, whether or not convertible or
 
 4           having stock purchase rights, which are subordinated,
 
 5           together with security interests against the assets of
 
 6           the borrower, by their terms to all borrowings of the
 
 7           borrower from other institutional lenders, that is for
 
 8           a term of not less than three years, that has no part
 
 9           amortized during the first three years;
 
10      (4)  General or limited partnership interests; and
 
11      (5)  Membership interests in limited liability companies."
 
12                        PART IV.  EDUCATION
 
13      SECTION 17.  The legislature finds that there is a need to
 
14 expand educational programs in science and math at Hawaii's "E
 
15 Academies", which were established by section 17 of Act 178,
 
16 Session Laws of Hawaii 1999, to afford students greater
 
17 opportunities in new educational technologies, and provide
 
18 relevant, challenging, and meaningful course offerings for
 
19 students interested in pursuing a career in advanced technology
 
20 fields.  The legislature finds that the use of "E Academies",
 
21 which are virtual, site-based schools that provide students with
 
22 industry and academic standards-based instruction and assessments
 
23 in technology, science, math, and engineering, offer enhanced
 

 
Page 44                                                    2901
                                     H.B. NO.           H.D. 2
                                                        S.D. 1
                                                        

 
 1 opportunities to students who are interested in furthering their
 
 2 preparation for technology positions or who are interested in
 
 3 advanced studies in post secondary information technology,
 
 4 science, engineering, and math.
 
 5      SECTION 18.  There is appropriated out of the general
 
 6 revenues of the State of Hawaii the sum of $           or so much
 
 7 thereof as may be necessary for fiscal year 2000-2001 for the
 
 8 expansion of the department of education's E Academies to provide
 
 9 students virtual onsite locations based at selected high schools
 
10 with industry and academic standards-based instruction and
 
11 assessments in technology, science, math, and engineering.  The
 
12 sum appropriated shall be expended by the department of education
 
13 for the purposes of this Part.
 
14                  PART V.  WORKFORCE DEVELOPMENT
 
15      SECTION 19.  The legislature finds that there is a need to
 
16 expand the millennium workforce development training program,
 
17 which was created by section 12 of Act 178, Session Laws of
 
18 Hawaii 1999, and placed within the department of labor and
 
19 industrial relations for administrative purposes.  In particular,
 
20 the legislature finds that there is a need for Hawaii's public
 
21 community colleges to develop training programs to improve the
 
22 skills of students in those colleges for jobs in the new economy,
 
23 in such industries as biotechnology, health care, information
 

 
Page 45                                                    2901
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                                                        S.D. 1
                                                        

 
 1 technology, environmental science and technology, and
 
 2 telecommunications.  The development of new or enhanced programs
 
 3 in these and related areas at the State's community colleges will
 
 4 help to reduce the need to import workers and increase job
 
 5 opportunities for Hawaii's residents by improving their skills in
 
 6 these areas.
 
 7      SECTION 20.  There is appropriated out of the general
 
 8 revenues of the State of Hawaii the sum of $           or so much
 
 9 thereof as may be necessary for fiscal year 2000-2001 to be
 
10 expended by the University of Hawaii's community colleges for the
 
11 purposes of establishing the Pacific center for advanced
 
12 technology training where a coordinated statewide approach to
 
13 designing and delivering customized training to the high
 
14 technology industry in Hawaii will be implemented.
 
15      The sum appropriated shall be expended by the University of
 
16 Hawaii for the purposes of this Part.
 
17      SECTION 21.  There is appropriated out of the general
 
18 revenues of the State of Hawaii the sum of $           or so much
 
19 thereof as may be necessary for fiscal year 2000-2001 to be
 
20 expended by Hawaii's public community colleges for the purposes
 
21 of the millennium workforce development program established in
 
22 section 371-17, Hawaii Revised Statutes, to prepare students for
 
23 the workforce of the new economy.  
 

