REPORT TITLE:
Technology; Taxation


DESCRIPTION:
Allows biotechnology companies to sell their unused net operating
loss carryover and unused tax credits to other qualified
biotechnology companies.  Also extends capital loss carryforward
for biotechnology companies.  Enhances the tax benefits provided
in Act 178, Session Laws of Hawaii 1999 for qualified high
technology business.      (SB2482 HD1)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        2482
THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 2000                                H.D. 1
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT
RELATING TO TECHNOLOGY BUSINESS TAXATION.



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

 1      SECTION 1.  Chapter 235, Hawaii Revised Statutes, is amended
 
 2 by adding a new section to be appropriately designated and to
 
 3 read as follows:
 
 4      "235-    High technology; sale of unused net operating loss
 
 5 carryover and unused tax credits.  (a)  A biotechnology company
 
 6 may apply to the department of taxation to sell its unused net
 
 7 operating loss carryover or unused tax credits to another
 
 8 biotechnology company.  If approved by the department of
 
 9 taxation, a biotechnology company may sell its unused net
 
10 operating loss carryover or tax credits to another biotechnology
 
11 company in an amount equal to at least seventy-five per cent of
 
12 the dollar value of the net operating loss or tax credits.  The
 
13 net operating loss or tax credits purchased by the biotechnology
 
14 company shall be claimed in the year the sale is approved by the
 
15 department.  Any unused net operating loss or tax credits by the
 
16 biotechnology company may be carried forward under applicable
 
17 law.  The income received by the seller biotechnology company
 
18 shall be reported on its tax return but shall not be considered
 
19 taxable income.  No qualified biotechnology company shall sell:
 

 
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 1      (1)  Net operating loss carryovers in excess of $1; or
 
 2      (2)  Tax credits in excess of $1;
 
 3 in any taxable year.
 
 4      (b)  No application for the sale of unused net operating
 
 5 losses or tax credits shall be approved in which the seller
 
 6 biotechnology company:
 
 7      (1)  Has demonstrated positive net income in any of the two
 
 8           previous full years of ongoing operations as determined
 
 9           on its financial statements;
 
10      (2)  Has demonstrated a ratio in excess of one hundred ten
 
11           per cent or greater of operating revenues divided by
 
12           operating expenses in any of the two previous full
 
13           years of operations as determined on its financial
 
14           statements; or
 
15      (3)  Is directly or indirectly at least fifty per cent owned
 
16           or controlled by another corporation that has
 
17           demonstrated positive net income in any of the two
 
18           previous full years of ongoing operations as determined
 
19           on its financial statements or is part of a
 
20           consolidated group of affiliate corporations, as filed
 
21           for federal income tax purposes, that in the aggregate
 
22           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 combined financial statements.
 
 3      (c)  The department of taxation shall adopt rules, pursuant
 
 4 to chapter 91, to effectuate this section including:
 
 5      (1)  Procedure and criteria for the approval or disapproval
 
 6           of applications filed by biotechnology companies buying
 
 7           or selling unused net operating losses or tax credits;
 
 8           and
 
 9      (2)  Criteria to provide for the equitable apportionment of
 
10           qualified sales allowed annually under this section to
 
11           eligible applicants.
 
12      (d)  As used in this section:
 
13      "Biotechnology" means the continually expanding body of
 
14 fundamental knowledge regarding the functioning of biological
 
15 systems, including the marine sciences, from the macro level to
 
16 the molecular and subatomic levels, as well as novel products,
 
17 services, technologies, and sub-technologies developed as a
 
18 result of insights gained from research advances that add to that
 
19 body of fundamental knowledge.
 
20      "Biotechnology company" means a corporation that has its
 
21 headquarters or base of operation in the State and is engaged in
 
22 the research, development, production, or provision of
 
23 biotechnology or the marine sciences, for the purpose of
 

 
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 1 developing or providing products or processes for specific
 
 2 commercial or public purposes, including but not limited to
 
 3 medical, pharmaceutical, nutritional, and other health-related,
 
 4 agricultural, or environmental purposes.
 
 5      "Tax credits" means tax credits allowed under sections
 
 6 235-110.7 and 235-110.91."
 
