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THE SENATE

S.B. NO.

1197

TWENTY-FIRST LEGISLATURE, 2001

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO HIGH TECHNOLOGY.

 

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

SECTION 1. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235- Technology infrastructure renovation tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter an income tax credit which shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year for which the credit is properly claimed.

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

In the case of a partnership, S corporation, estate, or trust renovating an existing commercial building located in Hawaii, the credit allowable is for renovation costs incurred by the entity for the taxable year. The cost upon which the credit is computed shall be determined at the entity level. Distribution and share of the credit shall be determined pursuant to section 235-110.7(a).

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no credit shall be allowed for that portion of the renovation costs for which the deduction is taken. The basis of the existing commercial building in Hawaii for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of the credit allowable and claimed. In the alternative, the taxpayer shall treat the amount of the credit allowable and claimed as a taxable income item for the taxable year in which it is properly recognized under the method of accounting used to compute taxable income.

(c) The tax credit claimed by a taxpayer pursuant to this section shall be deductible from the taxpayer's net income tax liability, if any, for the taxable year in which the credit is properly claimed. If the credit for renovation costs claimed by a taxpayer exceeds the taxpayer's income tax liability, the excess of the credit over liability may be used against the taxpayer's income tax liability in subsequent years until exhausted.

(d) All claims for a tax credit under this section must be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to properly claim the credit shall constitute a waiver of the right to claim the credit.

(e) The director may adopt rules and forms necessary to carry out this section. The director may require the taxpayer to furnish reasonable information to ascertain the validity of the claim for credit under this section.

(f) The tax credit allowed under this section shall be available for taxable years beginning after December 31, 2000, and shall not be available for taxable years beginning after December 31, 2005.

(g) As used in this section:

"Data, voice, and video communications" means high speed Internet access, direct satellite communications access, enlarged riser capacities, conduits, videoconferencing facilities, emergency electrical backup, and disaster back-up and recovery access.

"Energy efficiency" means programmed start and stop, duty cycling and automatic reset, automatic demand control, adaptive control, heat and cold optimization, and optimal energy sourcing.

"Existing commercial building" means a commercial building which was placed in service before the effective date of this Act.

"Lifesafety systems" means closed-circuit television, card access control, smoke detection systems, intrusion alarms, emergency control of elevators, HVAC systems and doors, and universal power supply systems.

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

"Renovation cost" means costs incurred to plan, design, install, construct and purchase equipment to provide the building with energy efficiency, lifesafety systems, and data, voice, and video communications."

SECTION 2. Chapter 237, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§237- Exemption for sale of net operating loss by qualified high technology business. There shall be exempted from, and excluded from the measure of, taxes imposed by this chapter all of the value or gross income derived from the sale of a net operating loss by a qualified high technology business defined in section 235-111.5 or by any partner, member, or shareholder of a qualified high technology business in the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations."

SECTION 3. Section 235-2.4, Hawaii Revised Statutes, is amended to read as follows:

"§235-2.4 Operation of certain Internal Revenue Code provisions; sections 63 to 530. (a) Section 63 (with respect to taxable income defined) of the Internal Revenue Code shall be operative for the purposes of this chapter, except that the standard deduction amount in section 63(c) of the Internal Revenue Code shall instead mean:

(1) $1,900 in the case of:

(A) A joint return as provided by section 235-93; or

(B) A surviving spouse (as defined in section 2(a) of the Internal Revenue Code);

(2) $1,650 in the case of a head of household (as defined in section 2(b) of the Internal Revenue Code);

(3) $1,500 in the case of an individual who is not married and who is not a surviving spouse or head of household; or

(4) $950 in the case of a married individual filing a separate return.

Section 63(c)(4) shall not be operative in this State. Section 63(c)(5) shall be operative, except that the limitation on basic standard deduction in the case of certain dependents shall be the greater of $500 or such individual's earned income. Section 63(f) shall not be operative in this State.

The standard deduction amount for nonresidents shall be calculated pursuant to section 235-5.

(b) Section 72 (with respect to annuities; certain proceeds of endowment and life insurance contracts) of the Internal Revenue Code shall be operative for purposes of this chapter and be interpreted with due regard to section 235-7(a), except that the ten per cent additional tax on early distributions from retirement plans in section 72(t) shall not be operative for purposes of this chapter.