 
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 1      The sum appropriated shall be expended by the University of
 
 2 Hawaii for the purposes of this Part.
 
 3            PART VI.  UNIVERSITY RESEARCH AND TRAINING
 
 4      SECTION 22.  The purpose of this Part is to appropriate
 
 5 funds to the University of Hawaii's college of engineering,
 
 6 college of business administration, and school of medicine, and
 
 7 the University of Hawaii at Hilo to develop new programs and
 
 8 enhance existing programs to enable Hawaii's students to more
 
 9 effectively compete for jobs in the new economy, in such
 
10 industries as biotechnology, health care, information technology,
 
11 environmental science and technology, and telecommunications.
 
12 The legislature finds that funding these programs for these
 
13 colleges at the University of Hawaii will assist in reducing the
 
14 need to import workers and increase job opportunities for
 
15 Hawaii's residents by improving their skills in these areas.
 
16      SECTION 23.  There is appropriated out of the general
 
17 revenues of the State of Hawaii the sum of $           or so much
 
18 thereof as may be necessary for fiscal year 2000-2001 to conduct
 
19 advanced communications research at the University of Hawaii's
 
20 college of engineering.
 
21      The sum appropriated shall be expended by the University of
 
22 Hawaii for the purposes of this Part.
 
23      SECTION 24.  There is appropriated out of the general
 

 
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 1 revenues of the State of Hawaii the sum of $           or so much
 
 2 thereof as may be necessary for fiscal year 2000-2001 for the
 
 3 expansion of research, scholarship, and instruction in electronic
 
 4 commerce at the University of Hawaii's college of business
 
 5 administration.
 
 6      The sum appropriated shall be expended by the University of
 
 7 Hawaii for the purposes of this Part.
 
 8      SECTION 25.  There is appropriated out of the general
 
 9 revenues of the State of Hawaii the sum of $           or so much
 
10 thereof as may be necessary for fiscal year 2000-2001 to conduct
 
11 research in molecular genetics at the University of Hawaii's
 
12 school of medicine.
 
13      The sum appropriated shall be expended by the University of
 
14 Hawaii for the purposes of this Part.
 
15      SECTION 26.  There is appropriated out of the general
 
16 revenues of the State of Hawaii the sum of $           or so much
 
17 thereof as may be necessary for fiscal year 2000-2001 to develop
 
18 new programs and enhance existing programs at the University of
 
19 Hawaii at Hilo to prepare students for the workforce of the new
 
20 economy.
 
21      The sum appropriated shall be expended by the University of
 
22 Hawaii for the purposes of this Part.
 
23           PART VII.  MARKETING AND ELECTRONIC COMMERCE
 

 
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 1      SECTION 27.  The legislature finds that the Internet is a
 
 2 critical component of the new economy because of its enormous
 
 3 potential to increase efficiency and raise productivity.
 
 4 Internet commerce, which is probably the most significant
 
 5 component of electronic commerce, or "e-commerce", includes such
 
 6 areas as online financial services, consumer retail and business-
 
 7 to-business transactions, media, infrastructure, and consumer and
 
 8 business Internet access services.
 
 9      The legislature further finds that the total United States
 
10 Internet economy more than doubled between 1996 and 1997, from
 
11 $15,500,000,000 to $38,800,000,000.  By 2001, it has been
 
12 projected that the total United States Internet economy will be
 
13 over $350,000,000,000.  Of this amount, business-to-business
 
14 e-commerce is expected to account for the largest share, while
 
15 consumer retail activity is expected to emerge more slowly,
 
16 totaling over $18,000,000,000 in the year 2001.
 
17      The purpose of this Part is to increase the State's share of
 
18 this significant economic activity and the facilitation of
 
19 e-commerce in Hawaii through the development of partnerships
 
20 between the Hawaii tourism authority and Hawaii's business
 
21 community to promote the State, through a coordinated statewide
 
22 effort, as an Internet and server-friendly place to conduct
 
23 electronic commerce.
 

