Report Title:

Business-Research Institute Tax Credit

Description:

Proposes a 20% business-research institute tax credit for the development and growth of new technology-intensive businesses. (SD1)

THE SENATE

S.B. NO.

713

TWENTY-THIRD LEGISLATURE, 2005

S.D. 1

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO A BUSINESS-RESEARCH INSTITUTE TAX CREDIT.

 

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

SECTION 1. Hawaii has long strived for the diversification of our economic base. The legislature finds that the State's economic future depends increasingly on investment in emerging technology-based sectors. Such activities as scientific research and development, information technology, biotechnology, film production and digital media, dual use technology, ocean sciences, and others can help Hawaii compete effectively in the global markets of the future. Moreover, the development of such activity can provide new and well-paying jobs that will help give Hawaii's youth a bright future at home, rather than being forced to leave the State to find that future.

Act 221, Session Laws of Hawaii 2001, has helped to increase Hawaii's emerging technology industry. These legislative efforts have resulted in growing interest in Hawaii as a "New Economy" marketplace. Act 215, Session Laws of Hawaii 2004, further set Hawaii apart as a tech-friendly place to do business for both technology-intensive and less-technology-intensive businesses.

The legislature finds that the State needs to provide additional tools to strengthen the State's science and technology base to sustain the development and growth of new technology-intensive businesses.

The legislature further finds that in order to foster world-class research institutions in Hawaii and to promote partnerships between business and Hawaii's post-secondary educational and research institutions, new funding for scientific research and development is critical to support such activity. The legislature notes that other jurisdictions have enacted tax credits for businesses that provide tax incentives for expenditures made for qualified scientific research and experimental development.

The purpose of this Act is to establish the Hawaii business-research institute tax credit to promote the formation and funding of research partnerships between business entities and eligible research institutions, which will result in increased scientific research at our universities and the growth of new technology-based enterprises.

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

"§235-   Tax credit for business-research institute research and development projects. (a) There shall be allowed to each taxpayer that is a qualifying business entity and subject to the taxes imposed by this chapter, a refundable business-research institute tax credit in the amount of twenty per cent of all qualified expenditures made during a taxable year in which the qualifying business entity is under contract to have scientific research or experimental development, or both, conducted with an eligible research institute to which it is not connected. If the qualifying business entity claims a tax credit for research activities as allowed elsewhere in chapter 235, that credit shall be deducted from its qualified expenditures for determining the tax credit for business-research institute research and development. No qualifying business entity, alone or in partnership, may claim more than one tax credit under chapter 235 for the same qualified expenditure. The credit allowed under this section shall be claimed against the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. If the tax credit under this section exceeds the taxpayer's income tax liability, the excess of the credit over liability shall be refunded to the taxpayer, subject to the provisions in subsection (g); provided that no refund as a result of the tax credit allowed by this section shall be made for amounts less than $1.

(b) In the case of a partnership, S corporation, estate, or trust of a qualified business entity, the tax credit allowable is for qualified expenditures incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

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

Every qualified business entity, no later than March 1 of each year in which qualified expenditures were expended in the previous taxable year, shall submit a written statement, certified by the eligible research institute, to the director of business, economic development, and tourism, identifying:

(1) Qualified expenditures, if any, expended in the previous taxable year;

(2) Other State tax credits, if any, claimed for research activities under provisions of Chapter 235-110.91; and

(3) The amount of tax credits claimed pursuant to this section, if any, in the previous taxable year.

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

(1) Maintain confidential records of the taxpayers claiming the credits in subsection (a);

(2) Obtain the amount of the qualifying expenditures;

(3) Total all qualifying and cumulative expenditures or expenditures that the department of business, economic development, and tourism certifies; and

(4) Certify the amount of the tax credit for each taxable year and cumulative amount of the tax credit.

Upon each determination, the department of business, economic development, and tourism shall issue a certificate to the taxpayer verifying the qualifying expenditure amounts, the credit amount certified for each taxable year, and the cumulative amount of the tax credit during the credit period. The taxpayer shall file the certificate with the taxpayer's tax return with the department of taxation. Notwithstanding the department of business, economic development, and tourism's certification authority under this section, the director of taxation may audit and adjust the taxpayer's certification to conform to the facts.

(e) As used in this section:

"Business entity" means a for-profit legal business entity including, but not limited to, corporations, limited liability companies, and partnerships.