 7      SECTION 2.  Section 235-2.4, Hawaii Revised Statutes, is
 
 8 amended to read as follows:
 
 9      "235-2.4  Operation of certain Internal Revenue Code
 
10 provisions.(a)  Section 63 (with respect to taxable income
 
11 defined) of the Internal Revenue Code shall be operative for the
 
12 purposes of this chapter, except that the standard deduction
 
13 amount in section 63(c) of the Internal Revenue Code shall
 
14 instead mean:
 
15      (1)  $1,900 in the case of:
 
16           (A)  A joint return as provided by section 235-93; or
 
17           (B)  A surviving spouse (as defined in section 2(a) of
 
18                the Internal Revenue Code);
 
19      (2)  $1,650 in the case of a head of household (as defined
 
20           in section 2(b) of the Internal Revenue Code);
 
21      (3)  $1,500 in the case of an individual who is not married
 
22           and who is not a surviving spouse or head of household;
 
23           or
 

 
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 1      (4)  $950 in the case of a married individual filing a
 
 2           separate return.
 
 3      Section 63(c)(4) shall not be operative in this State.
 
 4 Section 63(c)(5) shall be operative, except that the limitation
 
 5 on basic standard deduction in the case of certain dependents
 
 6 shall be the greater of $500 or [such] the individual's earned
 
 7 income.  Section 63(f) shall not be operative in this State.
 
 8      The standard deduction amount for nonresidents shall be
 
 9 calculated pursuant to section 235-5.
 
10      (b)  Section 72 (with respect to annuities; certain proceeds
 
11 of endowment and life insurance contracts) of the Internal
 
12 Revenue Code shall be operative for purposes of this chapter and
 
13 be interpreted with due regard to section 235-7(a), except that
 
14 the ten per cent additional tax on early distributions from
 
15 retirement plans in section 72(t) shall not be operative for
 
16 purposes of this chapter.
 
17      (c)  Section 121 (with respect to exclusion of gain from
 
18 sale of principal residence) of the Internal Revenue Code shall
 
19 be operative for purposes of this chapter, except that for the
 
20 election under section 121(f), a reference to section 1034
 
21 treatment means a reference to section 235-2.4(n) in effect for
 
22 taxable year 1997.
 

 
 
 
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 1     (d)  Section 219 (with respect to retirement savings) of the
 
 2 Internal Revenue Code shall be operative for the purpose of this
 
 3 chapter.  For the purpose of computing the limitation on the
 
 4 deduction for active participants in certain pension plans for
 
 5 state income tax purposes, adjusted gross income as used in
 
 6 section 219 as operative for this chapter means federal adjusted
 
 7 gross income.
 
 8     (e)  Section 220 (with respect to medical savings accounts)
 
 9 of the Internal Revenue Code shall be operative for the purpose
 
10 of this chapter, but only with respect to medical services
 
11 accounts that have been approved by the Secretary of the Treasury
 
12 of the United States.
 
13     (f)  Section 408A (with respect to Roth Individual Retirement
 
14 Accounts) of the Internal Revenue Code shall be operative for the
 
15 purposes of this chapter.  For the purposes of determining the
 
16 aggregate amount of contributions to a Roth Individual Retirement
 
17 Account or qualified rollover contribution to a Roth Individual
 
18 Retirement Account from an individual retirement plan other than
 
19 a Roth Individual Retirement Account, adjusted gross income as
 
20 used in section 408A as operative for this chapter means federal
 
21 adjusted gross income.
 
22     (g)  In administering the provisions of sections 410 to 417
 
23 (with respect to special rules relating to pensions, profit
 

 
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 1 sharing, stock bonus plans, etc.), sections 418 to 418E (with
 
 2 respect to special rules for multiemployer plans), and sections
 
 3 419 and 419A (with respect to treatment of welfare benefit funds)
 
 4 of the Internal Revenue Code, the department of taxation shall
 
 5 adopt rules under chapter 91 relating to the specific
 
 6 requirements under such sections and to such other administrative
 
 7 requirements under those sections as may be necessary for the
 
 8 efficient administration of sections 410 to 419A.
 