 
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 1      SECTION 28.  Section 201B-6, Hawaii Revised Statutes, is
 
 2 amended by amending subsection (a) to read as follows:
 
 3      "(a)  The authority shall be responsible for developing a
 
 4 strategic tourism marketing plan that shall be updated every
 
 5 three years and includes the following:
 
 6      (1)  Identification and evaluation of current and future
 
 7           tourism needs for the different regions of the State;
 
 8      (2)  Goals and objectives in accordance with identified
 
 9           needs;
 
10      (3)  Statewide promotional efforts and programs;
 
11      (4)  Targeted markets;
 
12      (5)  Efforts to enter into brand marketing projects that
 
13           make effective use of cooperative advertising programs;
 
14      (6)  Measures of effectiveness for the authority's
 
15           promotional programs; and
 
16      (7)  Coordination of marketing plans of all destination
 
17           marketing organizations receiving state funding prior
 
18           to finalization of the authority's marketing plan.
 
19      The authority shall also develop and include in its
 
20 marketing plan, goals and objectives for marketing the State to
 
21 the techno-tourism niche [as well as], for marketing Hawaii's
 
22 technology assets to appropriate visitor markets worldwide as a
 
23 high technology destination, and for integrating marketing
 

 
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 1 objectives with existing and potential state telecommunications
 
 2 and information resources in the public and private sectors.  The
 
 3 authority shall also coordinate the requirements for and
 
 4 availability of the State's existing and potential
 
 5 telecommunications and information resources with the department
 
 6 of accounting and general services."
 
 7      SECTION 29.  Section 201B-7, Hawaii Revised Statutes, is
 
 8 amended by amending subsection (a) to read as follows:
 
 9      "(a)  The authority may enter into contracts and agreements
 
10 that include the following:
 
11      (1)  Tourism promotion, marketing, and development;
 
12      (2)  Market development-related research;
 
13      (3)  Product development and diversification issues;
 
14      (4)  Promotion, development, and coordination of sports-
 
15           related activities and events;
 
16      (5)  Promotion of Hawaii, through a coordinated statewide
 
17           effort, as an Internet and server-friendly place to
 
18           conduct electronic commerce, including entering into
 
19           appropriate public-private sector business
 
20           partnerships.  As used in this paragraph, the terms
 
21           "electronic commerce" and "Internet" have the same
 
22           meanings as defined in section 231-8.6(c);
 
23     [(5)] (6)  Reduction of barriers to travel;
 

 
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 1     [(6)] (7)  Tourism public information and educational
 
 2           programs;
 
 3     [(7)] (8)  Programs to monitor and investigate complaints
 
 4           about the problems resulting from the tourism industry
 
 5           in the State; and
 
 6     [(8)] (9)  Any and all other activities necessary to carry
 
 7           out the intent of this chapter;
 
 8 provided that for the purposes of continuity, the Hawaii Visitors
 
 9 and Convention Bureau shall be the designated agency to conduct
 
10 the marketing and promotion of the State until the end of fiscal
 
11 year 1998-1999 or until a date specified by the board."
 
12                PART VIII. TECHNOLOGY INVESTMENTS 
 
13      SECTION 30.  The legislature finds that there are many
 
14 investors in Hawaii who would like to invest in local start-up
 
15 companies or in commercialization of research efforts, such as
 
16 those carried out by the University of Hawaii.  However, these
 
17 investors are often unable to meet the standards of an accredited
 
18 investor -- which require $2,000,000 in net assets and an annual
 
19 income of $250,000 -- and thus cannot invest in the majority of
 
20 private placements being offered.
 
21      The legislature further finds that there is a need for an
 
22 investment vehicle that would allow participation by smaller
 
23 investors, as a means of proving additional options for Hawaii
 

 
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                                                        S.D. 1
                                                        

 
 1 investors, and in aiding the growth of Hawaii technology
 
 2 companies.
 
 3      The purpose of this Part is to create such a program -- the
 
 4 maka`ainana technology program for small individual investors.
 