"Connected" means a relationship between a business entity and an eligible research institute, or an employee of the eligible research institute during the term of the eligible contract or during the twenty-four months before the contract was entered into, where:

(1) The eligible research institute or an employee of the eligible research institute, or a person who does not deal at arm's length with the employee, owned, directly or indirectly in any manner whatever, shares of the capital stock of the business entity that:

(A) Carry more than ten per cent of the voting rights attached to voting securities of the business entity; or

(B) Have a fair market value of more than ten per cent of the fair market value of all of the issued shares of the capital stock of the business entity;

(2) The eligible research institute, or an employee of the eligible research institute, or a person who does not deal at arm's length with the employee, and the business entity were members of the same partnership, except as limited partners in an investment partnership, or did not deal at arm's length; or

(3) A partnership of which the eligible research institute, or an employee of the eligible research institute, or a person who does not deal at arm's length with the employee, is a member, owned, directly or indirectly in any manner whatever, any of the shares of the business entity.

"Eligible contract" means:

(1) A contract entered into by a qualifying business entity with an eligible research institute if, under the terms of the contract, the eligible research institute agrees to directly perform in Hawaii scientific research and experimental development related to a business carried on in Hawaii by the qualifying business entity that meets the following requirements:

(A) The activity is undertaken for the purpose of discovering information that is technological in nature;

(B) The application of the technological information is intended to be useful in the development of a new or improved business component of the taxpayer; and

(C) The technological information exceeds, expands, or refines the common knowledge of skilled professionals in a particular field of science or engineering; and

(2) The business entity is entitled to exploit the results of the research and development carried out under the agreement and shall bear the risk of loss.

"Eligible research institute" means:

(1) A Hawaii university or institution of higher education;

(2) A Hawaii nonprofit corporation for scientific research and experimental development; or

(3) A hospital research institute that:

(A) Is a Hawaii hospital; or

(B) Is a nonprofit corporation for scientific research and experimental development that is affiliated with a Hawaii hospital with which it has entered into an agreement so that the teaching staff from the hospital and students in the health professions may actively participate in and receive educational benefits from the research activities.

"Qualifying business entity" or "qualified business entity" means a for-profit business entity that:

(1) Conducts business in Hawaii in the taxable year through a permanent establishment in Hawaii;

(2) Is under contract with an eligible research institute during the taxable year in which the tax credit is claimed;

(3) Is not connected in the taxable year to the eligible research institute that entered into the eligible contract or to any other eligible research institute that carries out the scientific research and experimental development that is to be performed under the eligible contract; and

(4) Is not controlled directly or indirectly during the twenty-four month period prior to the eligible contract, by:

(A) A trust, if any of the capital or income beneficiaries of the trust in an eligible research institute; or

(B) A business entity carrying on a personal services business.

"Qualifying expenditure" or "qualified expenditure" means:

(1) A payment of money made by the qualified business entity to the eligible research institute under the terms of the contract;

(2) An expenditure incurred by the qualified business entity for scientific research and experimental development carried on in Hawaii to fulfill a contract with the eligible research institute; and

(3) An expenditure that is not related to the following activities:

(A) Market research, testing, or development (including advertising or promotions);

(B) General surveys;

(C) Environmental impact studies or reports;

(D) Testing or analysis of equipment or products for the purposes of quality or quantity control;

(E) Conferences or seminars;

(F) Acquiring or improving land to be used in connection with research and experimentation;

(G) Acquiring another person's patent, model, production or process;

(H) Acquiring or improving depreciable or depletable property used in connection with research and experimentation; or

(I) Overhead costs, such as administrative and maintenance wages, utilities and office supplies.

(f) This section shall apply to taxable years beginning after December 31, 2005, and shall not apply to taxable years after December 31, 2011. Credits authorized under the Hawaii business-research institute tax credit shall be limited to an aggregate total of $2,000,000 per taxable year. The maximum tax credit a business entity or an associated group of business entities is eligible for is $500,000 per year, regardless of total investment for the year.

These credits shall be offered on a first come, first served basis until the cap of $2,000,000 for any one calendar year is reached. Any certified claim that exceeds the cap shall be carried forward to the subsequent year, no later than 2013, provided that there are credits available under this section. If more than one claim is received at the same time, and there are insufficient credits available for that calendar year, each business shall receive a pro rata share of the remaining credits. The amount of each share shall be calculated by determining the percentage of total remaining claims attributable to each claimant and applying that percentage to the total remaining credits. If the credits claimed are carried forward because the total claims exceeded $2,000,000 for the taxable year, the affected business entities shall receive first claim to the funds provided under this section in the following year. The total credits claimed under this section shall not exceed $10,000,000."

SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall apply to taxable years beginning after December 31, 2005, and shall not apply to taxable years after December 31, 2011, provided that credits earned prior to December 31, 2011, which exceeded the total allowable for any year, are claimed no later than December 31, 2013.