Hawaiʻi's Technology Community

Posted on behalf of HVCA President Bill Spencer

On January 21, 2009, at 7:00AM, the Hawaii State Legislature will begin its 2009 term. If you care about keeping Act 221 intact and extending it into the future, you must be present and show your support.

The EXTEND221.ORG group will assemble at the capital at 7:00AM on the morning of January 21, 2009 at the Father Damien statue in front of the Capitol Building. We will be passing out FREE EXTEND221.ORG T-Shirts for you to wear. It is very important that you be visible and also visit your Representative and Senator and let them know that you want to keep Act 221 unchanged and extend it beyond its 2010 sunset date.

This is a critical year for Act 221. The governor and several democratic legislators have announced plans to change, tighten or even kill the act all together. Despite the Department of Taxation’s analysis of the costs and benefits of Act 221, which demonstrate an overwhelmingly positive impact, Act 221 is being threatened as never before.

The fight to extend Act 221 begins now. We must be vigilant. We must let your voices be heard. We must show the legislature, the press and the governor that there is a tech sector composed of real people who care about Hawaii’s future and who care about the need to diversify our economy. We cannot tolerate changes to the rules. The governor promised no changes to Act 221 in her first campaign and when Act 215 was enacted in 2004. These promises have been broken. Investors have relied on no changes to the rules of the game, so any changes made this year will severely hurt companies seeking funding.

Please do not let this opportunity pass us by. We must be there in force. This is a time for action, for all of us to come out and show our support for this critical statute. If you care about diversifying the economy with a tech sector and if you care about making sure there is sufficient capital to grow and nurture budding tech companies. Please be there on January 21, 2009 at 7:00AM at the Capitol Father Damien statue and show your support!

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Comment by Bill Spencer on January 23, 2009 at 10:59am
Warmest thanks to all of you who showed up at Wednesday's rally at the Capitol. The show of force was important. None-the-less, the Governor has now announced that she intends to repeal Act 221 whereas before she was only talking about "tightening" it.

Act 221 was modified in 2004 via Act 215 and addressed all of the criticisms of the original act. But news paper reports continue to allude to the problems that may have happened pre Act 215 as if they still happen. This is simply not so. At that time the administration promised to let the law run its course with no further changes.

The venture and angel investing community do not see a need for changes. Changes that have been suggested would demonstrate further that the administration cannot keep its word and turn off investors who need some certainty. Accusations of abuse of the law in its current form are simply unfounded. There have only been two audits out of 333 companies and those did not conclude that the law was broken. Fifteen suspected cases were reviewed resulting in the two audits.

Other changes that have been proposed include:

1) Not allowing disproportionate allocation of credits among investors. This would have the affect of killing the incentive that attracts outside investment in Hawaii deals from non-tax advantaged investors. Worst case, there has been two dollars invested for every dollar of tax credits allowed.

2) Incresing the clawback from 10% of the last two year's of credits claimed to a higher percentage. Does punishing investors with a higher clawback if a business fails or has to move locations for strategic business reasons make any sense?

3) Removing performing arts as a qualified high tech busienss category. Yes, ABC/Lost and a few other mainland movie deals got special authorization by Governor Lingle resulting in $100 million worth of credits being allocated to investors in these deals. They wouldn't have been done unless the governor approved it. The fact is that the intent of including performing arts was to help the local digital media, local movie producers and local musicians and artists NOT help Hollywood move producers. The loss of these investment dollars to Hollywood productions is all the Governor's fault. Act 88 gives movie producers a 15-20 percent tax refund (depending upon island) which is more attractive than the credit. Removing performing arts only hurts the local perfomring arts industry.

4) Reducing or eliminating the R&D tax refund. The whole point of Act 221 was to stimulate the creation of intellectual property. The criteria for getting a comfort letter from the Dept. of Taxation authorizing a company as a qualified high tech business is based on whether the company spends 50% of its R&D dollars in Hawaii or derives 75% of its revenues directly from products/services developed by that R&D effort. The refund allows companies to get 20% of their aqualified R&D expenditures returned to them. This is an attractive incentive the mainland investors appreciate as do the companies performing R&D. Federal tax law only allows a company a 10% refund on the increased expenditure in R&D from one year to the next. THe R&D refund is a very small amount of the total cost of Act 221.

By the way, it was revealed and confirmed by the Tax Department at last Wednesday's informational briefing on Act 221, that the State maintains from one year to the next a ONE BILLION DOLLAR DELINQUENT TAX LIABILITY. That means people and companies owe the State $1 Billion in back taxes. Those dollars are not being used to create anything, compared to Act 221 credits.

Finally, repealing or changing the rules of the game at this point sends a terrible message to investors and could severely hurt the chances of many companies in the pipeline that depend on investment year after year to reach their goals. Investors don't give companies one big round of funding and hope for the best. The provide funding for a year's worth of activity that a company usues to meet milestones. If milestones are met, investors will fund a second, third or fourth round. We have only six years of funding and only 38 of 333 QHTB's have grown enough to be profitable. Repealing the program or tightening it with changes suggested above will simply stop the flow of investment putting most of these growing companies out of business.

Hence the position of HVCA/ that the act be allowed to run its course unchanged and be extended after sunset in 2010.

I have never heard one suggestion from anyone as to a better alternative to Act 221, or any alternative for that matter that can serve as a better economic stimulus aimed at deversifying our economy with a vibrant tech sector. If you have a better idea, I would like to hear it.
Comment by Dave Takaki on January 12, 2009 at 10:45am
I'll be there, but if we are to be effective we must meet to begin to formulate a position(s), as Laurence suggests above, and as others have. How about a Saturday, say the 24th or the 31st? For a plug-in venue for now, at Editions Limited's office at 619 Kapahulu Ave, Suite 201? It's also above Starbuck's on the corner of Date and Kapahulu.
Comment by Laurence A. Lee on January 9, 2009 at 3:00pm
On the site, the opening statement rallies people to protect Act 221 against "Senseless Changes".

Is there a specific list of proposed changes that this organization objects to, or is this just political rhetoric?

From where I sit, I cannot in good conscience support the extension of Act 221 in its current form - especially when I'm seeing the State reducing expenditures on other worthwhile programs.

I would rather see 221/215 expire gracefully in 2010 (with replacement legislation if/when the economy turns around again).

For me to go along with an extension of 221/215, I'd want to see changes, in order to address some concerns raised in other blog threads over the past few weeks.

So... which proposed amendments to 221/215 are considered "Senseless Changes"? Is there room for compromise, or is adamant about keeping this legislation unmolested beyond 2010?


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