(c) Section 121 (with respect to exclusion of gain from sale of principal residence) of the Internal Revenue Code shall be operative for purposes of this chapter, except that for the election under section 121(f), a reference to section 1034 treatment means a reference to section 235-2.4(n) in effect for taxable year 1997.

(d) Section 165 (with respect to losses) of the Internal Revenue Code shall be operative for purposes of this chapter. Section 165 as operative for this chapter shall also apply to losses sustained from the sale of stocks issued through the exercise of the stock options or warrants granted by a qualified high technology business defined in section 235-9.5.

[(d)] (e) Section 219 (with respect to retirement savings) of the Internal Revenue Code shall be operative for the purpose of this chapter. For the purpose of computing the limitation on the deduction for active participants in certain pension plans for state income tax purposes, adjusted gross income as used in section 219 as operative for this chapter means federal adjusted gross income.

[(e)] (f) Section 220 (with respect to medical savings accounts) of the Internal Revenue Code shall be operative for the purpose of this chapter, but only with respect to medical services accounts that have been approved by the Secretary of the Treasury of the United States.

(g) Section 265 (with respect to expenses and interest relating to tax-exempt income) of the Internal Revenue Code shall be operative for purposes of this chapter; except that it shall not apply to expenses for royalties and other income derived from any patents, copyrights, and trade secrets from an individual or a qualified high technology business defined in section 235-7.3. Such expenses shall be deductible.

[(f)] (h) Section 408A (with respect to Roth Individual Retirement Accounts) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purposes of determining the aggregate amount of contributions to a Roth Individual Retirement Account or qualified rollover contribution to a Roth Individual Retirement Account from an individual retirement plan other than a Roth Individual Retirement Account, adjusted gross income as used in section 408A as operative for this chapter means federal adjusted gross income.

[(g)] (i) In administering the provisions of sections 410 to 417 (with respect to special rules relating to pensions, profit sharing, stock bonus plans, etc.), sections 418 to 418E (with respect to special rules for multiemployer plans), and sections 419 and 419A (with respect to treatment of welfare benefit funds) of the Internal Revenue Code, the department of taxation shall adopt rules under chapter 91 relating to the specific requirements under such sections and to such other administrative requirements under those sections as may be necessary for the efficient administration of sections 410 to 419A.

In administering sections 401 to 419A (with respect to deferred compensation) of the Internal Revenue Code, Public Law 93-406, section 1017(i), shall be operative for the purposes of this chapter.

In administering section 402 (with respect to the taxability of beneficiary of employees' trust) of the Internal Revenue Code, the tax imposed on lump sum distributions by section 402(e) of the Internal Revenue Code shall be operative for the purposes of this chapter and the tax imposed therein is hereby imposed by this chapter at the rate determined under this chapter.

[(h)] (j) Section 468B (with respect to special rules for designated settlement funds) of the Internal Revenue Code shall be operative for the purposes of this chapter and the tax imposed therein is hereby imposed by this chapter at a rate equal to the maximum rate in effect for the taxable year imposed on estates and trusts under section 235-51.

[(i)] (k) Section 469 (with respect to passive activities and credits limited) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purpose of computing the offset for rental real estate activities for state income tax purposes, adjusted gross income as used in section 469 as operative for this chapter means federal adjusted gross income.

[(j)] (l) Sections 512 to 514 (with respect to taxation of business income of certain exempt organizations) of the Internal Revenue Code shall be operative for the purposes of this chapter as provided in this subsection.

"Unrelated business taxable income" means the same as in the Internal Revenue Code, except that in the computation thereof sections 235-3 to 235-5, and 235-7 (except subsection (c)), shall apply, and in the determination of the net operating loss deduction there shall not be taken into account any amount of income or deduction that is excluded in computing the unrelated business taxable income. Unrelated business taxable income shall not include any income from a prepaid legal service plan.

For a person described in section 401 or 501 of the Internal Revenue Code, as modified by section 235-2.3, the tax imposed by section 235-51 or 235-71 shall be imposed upon the person's unrelated business taxable income.

[(k)] (m) Section 521 (with respect to cooperatives) and subchapter T (sections 1381 to 1388, with respect to cooperatives and their patrons) of the Internal Revenue Code shall be operative for the purposes of this chapter as to any cooperative fully meeting the requirements of section 421-23, except that Internal Revenue Code section 521 cooperatives need not be organized in Hawaii.