 9      In administering sections 401 to 419A (with respect to
 
10 deferred compensation) of the Internal Revenue Code, Public Law
 
11 93-406, section 1017(i), shall be operative for the purposes of
 
12 this chapter.
 
13      In administering section 402 (with respect to the taxability
 
14 of beneficiary of employees' trust) of the Internal Revenue Code,
 
15 the tax imposed on lump sum distributions by section 402(e) of
 
16 the Internal Revenue Code shall be operative for the purposes of
 
17 this chapter and the tax imposed therein is hereby imposed by
 
18 this chapter at the rate determined under this chapter.
 
19     (h)  Section 468B (with respect to special rules for
 
20 designated settlement funds) of the Internal Revenue Code shall
 
21 be operative for the purposes of this chapter and the tax imposed
 
22 therein is hereby imposed by this chapter at a rate equal to the
 

 
 
 
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 1 maximum rate in effect for the taxable year imposed on estates
 
 2 and trusts under section 235-51.
 
 3     (i)  Section 469 (with respect to passive activities and
 
 4 credits limited) of the Internal Revenue Code shall be operative
 
 5 for the purposes of this chapter.  For the purpose of computing
 
 6 the offset for rental real estate activities for state income tax
 
 7 purposes, adjusted gross income as used in section 469 as
 
 8 operative for this chapter means federal adjusted gross income.
 
 9     (j)  Sections 512 to 514 (with respect to taxation of
 
10 business income of certain exempt organizations) of the Internal
 
11 Revenue Code shall be operative for the purposes of this chapter
 
12 as provided in this subsection.
 
13     "Unrelated business taxable income" means the same as in the
 
14 Internal Revenue Code, except that in the computation thereof
 
15 sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall
 
16 apply, and in the determination of the net operating loss
 
17 deduction there shall not be taken into account any amount of
 
18 income or deduction [which] that is excluded in computing the
 
19 unrelated business taxable income.  Unrelated business taxable
 
20 income shall not include any income from a prepaid legal service
 
21 plan.
 
22     For a person described in section 401 or 501 of the Internal
 
23 Revenue Code, as modified by section 235-2.3, the tax imposed by
 

 
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 1 section 235-51 or 235-71 shall be imposed upon the person's
 
 2 unrelated business taxable income.
 
 3     (k)  Section 521 (with respect to cooperatives) and
 
 4 subchapter T (sections 1381 to 1388, with respect to cooperatives
 
 5 and their patrons) of the Internal Revenue Code shall be
 
 6 operative for the purposes of this chapter as to any cooperative
 
 7 fully meeting the requirements of section 421-23, except that
 
 8 Internal Revenue Code section 521 cooperatives need not be
 
 9 organized in Hawaii.
 
10     (l)  Sections 527 (with respect to political organizations)
 
11 and 528 (with respect to certain homeowners associations) of the
 
12 Internal Revenue Code shall be operative for the purposes of this
 
13 chapter and the taxes imposed in each such section are hereby
 
14 imposed by this chapter at the rates determined under section
 
15 235-71.
 
16     (m)  Section 530 (with respect to education individual
 
17 retirement accounts) of the Internal Revenue Code shall be
 
18 operative for the purposes of this chapter.  For the purpose of
 
19 determining the maximum amount that a contributor could make to
 
20 an education individual retirement account for state income tax
 
21 purposes, modified adjusted gross income as used in section 530
 
22 for this chapter means federal modified adjusted gross income as
 
23 defined in section 530.
 

 
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 1     (n)  Section 641 (with respect to imposition of tax) of the
 
 2 Internal Revenue Code shall be operative for the purposes of this
 
 3 chapter subject to the following:
 
 4      (1)  The deduction for exemptions shall be allowed as
 
 5           provided in section 235-54(b)[.];
 
 6      (2)  The deduction for contributions and gifts in
 
 7           determining taxable income shall be limited to the
 
 8           amount allowed in the case of an individual, unless the
 
 9           contributions and gifts are to be used exclusively in
 
10           the State[.]; and
 
11      (3)  The tax imposed by section 1(e) of the Internal Revenue
 
12           Code as applied by section 641 of the Internal Revenue
 
13           Code is hereby imposed by this chapter at the rate and
 
14           amount as determined under section 235-51 on estates
 
15           and trusts.
 