 5      SECTION 31.  Chapter 211F, Hawaii Revised Statutes, is
 
 6 amended by adding a new part to be appropriately designated and
 
 7 to read as follows:
 
 8           "PART  .   THE MAKA'AINANA TECHNOLOGY PROGRAM
 
 9      211F-   Definitions.  As used in this part:
 
10      "Computer data" means any representation of information,
 
11 knowledge, facts, concepts, or instructions that is being
 
12 prepared or has been prepared and is intended to be processed, is
 
13 being processed, or has been processed in a computer or computer
 
14 network.  "Computer data" includes works in the performing arts
 
15 such as audio files, video files, audiovisual files, computer
 
16 animation, and other entertainment products that are perceived by
 
17 or through the operation of a computer.
 
18      "Computer program" means an ordered set of computer data
 
19 representing coded instructions or statements, that, when
 
20 executed by a computer, causes the computer to perform one or
 
21 more computer operations.
 
22      "Computer software" means computer data, a computer program,
 
23 or a set of computer programs, procedures, or associated
 

 
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 1 documentation concerned with the operation and function of a
 
 2 computer system, and includes both systems and application
 
 3 programs and subdivisions, such as assemblers, compilers,
 
 4 routines, generators, and utility programs.
 
 5      "Financial organization" means an organization authorized to
 
 6 do business in Hawaii that is:
 
 7      (1)  Certified as an insurer by the insurance commissioner;
 
 8      (2)  Licensed or chartered as a financial institution by the
 
 9           commissioner of financial institutions;
 
10      (3)  Chartered by an agency of the federal government;
 
11      (4)  Subject to the jurisdiction and regulation of the
 
12           federal Securities and Exchange Commission; or
 
13      (5)  Any other entity otherwise authorized to do business in
 
14           the State that meets the requirements of this part.
 
15      "Program" means the maka'ainana technology program.
 
16      "Program manager" means a financial organization selected by
 
17 the corporation to manage the program.
 
18      "Qualified high technology business":
 
19      (1)  Means a business, employing or owning capital or
 
20           property, or maintaining an office, in this State that:
 
21           (A)  Conducts a majority of its activities in
 
22                performing qualified research in this State; or
 
23           (B)  Receives a majority of its gross income derived
 

 
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 1                from qualified research; provided that the income
 
 2                is received from:
 
 3                (i)  Products sold from, manufactured in, or
 
 4                     produced in the State; or
 
 5               (ii)  Services performed in this State.
 
 6      (2)  Does not include:
 
 7           (A)  Any trade or business involving the performance of
 
 8                services in the field of law, architecture,
 
 9                accounting, actuarial science, consulting,
 
10                athletics, financial services, or brokerage
 
11                services;
 
12           (B)  Any banking, insurance, financing, leasing,
 
13                rental, investing, or similar business; any
 
14                farming business, including the business of
 
15                raising or harvesting trees; any business
 
16                involving the production or extraction of products
 
17                of a character with respect to which a deduction
 
18                is allowable under section 611 (with respect to
 
19                allowance of deduction for depletion), 613 (with
 
20                respect to basis for percentage depletion), or
 
21                613A (with respect to limitation on percentage
 
22                depleting in cases of oil and gas wells) of the
 
23                Internal Revenue Code;
 

 
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 1           (C)  Any business operating a hotel, motel, restaurant,
 
 2                or similar business; and
 
 3           (D)  Any trade or business involving a hospital, a
 
 4                private office of a licensed health care
 
 5                professional, a group practice of licensed health
 
 6                care professionals, or a nursing home.
 
 7      "Qualified research" means:
 
 8      (1)  The same as in section 41(d) of the Internal Revenue
 
 9           Code; or
 
10      (2)  Developing, designing, modifying, programming, and
 
11           licensing computer software;
 
12 except that it shall not include research conducted outside the
 
13 State.
 
14      "Venture capital investment" means any of the following
 
15 investments in a qualified high technology business:
 
16      (1)  Common or preferred stock and equity securities without
 
17           a repurchase requirement for at least five years;
 
18      (2)  A right to purchase stock or equity securities;
 
19      (3)  Any debenture or loan, whether or not convertible or
 
20           having stock purchase rights, which are subordinated,
 
21           together with security interests against the assets of
 
22           the borrower, by their terms to all borrowings of the
 
23           borrower from other institutional lenders, that is for
 

 
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                                                        S.D. 1
                                                        

 
 1           a term of not less than three years, and that has no
 
 2           part amortized during the first three years;
 
 3      (4)  General or limited partnership interests; and
 
 4      (5)  Membership interests in limited liability companies.
 