[(l)] (n) Sections 527 (with respect to political organizations) and 528 (with respect to certain homeowners associations) of the Internal Revenue Code shall be operative for the purposes of this chapter and the taxes imposed in each such section are hereby imposed by this chapter at the rates determined under section 235-71.

[(m)] (o) Section 530 (with respect to education individual retirement accounts) of the Internal Revenue Code shall be operative for the purposes of this chapter. For the purpose of determining the maximum amount that a contributor could make to an education individual retirement account for state income tax purposes, modified adjusted gross income as used in section 530 as operative for this chapter means federal modified adjusted gross income as defined in section 530."

SECTION 4. Section 235-2.45, Hawaii Revised Statutes, is amended by amending subsection (e) to read as follows:

"(e) Section 704 of the Internal Revenue Code (with respect to a partner's distributive share) shall be operative for purposes of this chapter; except that [[]section 704(b)(2)[]] shall not apply to [allocations]:

(1) Allocations of the high technology business investment tax credit allowed by section 235-110.9[.]; or

(2) Allocations of net operating loss pursuant to section 235-111.5."

SECTION 5. Section 235-7.3, Hawaii Revised Statutes, is amended to read as follows:

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

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

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

(b) For the purposes of this section:

"Performing arts products" means:

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

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

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

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

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

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

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

"Qualified research" means:

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

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

(3) Biotechnology; or

(4) Performing arts products."

SECTION 6. Section 235-9.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-9.5 Stock options from qualified high technology businesses [exempt] excluded from taxation. (a) Notwithstanding any law to the contrary, all income [received from stock options] earned and proceeds derived from stock options or stock, including stock issued through the exercise of stock options or warrants, from:

(1) [a] A qualified high technology business by an employee, officer, or director of the qualified high technology business, or investor who qualifies for the credit under section 235-110.9, [that would otherwise be taxed as ordinary income or as capital gains to those persons]: or

(2) A holding company of a qualified high technology business by an employee, officer, or director of the qualified high technology business, or investor who qualifies for the credit under section 235-110.9; provided the stock options or stock were granted in relation to employment or other duties or activities directly related to the qualified high technology business

[is exempt] shall be excluded from taxation under this chapter.

(b) Income earned and proceeds derived from stock options or stock includes income from:

(1) Dividends from stock;

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

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

[(b)] (c) For the purposes of this section:

"Holding company of a qualified high technology business" means a company that owns at least eighty per cent of the total combined voting power of all classes of stock entitled to vote or at least eighty per cent of the total value of shares of all classes of stock of a qualified high technology business.

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

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

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

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

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

"Qualified research" means:

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

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

(3) Biotechnology."

SECTION 7. Section 235-110.9, Hawaii Revised Statutes, is amended by amending subsections (a), (d) and (e) to read as follows:

"(a) There shall be allowed to each taxpayer, subject to the taxes imposed by this chapter, a high technology investment tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. [The]

For taxable years beginning after December 31, 1998, and prior to January 1, 2000, the tax credit shall be an amount equal to ten per cent of the investment made by the taxpayer in each qualified high technology business, up to a maximum allowed credit of $500,000 for the taxable year for the investment made by the taxpayer in a qualified high technology business[.];

For taxable years beginning after December 31, 1999, the maximum credit allowed per year per taxpayer for the investment made by the taxpayer in each qualified high technology business shall be $1,000,000. The amount of the credit for the taxable year in which the investment was made and for the following four years shall be as follows:

(1) In year one, the year the investment was made, thirty-five per cent;

(2) In year two, twenty-five per cent;

(3) In year three, twenty per cent;

(4) In year four, ten per cent; and

(5) In year five, ten per cent

of the investment made by the taxpayer in each qualified high technology business.

If as of the close of any taxable year in the five-year period a qualified high technology business no longer qualifies as such, the taxpayer's tax under this chapter for the taxable year shall be increased by the amount of the tax credit for the two previous years.

(d) As used in this section:_

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

(1) More than fifty per cent of whose total business activities are qualified research; provided that the business conducts more than seventy-five per cent of its qualified research in this State; [or]

(2) More than seventy-five per cent of its gross income is derived from qualified research; provided that the income is received from:

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

(B) Services performed in this State.

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

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

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

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

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

"Qualified research" means:

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

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

(3) Biotechnology.