16      (o)  Section 667 (with respect to treatment of amounts
 
17 deemed distributed by trusts in preceding years) of the Internal
 
18 Revenue Code shall be operative for the purposes of this chapter
 
19 and the tax imposed therein is hereby imposed by this chapter at
 
20 the rate determined under this chapter; except that the reference
 
21 to tax-exempt interest to which section 103 of the Internal
 
22 Revenue Code applies in section 667(a) of the Internal Revenue
 

 
 
 
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 1 Code shall instead be a reference to tax-exempt interest to which
 
 2 section 235-7(b) applies.
 
 3     (p)  Section 685 (with respect to treatment of qualified
 
 4 funeral trusts) of the Internal Revenue Code shall be operative
 
 5 for purposes of this chapter, except that the tax imposed under
 
 6 this chapter shall be computed at the tax rates provided under
 
 7 section 235-51, and no deduction for the exemption amount
 
 8 provided in section 235-54(b) shall be allowed.  The cost-of-
 
 9 living adjustment determined under section 1(f)(3) of the
 
10 Internal Revenue Code shall be operative for the purpose of
 
11 applying section 685(c)(3) under this chapter.
 
12     (q)  Section 704 (with respect to a partner's distributive
 
13 share) of the Internal Revenue Code shall be operative for
 
14 purposes of this chapter; except that subsection (b)(2) shall not
 
15 apply to allocations of the high-technology business investment
 
16 tax credit allowed by section 235-110.9.
 
17     [(q)] (r)  Section 1212 (with respect to capital loss
 
18 carrybacks and carryforwards) of the Internal Revenue Code shall
 
19 be operative for the purposes of this chapter; except that for
 
20 the purposes of this chapter the capital loss carryback
 
21 provisions of section 1212 shall not be operative and the capital
 
22 loss carryforward allowed by section 1212(a) shall be limited to
 
23 five years[.]; except for biotechnology companies under section
 
24 235-  , which shall be limited to fifteen years.
 

 
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 1     [(r)] (s)  Subchapter S (sections 1361 to 1379) (with respect
 
 2 to tax treatment of S corporations and their shareholders) of
 
 3 chapter 1 of the Internal Revenue Code shall be operative for the
 
 4 purposes of this chapter as provided in part VII.
 
 5     [(s)] (t) Section 6015 (with respect to relief from joint and
 
 6 several liability on joint return) of the Internal Revenue Code
 
 7 is operative for purposes of this chapter.
 
 8     [(t)] (u) Subchapter C (sections 6221 to 6233) (with respect
 
 9 to tax treatment of partnership items) of chapter 63 of the
 
10 Internal Revenue Code shall be operative for the purposes of this
 
11 chapter.
 
12     [(u)] (v)  Subchapter D (sections 6240 to 6255) (with respect
 
13 to simplified audit procedures for electing large partnerships)
 
14 of the Internal Revenue Code shall be operative for the purposes
 
15 of this chapter, with due regard to chapter 232 relating to tax
 
16 appeals.
 
17     [(v)] (w)  Section 6511(h) (with respect to running of
 
18 periods of limitation suspended while taxpayer is unable to
 
19 manage financial affairs due to disability) of the Internal
 
20 Revenue Code shall be operative for purposes of this chapter,
 
21 with due regard to section 235-111 relating to the limitation
 
22 period for assessment, levy, collection, or credit.
 

 
 
 
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 1     [(w)] (x)  Section 7518 (with respect to capital construction
 
 2 fund for commercial fishers) of the Internal Revenue Code shall
 
 3 be operative for the purposes of this chapter.  Qualified
 
 4 withdrawals for the acquisition, construction, or reconstruction
 
 5 of any qualified asset [which] that is attributable to deposits
 
 6 made before the effective date of this section shall not reduce
 
 7 the basis of the asset when withdrawn.  Qualified withdrawals
 
 8 shall be treated on a first-in-first-out basis."
 
