June 25, 2001

RE:  Act 221,  Session Laws of Hawaii 2001 (Act 221), Relating to Taxation

Tax Announcement No. 2001-14, issued June 14, 2001, is re-issued to correct a typographical error in the discussion regarding the high technology business investment tax credit.  The credit amount is increased to $2,000,000 (not $5,000,000) graduated over five years (35% to 10%) from the date of investment.

The text of Tax Announcement No. 2001-14 has been revised to read as follows:

Act 221 encourages the continued growth and development of technical businesses by expanding and clarifying prior tax incentives and provides additional tax incentives for technical and non-technical businesses.

Technology infrastructure renovation tax credit

Section 2 provides a new technology infrastructure renovation tax credit.  This is a nonrefundable income tax credit for 4% of the "renovation costs" for each commercial building  located in Hawaii and is similar to the hotel and construction remodeling tax credit in section 235-110.4, Hawaii Revised Statutes (HRS).  This credit is available for tax years 2001 through 2005. "Renovation costs" means costs incurred after December 31, 2000, to plan, design, install, construct, and purchase technology-enabled infrastructure equipment to provide a commercial building with technology-enabled infrastructure.

General excise tax (GET) and public service company tax exemption

Sections 3 and 4, respectively, provide a GET and public service company tax exemption for amounts received by a "public Internet data center" from July 1, 2001 through December 31, 2005.

GET not applicable to the sale of Net Operating Losses (NOLs)

Section 3 also provides a GET exemption for the sale of NOLs by a qualified high technology business (QHTB) pursuant to section 235-7.3, HRS.  This exemption is effective from January 1, 2001 through December 31, 2005.

Provisions disallowing losses not applicable

Section 5 provides that Internal Revenue Code (IRC) section 165 (with respect to losses) shall be operative for income tax purposes and shall apply to losses sustained from the sale of stock issued through stock options or warrants granted by a QHTB.   Additionally, IRC section 265 (which disallows expenses and interest relating to tax exempt income) shall be operative for income tax purposes but shall not apply to expenses for royalties and other income derived from patents, copyrights, or trade secrets by an individual or QHTB.  Such expenses shall be deductible.  These changes are effective beginning tax year 2001.

Allow allocation of credit and NOLs

Section 6  allows partnership investors the flexibility of allocating the high technology business investment tax credit in section 235-110.9, HRS, and NOLs in section 235-111.5, HRS, among the partners without regard to their proportionate interests in a QHTB partnership.  These changes are effective beginning tax year 2001.

Clarify income tax exclusion for royalties from performing arts products

Royalties and other income derived from patents and copyrights received by an individual  or QHTB that are owned by the individual or QHTB and developed and arising out of a QHTB are excluded from the income tax.  The exclusion is applicable to income derived from trade secrets and performing arts products.   Section 7 clarifies that the performing arts product exclusion in section 235-7.3, HRS, is applicable to both the author and assignors, licensors, and licensees.

Expand definition of a QHTB

Section 7 also expands the definition of a QHTB in section 235-7.3, HRS, to include sensor and optic technologies, ocean sciences, astronomy,  and non-fossil fuel energy related technology.

The various definitions of QHTB under prior law, including the definition in section 235-7.3, HRS, excluded certain types of businesses such as accounting, law, financial, hotels, and farming (negative definitions).  Section 7 removes the negative definitions in section 235-7.3, HRS, and for the other tax incentives which incorporate this definition allowing any type of business to qualify as a QHTB provided it meets the basic requirements.

These changes are effective beginning tax year 2001.

Clarify stock option exclusion

Section 235-9.5, HRS, exempts "all" income received from stock options from income tax liability.  Section 8 clarifies that this exemption includes dividends from stock, the receipt of the options, the exercise of the options, and income from the sale of the stock received from exercising the stock option.

In addition, section 8 clarifies that this tax incentive is an exclusion from income and extends the exclusion to stock issued by a holding company of a QHTB.  If a QHTB is owned by a holding company, most, if not all of the stock of the QHTB would be held by the holding company.  Thus, employees, officers, directors, and investors in the QHTB could receive the holding company's stock, rather than the QHTB's stock.

These changes are effective beginning tax year 2001.

Expand high technology business investment tax credit

Section 235-110.9, HRS, provided a 10% nonrefundable income tax credit to encourage investments in QHTBs up to a maximum allowed credit of $500,000 per year per investor.

Section 9 increases the credit amount to $2,000,000 graduated over five years (35% to 10%) from the date of investment.  The credit is capped at varying amounts ($700,000 in the year the investment is made to $200,000 in the last year).  Some of the credit claimed will be recaptured from the investor if the QHTB ceases to qualify as a QHTB during the five-year period.

Section 9 applies to taxable years 2001 through 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.

Expand research and development income tax credit

Section 10 expands section 235-110.91, HRS, which provides a 20% refundable State research and development tax credit, similar to the federal research and development tax credit.  The State tax credit, under prior law, was based on increases in research expenses from the previous year.

Section 10 provides that references to the base amount shall not apply and a credit may be claimed without increasing research expenses.  These changes are effective for tax years 2001 through 2005.

Clarify sale of NOLs

Section 11 clarifies section 235-111.5, HRS, relating to the sale of NOLs by QHTBs.  Section 235-111.5, HRS, currently does not define the term "qualified high technology business."  The appearance of the identical term in other sections with varying definitions adds to the confusion for businesses that might qualify as QHTBs that could sell NOLs.  Act 221 inserts the definition for QHTBs that is in section 235-7.3, HRS.

Section 235-111.5, HRS, previously required that businesses applying for the sale of NOLs must meet specific income, revenue, and control requirements all of which must be certified by a licensed certified public accountant (CPA).  Act 221 repeals the CPA certification requirement.

A QHTB may sell a NOL for "at least seventy five per cent of the amount of the surrendered tax benefit."  Act 221 clarifies that the amount of the "surrendered tax benefit" is the tax liability saved if the net operating loss carryforward could have been used by the QHTB.

The prior law did not specify what tax rate should be used to compute the "surrendered tax benefit."  Act 221 establishes the rate as the corporate rate in section 235-71, HRS.

These changes are effective beginning tax year 2001.

Expand related entities exemption

Section 12 expands the related entities exemption which exempts from the GET amounts received, charged, or attributable for "services" or interest between one  "related entity" and another "related entity."

Section 12 expands the definition of "services" in section 237-23.5, HRS, to exempt from the GET the use of computer software and hardware, information technology services, and database management between related entities.  These changes are applicable to gross income or gross proceeds received beginning July 1, 2001.

Liberal lnterpretation

Section 13 of specifies that it is the Legislature's intention that the changes be construed liberally.

Forms and other tax information may be downloaded from the Department's website at:  On Oahu, forms may be ordered by calling the Department's Forms Request Line at:  587-7572.  Persons who are not calling from Oahu, may call:  1-800-222-7572 (toll-free) to receive forms by mail or by fax.

Director of Taxation

HRS Section Explained:  HRS Section 235-2.4, 235-7.3, 235-9.5, 235-71, 235-110.9, 235-110.91, 235-111.5 and 237-23.5

For official copies of acts, please contact:
Office of the Lieutenant Governor, State Capitol, 5th Floor, Honolulu 96813.
Phone: 586-0255, Monday - Friday, 7:45 am - 4:30 pm