(e) This section shall not apply to taxable years beginning after December 31, 2005[.]; provided that a taxpayer may continue to claim the credits if the five-year period to claim the credits commences in taxable years beginning before January 1, 2006."

SECTION 8. Section 235-110.91, Hawaii Revised Statutes, is amended as follows:

1. By amending subsections (a) and (c) to read:

"(a) Section 41 (with respect to the credit for increasing research activities) and section 280C(c) (with respect to certain expenses for which the credit for increasing research activities are allowable) of the Internal Revenue Code shall be operative for the purposes of this chapter as provided in this section[.]; except that references to the base amount shall not apply and credit for all research expenses may be taken without regard to the amount of expenses for previous years. If section 41 of the Internal Revenue Code is repealed or terminated prior to January 1, 2006, its provisions shall remain in effect for purposes of the income tax law of the State as provided for in subsection (h).

(c) There shall be allowed to each taxpayer, subject to the tax imposed by this chapter, an income tax credit for [increased] research activities equal to the credit for increasing research activities provided by section 41 of the Internal Revenue Code. The credit shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed."

2. By amending subsection (e) to read:

"(e) If the tax credit for [increased] research activities claimed by a taxpayer exceeds the amount of income tax payment due from the taxpayer, the excess of the tax credit over payments due shall be refunded to the taxpayer; provided that no refund on account of the tax credit allowed by this section shall be made for amounts less than $1."

SECTION 9. Section 235-111.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-111.5 High technology; sale of unused net operating loss carryover. (a) A qualified high technology business may apply to the department of taxation to sell its unused net operating loss carryover to another taxpayer. If approved by the department of taxation, a qualified high technology business may sell its unused net operating loss carryover to another taxpayer in an amount equal to at least seventy-five per cent of the amount of the surrendered tax benefit[;], computed at the corporate rate pursuant to section 235-71; provided that the qualified high technology business may sell no more than [$500,000] $1,000,000 of its unused net operating loss carryover to another taxpayer per year. In the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations, each partner, member, or shareholder may sell its share of the entity's total net operating loss. The tax benefit purchased by the buyer shall be claimed in the year for which the sale is approved by the department. Any use of the purchased net operating loss carryover for tax carryback or carryforward purposes shall comply with applicable law. The income from the sale of the net operating loss carryover received by the seller shall be reported on its tax return in the taxable year received but shall not be considered taxable income.

(b) [No application for the sale of unused net operating losses shall be approved if the seller is a qualified high technology business that:

(1) Has demonstrated positive net income in any of the two previous full years of ongoing operations as determined on its financial statements;

(2) Has demonstrated a ratio in excess of one hundred ten per cent or greater of operating revenues divided by operating expenses in any of the two previous full years of operations as determined on its financial statements; or

(3) Is directly or indirectly at least fifty per cent owned or controlled by another corporation that has demonstrated positive net income in any of the two previous full years of ongoing operations as determined on its financial statements or is part of a consolidated group of affiliate corporations, as filed for federal income tax purposes, that in the aggregate has demonstrated positive net income in any of the two previous full years of ongoing operations as determined on its combined financial statements;

as certified and documented by a licensed certified public accountant].

In the case of partnerships, limited liability partnerships, limited liability companies classified as partnerships, and S corporations, the application for the sale of unused net operating losses shall only be approved to the extent that all partners, members, or shareholders certify that they have not received a tax benefit from the losses.

(c) As used in this section[, "net]:

"Net operating loss" means a net operating loss for income tax purposes occurring in the two taxable years preceding the year in which the sale of net operating loss carryover occurs.

"Qualified high technology business" means a business that conducts more than fifty per cent of its activities in qualified research.

"Qualified research" means:

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

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

(3) Biotechnology.

"Surrendered tax benefit" means the tax liability saved if the net operating loss carryforward could have been used by the qualified high technology business."

(d) This section shall only apply to sales of net operating loss carryovers after December 31, 2000, and before [January 1, 2004] January 1, 2006."

SECTION 10. Statutory material to be repealed is bracketed. New statutory material is underscored.

SECTION 11. This Act, upon its approval, shall apply to taxable years beginning after December 31, 2000; provided section 2 shall take effect on January 1, 2001, and shall be repealed on December 31, 2005.

INTRODUCED BY:

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