Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by Bill Spencer on April 28, 2009 at 12:44pm

If we all lived on Brewbaker planet, we would need to learn hula and maintain three jobs to make ends meet. He has always been anti-tech because he believes tourism is Hawaii's strategic niche and we can never build a tech industry.

Comment by Bruce M. Bird on April 28, 2009 at 12:33pm

Hi, Bill.

While I think Paul Brewbaker's comment is a bit "harsh", I do think it contains some insight.

Specifically, if a state has a reputation as being a "difficult" place in which to do business, how does it evolve into becoming a more "friendly" one ?

As you probably know, Hawaii has risen a bit in the rankings in this regard. (Well, more accurately, Hawaii is now viewed as being less of an unfriendly place to do business than the last time the survey was taken).
While it's possible that other previously more highly ranked states may have "slipped" in the rankings, I think that a good argument can be made that Act 221/215 has helped.

In any event, the general perception exists that Hawaii has a long way to go before being viewed as a "friendly" place in which to do business.

Comment by Bill Spencer on April 28, 2009 at 8:56am

What do you expect? Brewbaker is an economist!

Comment by Bruce M. Bird on April 28, 2009 at 5:23am

" Act 221 is neither necessary nor sufficient for Hawai'i to signal a credible commitment to an accommodative business climate. On the contrary, Act 221 (and its predecessor, Act 215) is a clear signal that political pressures with little economic foundation are the dominant determinant of the character of Hawai'i's business climate. It seems like that is the opposite of the signal Hawai'i would want to send." Economist Paul Brewbaker in Sunday's Honolulu Advertiser at: http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=2009904260346

P.S. -- Paul probably meant to use the word "successor" instead of "predecessor".

Comment by Bruce M. Bird on April 23, 2009 at 5:08pm

Hi, Dan. Good point.

Isn't it interesting that while a newly-created high-tech company often finds it necessary to "find its own way" when entering a new business or market --in other words, to find out what types of activities and revenue streams make sense for it to pursue-- the structure of Act 221 not only specifies the type of high-tech activity, but also, on occasion, the type of revenue stream?

I doubt that many people in Hawaii --or on the Mainland, for that matter-- were thinking a whole lot about SaaS in 2001. The changes to the high-tech credits in 2004 under Act 215 were primarily aimed at curtailing several of the perceived abuses that had received a fair amount of publicity in the early days of Act 221. Act 215 changed the definition of a "software activity". My sense is that "SaaS" was simply not on the "radar screens" of most legislators and policy makers in 2004.

Comment by Daniel Leuck on April 23, 2009 at 2:50pm

Hi Bruce. I'm not sure as to the percentage, but I can safely say most are subscription based or freemium (free basic version, paid premium version.) That being said, I'm not sure why ad supported SaaS companies are arbitrarily excluded, especially considering the fact many companies start out with ad supported models and go to a subscription or freemium model after a couple years.

Comment by Bruce M. Bird on April 23, 2009 at 2:23pm

Hi, Dan. You wrote: "SaaS, as the increasingly preferred way to deliver most types of software, has been the source of great confusion. This is especially true for models that don't have licensing fees. As a result, software companies pay attorneys to do things like reclassify them as entertainment companies." Great point!

By the way, what percentage of SaaS companies in Hawaii do you think use a licensing fee model ?

Comment by Daniel Leuck on April 23, 2009 at 1:47pm

I believe the definition of a QHTB is fundamental to the program, and should therefor be codified in the law with reasonable precision. SaaS, as the increasingly preferred way to deliver most types of software, has been the source of great confusion. This is especially true for models that don't have licensing fees. As a result, software companies pay attorneys to do things like reclassify them as entertainment companies. This is not a good system. The law should be clear on the definitions so business owners and investors can plan appropriately. DoTax policy can change on a dime with far less external scrutiny or accountability.

As you mentioned, the law can't cover every possible contingency, so the fine grain stuff obviously needs to be left to the DoTax.

I have worked with DoTax and they are very open to input from industry when crafting rules. Kurt and his staff are very reasonable and willing to work with industry.

That is good to hear. Technology is always a moving target, so I'm sure his job is not easy.

Comment by Bill Spencer on April 23, 2009 at 11:58am

Hi Bruce...the legislature simply does not get deep into the weeds and leaves it up to the agencies administering laws to make the rules. This is simply the way it works even at the national level. At the national level rule making is formalized and assures public input. In Hawaii rule making is not so formal. What you quote is the way it is, not my preference. What follows is from the DoTax report in December as to the breakout of the $1.2Billion invested in 177 QHTB's from 2001- to 2007 for everyone's reference.

From DoTax Report published in December 2008


QHTBs involved in performing arts received 36.1% of the total funds invested over the
eight year period covered in the Table 1 data, a cumulative total of $445.1 million. QHTBs
reporting that they were involved in multiple high technology activities received 26.2% of the
investments ($323.0 million). Computer software firms received investments totaling $179.8
million, or 14.6% of the total. Companies engaged in biotechnology received $111.4 million,
6
9.0% of the total. Non-fossil fuel energy-related technology firms received $94.3 million or
7.7% of the total during this eight year period.
It is worth noting that for 2007 investments only, non-fossil fuel energy-related
technology companies received 21.9% of the total investments made that year, reflecting an
increased interest in investing in firms that may address Hawaii's future alternative energy needs.

Comment by Bruce M. Bird on April 23, 2009 at 11:46am

Hi, Bill.

You wrote: "The legislature establishes intent. It is up to DoTax to make the rules."

If an Act were to state that an SaaS activity constituted an allowable "software" activity, then there would be nothing for the Department of Taxation to "interpret". Accordingly, it would not be "up to DoTax to make the rules" in this regard. So you might want re-think that one.

Your observation that the Department of Taxation is open to input from industry when crafting rules is well-taken. I've found most of the people I've dealt with at the Department of Taxation to be quite helpful.

There are more than 330 QTHBs out there. Subtract out the number of known comfort letters/rulings in this area issued by the Department of Taxation and you have a surprising number of QHTBs for which no comfort letter/ruling has been requested. Perhaps part of the reason the Department of Taxation is so open to input from industry in this area is that it continually has to deal with the myriad issues that emanate from this Act. Just think how many additional issues would come to the fore if every potential QHTB had to request a comfort letter/ruling from the Department of Taxation.

Some of the posts on this blog suggest that while Act 221 helps some businesses engaged in certain high-tech activities, it leaves other businesses engaged in other high-tech activities "out in the cold" and, still others, wondering whether they qualify or not. So, it just seems to me that Act 221 could be improved.

In any event, I would hope that everyone involved in the legislative process would have the common decency to avoid making retroactive changes to Act 221.

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