 5      211F-     Formation of maka'ainana technology program.(a)
 
 6 The corporation shall establish the maka'ainana technology
 
 7 program for the purpose of allowing individual investors to
 
 8 contribute to the program to invest venture capital in businesses
 
 9 in Hawaii.  The corporation may establish the program either:
 
10      (1)  By forming a separate corporation as a regulated
 
11           investment company meeting the requirements of sections
 
12           851 to 855 of the federal Internal Revenue Code of
 
13           1986, as amended, any requirements of the federal
 
14           Securities and Exchange Commission or the Hawaii
 
15           Uniform Securities Act, chapter 485, and the
 
16           requirements of this section; or
 
17      (2)  As provided in subsections (b) to (l).
 
18      (b)  The corporation may implement the maka'ainana
 
19 technology program through a regulated investment company under
 
20 the terms and conditions established by this part.  The
 
21 corporation may make changes to the program as required for
 
22 participants to obtain the federal and state income tax benefits
 
23 or treatment provided by sections 851 to 855 of the federal
 

 
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 1 Internal Revenue Code of 1986, as amended.
 
 2      The corporation may establish any of the following:
 
 3      (1)  A program that allows an income tax credit under
 
 4           section 235-    ; or
 
 5      (2)  A program that does not allow an income tax credit but
 
 6           under the program the dividends distributed by the
 
 7           regulated investment company are exempt from income
 
 8           taxation under chapter 235.  If the corporation
 
 9           establishes a program that is proposed to be exempt
 
10           from income taxation under chapter 235, it shall
 
11           furnish sufficient information and notify the
 
12           department of taxation and investors of the tax exempt
 
13           status of that program.
 
14      (c)  The corporation may implement the program through the
 
15 use of financial organizations as program managers.  Under the
 
16 program, individuals may establish accounts directly with a
 
17 program manager.
 
18      (d)  The corporation may solicit proposals from one or more
 
19 financial organizations to act as a program manager.  Financial
 
20 organizations submitting proposals shall describe the investment
 
21 instrument.  The corporation shall select as program managers the
 
22 financial organizations from among the bidding financial
 
23 organizations that demonstrate the most advantageous combination,
 

 
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                                                        S.D. 1
                                                        

 
 1 both to potential program participants and this State, based on
 
 2 the following factors:
 
 3      (1)  The financial stability and integrity of the financial
 
 4           organization;
 
 5      (2)  The ability of the financial organization to establish
 
 6           or act as a regulated investment company for the
 
 7           purposes of this part;
 
 8      (3)  The ability of the financial organization to satisfy
 
 9           recordkeeping and reporting requirements for the
 
10           purposes of a program that allows a tax credit under
 
11           section 235-    , a program that is exempt from
 
12           taxation under chapter 235, or both;
 
13      (4)  The financial organization's plan for promoting the
 
14           program and the resources it is willing to allocate to
 
15           promote the program;
 
16      (5)  The fees, if any, proposed to be charged to persons for
 
17           opening accounts;
 
18      (6)  The minimum initial deposit and minimum contributions,
 
19           subject to this section that the financial organization
 
20           will require;
 
21      (7)  Other benefits to the State or its residents included
 
22           in the proposal, including fees payable to the State to
 
23           cover expenses to operate the program.
 

 
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 1      (e)  The corporation may enter into a management contract of
 
 2 up to ten years with a financial organization.  The financial
 
 3 organization shall provide investment instruments meeting the
 
 4 requirements of this section.  The management contract shall
 
 5 include, at a minimum, terms requiring the financial organization
 
 6 to:
 
 7      (1)  Take any action required to keep the program in
 
 8           compliance with requirements of this section and to
 
 9           manage the program to meet the requirements of sections
 
10           851 to 855 of the federal Internal Revenue Code of
 
11           1986, as amended;
 
