Hawaii-2022-HB454-Introduced

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

"§235- Cybersecurity and artificial intelligence business investment tax credit. (a) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter a cybersecurity and artificial intelligence business 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 investment was made and the following four years provided the credit is properly claimed. The tax credit shall be as follows:

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

(2) In the first year following the year in which the investment was made, twenty-five per cent;

(3) In the second year following the investment, twenty per cent;

(4) In the third year following the investment, ten per cent; and

(5) In the fourth year following the investment, ten per cent;

of the investment made by the taxpayer in each qualified business, up to a maximum allowed credit in the year the investment was made, $700,000; in the first year following the year in which the investment was made, $500,000; in the second year following the year in which the investment was made, $400,000; in the third year following the year in which the investment was made, $200,000; and in the fourth year following the year in which the investment was made, $200,000.

(b) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. For the purpose of this section, "net income tax liability" means net income tax liability reduced by all other credits allowed under this chapter.

(c) If the tax credit under this section exceeds the taxpayer's income tax liability for any of the five years that the credit is taken, the excess of the tax credit over liability may be used as a credit against the taxpayer's income tax liability in subsequent years until exhausted. Every claim, including amended claims, for a tax credit under this section shall 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 comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) If at the close of any taxable year in the five-year period in subsection (a):

(1) The business no longer qualifies as a qualified business;

(2) The business or an interest in the business has been sold by the taxpayer investing in the qualified business; or

(3) The taxpayer has withdrawn the taxpayer's investment wholly or partially from the qualified business;

the credit claimed under this section shall be recaptured. The recapture shall be equal to ten per cent of the amount of the total tax credit claimed under this section in the preceding two taxable years. The amount of the credit recaptured shall apply only to the investment in the particular qualified business that meets the requirements of paragraph (1), (2), or (3). The recapture provisions of this subsection shall not apply to a tax credit claimed for a qualified business that does not fall within the provisions of paragraph (1), (2), or (3). The amount of the recaptured tax credit determined under this subsection shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs under this subsection.

(e) Every taxpayer, before March 31 of each year in which an investment in a qualified business was made in the previous taxable year, shall submit a written, certified statement to the director of taxation identifying:

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

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

(f) The department shall:

(1) Maintain records of the names and addresses of the taxpayers claiming the credits under this section and the total amount of the qualified investment costs upon which the tax credit is based;

(2) Verify the nature and amount of the qualifying investments;

(3) Total all qualifying and cumulative investments that the department certifies; and

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

Upon each determination made under this subsection, the department shall issue a certificate to the taxpayer verifying information submitted to the department, including qualifying investment 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.

The director of taxation may assess and collect a fee to offset the costs of certifying tax credit claims under this section. All fees collected under this section shall be deposited into the tax administration special fund established under section 235-20.5.

(g) As used in this section:

"Investment tax credit allocation ratio" means, with respect to a taxpayer that has made an investment in a qualified business, the ratio of:

(1) The amount of the credit under this section that is, or is to be, received by or allocated to the taxpayer over the life of the investment, as a result of the investment; to

(2) The amount of the investment in the qualified business.

"Qualified business" means a business, employing or owning capital or property, or maintaining an office, in this State; provided that:

(1) More than fifty per cent of its total business activities are the development of cybersecurity and artificial intelligence; and provided further that the business conducts more than seventy-five per cent of these development activities in this State; or

(2) More than seventy-five per cent of its gross income is derived from the development of cybersecurity and artificial intelligence; and provided further that this income is received from:

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

(B) Services performed in this State.

(h) Common law principles, including the doctrine of economic substance and business purpose, shall apply to any investment. There exists a presumption that a transaction satisfies the doctrine of economic substance and business purpose to the extent that the special allocation of the cybersecurity and artificial intelligence business tax credit has an investment tax credit ratio of 1.5 or less of credit for every dollar invested.

Transactions for which an investment tax credit allocation ratio greater than 1.5 but not more than 2.0 of credit for every dollar invested and claimed may be reviewed by the department for applicable doctrines of economic substance and business purpose.

Businesses claiming a tax credit for transactions with investment tax credit allocation ratios greater than 2.0 of credit for every dollar invested shall substantiate economic merit and business purpose consistent with this section."

SECTION 2. Chapter 241, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§241- Cybersecurity and artificial intelligence business investment tax credit. The cybersecurity and artificial intelligence business investment tax credit provided under section 235- shall be operative for this chapter on the effective date of this Act."

SECTION 3. Chapter 431, article 7, part II, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§431:7- Cybersecurity and artificial intelligence business investment tax credit. The cybersecurity and artificial intelligence business investment tax credit provided under section 235- shall be operative for this chapter on the effective date of this Act."

SECTION 4. Section 235-20.5, Hawaii Revised Statutes, is amended to read as follows:

"§235-20.5 Tax administration special fund; established. (a) There is established a tax administration special fund, into which shall be deposited:

(1) Fees collected under sections 235-20 [~~and~~], 235‑110.9[;], and 235- ;

(2) Revenues collected by the special enforcement section pursuant to section 231-85; provided that in each fiscal year, of the total revenues collected by the special enforcement section, all revenues in excess of $2,000,000 shall be deposited into the general fund; and

(3) Fines assessed pursuant to section 237D-4.

(b) The moneys in the fund shall be used for the following purposes:

(1) Issuing comfort letters, letter rulings, written opinions, and other guidance to taxpayers;

(2) Issuing certificates under [~~[section]~~] sections 235‑110.9[;] and 235- ;

(3) Administering the operations of the special enforcement section;

(4) Funding support staff positions in the special enforcement section; and

(5) Developing, implementing, and providing taxpayer education programs, including tax publications."

SECTION 5. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 6. This Act shall take effect upon its approval; provided that:

(1) Section 1 of this Act shall apply to taxable years beginning after December 31, 2020, for investments made pursuant to section 235- , Hawaii Revised Statutes, on or after the effective date of this Act; and

(2) Section 4 of this Act shall apply to taxable years beginning after December 31, 2020.

INTRODUCED BY:	_____________________________

HOUSE OF REPRESENTATIVES	H.B. NO.	454
THIRTY-FIRST LEGISLATURE, 2021
STATE OF HAWAII