 9      SECTION 3.  Section 235-7.3, Hawaii Revised Statutes, is
 
10 amended to read as follows:
 
11      "[[]235-7.3[]]  Royalties and other income from high
 
12 technology business excluded from gross income.(a)  In addition
 
13 to the exclusions in section 235-7, there shall be excluded from
 
14 gross income, adjusted gross income, and taxable income, amounts
 
15 received by an individual or a qualified high technology business
 
16 as royalties and other income derived from patents, trade
 
17 secrets, and copyrights:
 
18      (1)  Owned by the individual or qualified high technology
 
19           business; and
 
20      (2)  Developed and arising out of a qualified high
 
21           technology business.
 
22      (b)  For the purposes of this section:
 

 
 
 
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 1      "Computer data" means any representation of information,
 
 2 knowledge, facts, concepts, or instructions that is being
 
 3 prepared or has been prepared and is intended to be processed, is
 
 4 being processed, or has been processed in a computer or computer
 
 5 network.  "Computer data" includes works in the performing arts
 
 6 such as audio files, video files, audiovisual files, computer
 
 7 animation, and other entertainment products that are perceived by
 
 8 or through the operation of a computer.
 
 9      "Computer program" means an ordered set of computer data
 
10 representing coded instructions or statements, that, when
 
11 executed by a computer, causes the computer to perform one or
 
12 more computer operations.
 
13      "Computer software" means computer data, a computer program,
 
14 or a set of computer programs, procedures, or associated
 
15 documentation concerned with the operation and function of a
 
16 computer system, and includes both systems and application
 
17 programs and subdivisions, such as assemblers, compilers,
 
18 routines, generators, and utility programs.
 
19      "Qualified high technology business" means a business
 
20 performing qualified research.  The term "qualified high
 
21 technology business" does not include:
 
22      (1)  Any trade or business involving the performance of
 
23           services in the field of law, architecture, accounting,
 

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

 
 
 
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 1      (2)  Developing, designing, modifying, programming, and
 
 2           licensing computer software."
 
 3      SECTION 4.  Section 235-9.5, Hawaii Revised Statutes, is
 
 4 amended to read as follows:
 
 5      "[[]235-9.5[]]  Stock options from qualified high
 
 6 technology businesses exempt from taxation.(a)  Notwithstanding
 
 7 any law to the contrary, all income received from stock options
 
 8 from a qualified high technology business by an employee that
 
 9 would otherwise be taxed as ordinary income or as capital gains
 
10 to those employees is exempt from taxation under this chapter.
 
11      (b)  For the purposes of this section:
 
12      "Computer data" means any representation of information,
 
13 knowledge, facts, concepts, or instructions that is being
 
14 prepared or has been prepared and is intended to be processed, is
 
15 being processed, or has been processed in a computer or computer
 
16 network.  "Computer data" includes works in the performing arts
 
17 such as audio files, video files, audiovisual files, computer
 
18 animation, and other entertainment products that are perceived by
 
19 or through the operation of a computer.
 
20      "Computer program" means an ordered set of computer data
 
21 representing coded instructions or statements, that, when
 
22 executed by a computer, causes the computer to perform one or
 
23 more computer operations.
 

 
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 1      "Computer software" means computer data, a computer program,
 
 2 or a set of computer programs, procedures, or associated
 
 3 documentation concerned with the operation and function of a
 
 4 computer system, and includes both systems and application
 
 5 programs and subdivisions, such as assemblers, compilers,
 
 6 routines, generators, and utility programs.
 
 7      "Qualified high technology business" means a business
 
 8 performing qualified research.  The term "qualified high
 
 9 technology business" does not include:
 
10      (1)  Any trade or business involving the performance of
 
11           services in the field of law, architecture, accounting,
 
12           actuarial science, [performing arts,] consulting,
 
13           athletics, financial services, or brokerage services;
 
14      (2)  Any banking, insurance, financing, leasing, rental,
 
15           investing, or similar business; any farming business,
 
16           including the business of raising or harvesting trees;
 
17           any business involving the production or extraction of
 
18           products of a character with respect to which a
 
19           deduction is allowable under section 611 (with respect
 
20           to allowance of deduction for depletion), 613 (with
 
21           respect to basis for percentage depletion), or 613A
 
22           (with respect to limitation on percentage depleting in
 
23           cases of oil and gas wells) of the Internal Revenue
 
24           Code;
 

 
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 1      (3)  Any business operating a hotel, motel, restaurant, or
 
 2           similar business; and
 
 3      (4)  Any trade or business involving a hospital, a private
 
 4           office of a licensed health care professional, a group
 
 5           practice of licensed health care professionals, or a
 
 6           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      SECTION 5.  Section 235-110.9, Hawaii Revised Statutes, is
 
13 amended as follows:
 
14      1.  By amending its title to read:
 
15      "[[]235-110.9[]]  High-technology business investment tax
 
16 credit."
 