12      (2)  Keep adequate records of each account, keep each
 
13           account segregated from each other account, and provide
 
14           the corporation with the information necessary to
 
15           prepare any necessary statements;
 
16      (4)  Provide the corporation with the information necessary
 
17           to determine compliance with this section;
 
18      (5)  Provide the corporation access to the books and records
 
19           of the financial organization to the extent needed to
 
20           determine compliance with the contract;
 
21      (6)  Hold all accounts for the benefit of the account owner;
 
22      (7)  Be audited at least annually by a firm of independent
 
23           certified public accountants selected by the financial
 

 
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                                                        S.D. 1
                                                        

 
 1           organization, and provide the results of the audit to
 
 2           the corporation; and
 
 3      (8)  Provide the corporation with copies of all regulatory
 
 4           filings and reports related to the program made by the
 
 5           financial organization during the term of the
 
 6           management contract or while it is holding any
 
 7           accounts, other than confidential filings or reports
 
 8           that will not become part of the program.  The
 
 9           financial organization shall make available for review
 
10           by the corporation, the results of any periodic
 
11           examination of the financial organization by any state
 
12           or federal banking, insurance, or securities
 
13           commission, except to the extent that the report or
 
14           reports may not be disclosed under applicable law or
 
15           the rules of the examining agency.
 
16      (f)  The corporation may require an audit to be conducted of
 
17 the operations and financial position of the program manager at
 
18 any time if the corporation has any reason to be concerned about
 
19 the financial position, the recordkeeping practices, or the
 
20 status of accounts of the program manager.
 
21      (g)  During the term of any contract with a program manager,
 
22 the corporation shall conduct an examination of the program
 
23 manager and its handling of accounts.  The examination shall be
 

 
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 1 conducted at least biennially if the program manager is not
 
 2 otherwise subject to periodic examination by the commissioner of
 
 3 financial institutions, the Federal Deposit Insurance
 
 4 Corporation, or other similar entity.
 
 5      (h)  If selection of a financial organization as a program
 
 6 manager is not renewed, after the end of the term:
 
 7      (1)  Accounts previously established and held in investment
 
 8           instruments at the financial organization may be
 
 9           terminated;
 
10      (2)  Additional contributions may be made to the accounts;
 
11      (3)  No new accounts may be placed with the financial
 
12           organization; and
 
13      (4)  Existing accounts held by the financial organization
 
14           shall remain subject to all oversight and reporting
 
15           requirements established by the corporation.
 
16 If the corporation terminates a financial organization as a
 
17 program manager, the corporation shall take custody of accounts
 
18 held by the financial organization and shall seek to promptly
 
19 transfer the accounts to another financial organization that is
 
20 selected as a program manager and into investment instruments as
 
21 similar to the original instruments as possible.
 
22      (i)  The corporation may enter into contracts for the
 
23 services of consultants for rendering professional and technical
 

 
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                                                        S.D. 1
                                                        

 
 1 assistance and advice and any other contracts that are necessary
 
 2 and proper for the implementation of the program.
 
 3      (j)  The program shall only allow contributions from
 
 4 individual investors in amounts ranging from a minimum of $1,000
 
 5 to a maximum of $20,000 per investor.  An investor may remove the
 
 6 investor's contribution from the program at any time subject to
 
 7 any applicable federal or state law.  Upon request for removal,
 
 8 subject to the preceding sentence, the program manager shall pay
 
 9 to the investor the value of the contribution at the time of
 
10 removal.
 
11      (k)  The program manager shall invest all contributions
 
12 received from investors in securities not limited to legal
 
13 investments under state laws relating to the investment of trust
 
14 fund assets by trust companies, including those authorized by
 
15 article 8 of chapter 412.  Contributions shall be used for
 
16 venture capital investment.  Investment may be made in any manner
 
17 the program deems correct, including in a manner similar to a
 
18 mutual fund.  If no venture capital investment is available at
 
19 the time a contribution is made to the program, the program
 
20 manager may invest the contribution in any manner allowed a
 
21 regulated investment company until a venture capital investment
 
22 opportunity occurs.
 
