Tax-credit audit finding few questionable claims

By Sean Hao
Advertiser Staff Writer

The state tax department is auditing almost $8.7 million, or 60 percent, of the technology research tax-credit claims made in 2001, the first year of Hawai'i's bold yet controversial tax incentive program known as Act 221.

But so far, auditors have found little to suggest widespread abuse. Only two claims for research credits, valued at $540,000, out of 137 claims, have been denied, according to the Department of Taxation.

Additionally, only two out of 268 investment tax credit claims, worth about $80,000, have been rejected.

The figures were provided to The Advertiser yesterday in response to a request made under the state's Uniform Information Practices Act, which requires that certain government records be made public.

"Those are the amounts that we think are in question," said Marie Laderta, deputy director for the tax department. "It doesn't mean that in the end, the numbers will pan out to be the same. It could be more. It could be less."

The data helps illustrate why the administration of Gov. Linda Lingle wants to tighten up the tax credit requirements, but it doesn't fully answer the question of whether the credits designed to spur the state's fledgling technology industry are actually being abused.

Combined, the $620,000 in technology tax credits denied so far represent a fraction of the $21.9 million in tax credits claimed in the first year of Act 221.

Whether the law is being abused, as some contend, could be critical in determining if the state's landmark technology industry tax incentive program needs changing. The tax department launched its "crackdown" of alleged Act 221 abuses nearly seven months ago out of concern that the credits were used in an "overaggressive" manner to cut corporate and individual tax bills rather than to stimulate economic activity.

Laderta said she doesn't know when the audits of the 2001 claims will be completed.

"It depends on the complexity of each of the cases we're looking at," she said. "Of course, our goal is to do this as quickly as possible."

While Act 221 has been credited with attracting capital to the state, an unintended consequence has been its use by investors who wrote off millions of dollars pumped into projects that did not create permanent jobs, such as movie and TV productions. There is also concern that some credits were claimed by noneligible, tax-exempt organizations and that some research spending figures were inflated.

The state's research credit is among the most generous in the nation. It provides a refund valued at 20 percent of a company's qualifying research and development expenses. However, about $10 million — or more than two-thirds — of the $14.5 million in research tax credits claimed for 2001 went to non-technology companies.

In addition, the department is investigating allegations that a 100 percent investment tax credit provided in the law was claimed for investments that were repaid for services rendered, or under other complicated transactions specifically designed to avoid state taxes.

The department said the audits are hampered by language in Act 221 requiring that the law be interpreted liberally. Lingle has pushed to tighten the law and limit the value of research credits to increases in research and development spending made by a company rather than ongoing expenditures.

Until those changes are adopted by the Legislature, a cloud of uncertainty will continue to hang over the tax credit program, which expires at the end of 2005, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

"Moving forward, the thing is to make the time that's left on this credit work to attract legitimate businesses," he said. "If it takes these changes to do it, let's do it."

Ann Chung, executive director of the Hawai'i Technology Trade Association, said the fact that only a small number of credits have actually been denied means that Act 221 isn't being abused and doesn't need changing.

While the tax department provided some additional data on Act 221 claims for 2001, it said similar information for 2002 claims would not be available until next year. The department also said it has yet to compile figures on the jobs or salaries created under Act 221 based on new tax forms that were due in June.

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.