17      2.  By amending subsections (d), (e), and (f) to read:
 
18      "(d)  [As used in] For the purposes of this section:
 
19      Computer data" means any representation of information,
 
20 knowledge, facts, concepts, or instructions that is being
 
21 prepared or has been prepared and is intended to be processed, is
 
22 being processed, or has been processed in a computer or computer
 
23 network.  "Computer data" includes works in the performing arts
 

 
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 1 such as audio files, video files, audiovisual files, computer
 
 2 animation, and other entertainment products that are perceived by
 
 3 or through the operation of a computer; provided the works are
 
 4 created in the State and are transmitted or broadcast to users
 
 5 over the internet by way of servers located in the State.
 
 6      "Computer program" means an ordered set of computer data
 
 7 representing coded instructions or statements, that, when
 
 8 executed by a computer, causes the computer to perform one or
 
 9 more computer operations.
 
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      "Investment" means a nonrefundable investment, at risk, as
 
17 that term is used in section 465 (with respect to deductions
 
18 limited to amount at risk) of the Internal Revenue Code, in a
 
19 qualified high technology business, of cash that is transferred
 
20 to the qualified high technology business, the transfer of which
 
21 is in connection with a transaction in exchange for stock,
 
22 interests in partnerships, joint ventures, or other entities,
 
23 licenses (exclusive or nonexclusive), rights to use technology,
 

 
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 1 marketing rights, warrants, options, or any items similar to
 
 2 those included herein, including but not limited to options or
 
 3 rights to acquire any of the items included herein.  The
 
 4 nonrefundable investment is entirely at risk of loss where
 
 5 repayment depends upon the success of the qualified high
 
 6 technology business.  If the money invested is to be repaid to
 
 7 the taxpayer, no repayment except for dividends or interest shall
 
 8 be made for at least three years from the date the investment is
 
 9 made.  The annual amount of any dividend and interest payment to
 
10 the taxpayer shall not exceed twelve per cent of the amount of
 
11 the investment.
 
12      [(e) For the purposes of this section:]
 
13      "Qualified high technology business" [means]:
 
14      (1)  [A] Means a business, employing or owning capital or
 
15           property, or maintaining an office, in this State; [and
 
16           which] that:
 
17     [(2)] (A)  Conducts one hundred per cent of its activities in
 
18                performing qualified research in this State; or
 
19           (B)  Receives one hundred per cent of its gross income
 
20                derived from qualified research; provided that the
 
21                income is received from [products]:
 
22                (i)  Products sold from, manufactured[,] in, or
 
23                     produced in the State; or [services]
 

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

 
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 1     [(4)] (D)  Any trade or business involving a hospital, a
 
 2                private office of a licensed health care
 
 3                professional, a group practice of licensed health
 
 4                care professionals, or a nursing home.
 
 5     "Qualified research" means:
 
 6     (1)   The same as in section 41(d) of the Internal Revenue
 
 7           Code; or
 
 8     (2)   Developing, designing, modifying, programming, and
 
 9           licensing computer software;
 
10 except that it shall not include research conducted outside the
 
11 State.
 
12     [(f)] (e)  This section shall not apply to taxable years
 
13 beginning after December 31, 2005."
 