23      (l)  The corporation may adopt any necessary rules under
 

 
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 1 chapter 91.
 
 2      211F-  Limitation of liability.  In no case shall the
 
 3 corporation, officers or employees of the corporation, or the
 
 4 State be liable for the monetary loses of individuals
 
 5 contributing to the program.  In all cases, the program manager
 
 6 shall inform individual contributors of the risk involved in
 
 7 contributing to the program."
 
 8      SECTION 32.  Chapter 235, Hawaii Revised Statutes, is
 
 9 amended by adding a new section to be appropriately designated
 
10 and to read as follows:
 
11      "235-     Tax credit to promote investment in venture
 
12 capital.  (a)  Any taxpayer who files an individual income tax
 
13 return for a taxable year may claim an income tax credit under
 
14 this section against the Hawaii state individual net income tax.
 
15      (b)  The tax credit shall be an amount equal to twenty-five
 
16 per cent of the contribution made by the taxpayer during the
 
17 taxable year to a maka`ainana technology program, established
 
18 pursuant to part    , chapter 211F that has not been declared by
 
19 the strategic development corporation under section 211F-    to
 
20 be exempt from taxation of income under this chapter.  The credit
 
21 shall not exceed $5,000.
 
22      (c)  If the tax credit claimed by the taxpayer under this
 
23 section exceeds the amount of the income tax payments due from
 

 
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                                                        S.D. 1
                                                        

 
 1 the taxpayer, the excess of credit over payments due shall be
 
 2 refunded to the taxpayer; provided that the tax credit properly
 
 3 claimed by a taxpayer who has no income tax liability shall be
 
 4 paid to the taxpayer; and provided that no refunds or payments on
 
 5 account of the tax credit allowed by this section shall be made
 
 6 for amounts less than $1.
 
 7      (d)  If the taxpayer removes the taxpayer's contributions,
 
 8 or any part of the contributions, from the maka'ainana program,
 
 9 the taxpayer shall repay to the department the tax credit taken
 
10 as follows:
 
11      If the contributions are removed:          The repayment
 
12                                              percentage shall be:
 
13      (1)  One full year after made              100 per cent;
 
14      (2)  Two full years after made              80 per cent;
 
15      (3)  Three full years after made            60 per cent;
 
16      (4)  Four full years after made             40 per cent;
 
17      (5)  Five full years after made             20 per cent;
 
18      Any time after the periods set forth above, zero.
 
19      (e)  The director of taxation shall prepare such forms as
 
20 may be necessary to claim a credit under this section, may
 
21 require proof of the claim for the tax credit, and may adopt
 
22 rules pursuant to chapter 91.
 
23      (f)  All of the provisions relating to assessments and
 

 
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 1 refunds under this chapter and under section 231-23(c)(1) shall
 
 2 apply to the tax credit under this section.
 
 3      (g)  Claims for the tax credit under this section, including
 
 4 any amended claims, shall be filed on or before the end of the
 
 5 twelfth month following the taxable year for which the credit may
 
 6 be claimed."
 
 7      SECTION 33.  The governor's special advisor for technology
 
 8 development shall submit to the legislature at least twenty days
 
 9 prior to the convening of the 2001 regular session a report on
 
10 the initiatives and actions taken in response to this Act, and
 
11 shall work with the responsible agencies to ensure a full and
 
12 accurate accounting of the results of any new initiatives,
 
13 changes in operations, and any problems that should be addressed
 
14 as a result.
 
15      SECTION 34.  In codifying the new sections added by this
 
16 Act, the revisor of statutes shall substitute the appropriate
 
17 section numbers for the letters used in designating the new
 
18 sections in this Act.
 
19      SECTION 35.  Statutory material to be repealed is bracketed.
 
20 New statutory material is underscored.
 
21      SECTION 36.  This Act shall take effect upon its approval;
 
22 provided that:
 
23      (1)  Sections 18, 20, 21, 23, 24, 25, and 26 shall take
 

 
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 1           effect on July 1, 2000; and
 
 2      (2)  Part I and section 32, upon their approval, shall apply
 
 3           to taxable years beginning after December 31, 1999.