14     SECTION 6.  Section 235-110.91, Hawaii Revised Statutes, is
 
15 amended to read as follows:
 
16     "[[]235-110.91[]]  Tax credit for increasing research
 
17 activities.(a)  Section 41 (with respect to the credit for
 
18 increasing research activities) and section 280C(c) (with respect
 
19 to certain expenses for which the credit for increasing research
 
20 activities are allowable) of the Internal Revenue Code shall be
 
21 operative for the purposes of this chapter as provided in this
 
22 section.  If section 41 of the Internal Revenue Code is repealed
 
23 or terminated prior to January 1, 2006, its provisions shall
 

 
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 1 remain in effect until December 31, 2005, for purposes of the
 
 2 income tax law of the State as provided in subsection (h).
 
 3     (b)  All references to Internal Revenue Code sections within
 
 4 sections 41 and 280C(c) of the Internal Revenue Code shall be
 
 5 operative for purposes of this section.
 
 6     (c)  There shall be allowed to each taxpayer, subject to the
 
 7 tax imposed by this chapter, an income tax credit for increased
 
 8 research activities [that] equal to the credit for research
 
 9 activities provided by section 41 of the Internal Revenue Code.
 
10 The credit shall be deductible from the taxpayer's net income tax
 
11 liability, if any, imposed by this chapter for the taxable year
 
12 in which the credit is properly claimed.
 
13     (d)  [The tax credit for increased research activities shall
 
14 be equal to the sum of:
 
15     (1)   2.5 per cent of the excess (if any) of:
 
16           (A)  The qualified research expenses for the taxable
 
17                year; over
 
18           (B)  The base amount; and
 
19     (2)   2.5 per cent of the basic research payments determined
 
20           under section 41(e)(1)(A) of the Internal Revenue Code.
 
21     (e)  For purposes of this section:
 
22     (1)   The alternative incremental credit in section 41(c)(4)
 
23           of the Internal Revenue Code shall be equal to the sum
 
24           of 12.5 per cent of:
 

 
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 1           (A)  1.65 per cent of so much of the qualified research
 
 2                expenses for the taxable year as exceeds one per
 
 3                cent of the average described in section
 
 4                41(c)(1)(B) but does not exceed 1.5 per cent of
 
 5                such average;
 
 6           (B)  2.2 per cent of so much of those expenses as
 
 7                exceeds 1.5 per cent of the average but does not
 
 8                exceed two per cent of the average; and
 
 9           (C)  2.75 per cent of so much of those expenses as
 
10                exceeds two per cent of the average;
 
11     (2)   The term] For purposes of this section, "qualified
 
12           research" [under section 41(d)(1) of the Internal
 
13           Revenue Code shall not include research conducted
 
14           outside of the State; and
 
15     (3)   The term] and "basic research" under section 41(e) of
 
16           the Internal Revenue Code shall not include research
 
17           conducted outside of the State.
 
18     [(f)  The amount of reduced credit in section 280C(c)(3)(B)
 
19 of the Internal Revenue Code shall be equal to the excess of:
 
20     (1)   The amount of credit determined under section 41(a) (as
 
21           provided for in this section) (without regard to this
 
22           paragraph); over
 

 
 
 
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 1     (2)   The product of:
 
 2           (A)  The amount described in subsection (f)(1); and
 
 3           (B)  12.5 per cent of the maximum rate of tax under
 
 4                section 11(b)(1) of the Internal Revenue Code.
 
 5     (g)] (e)  If the tax credit for increased research activities
 
 6 claimed by a taxpayer exceeds the amount of income tax payment
 
 7 due from the taxpayer, the excess of the tax credit over payments
 
 8 due may be used as a credit against the taxpayer's income tax
 
 9 liability in subsequent years until exhausted.
 
10     [(h)] (f)   All claims for a tax credit under this section
 
11 [must] shall  be filed on or before the end of the twelfth month
 
12 following the close of the taxable year for which the credit may
 
13 be claimed. Failure to properly claim the credit shall constitute
 
14 a waiver of the right to claim the credit.
 
15     [(i)] (g)  The director of taxation may adopt any rules under
 
16 chapter 91 and forms necessary to carry out this section.
 
17     [(j)] (h)  This section shall not apply to taxable years
 
18 beginning after December 31, 2005."
 
19     SECTION 7.  Statutory material to be repealed is bracketed.
 
20 New statutory material is underscored.
 
21     SECTION 8.  This Act, upon its approval, shall apply to
 
22 taxable years beginning after December 31, 2010.