Department of Taxation Director Kurt Kawafuchi last week said an unspecified number of other claims for technology investment and research tax credits for 2001 continue to be scrutinized.

That three were denied was a "best guess" of the number of instances in which companies clearly didn't qualify for the credits, he said.

Kawafuchi provided few other details on the progress of the investigation, which could be critical in determining whether the state's landmark technology industry tax incentive program needs changing and in what way.

"We've concluded some of the audits," Kawafuchi said. "I think a number of them are still ongoing."

The results so far are "kind of bearing out what we expected," Kawafuchi said.

The tax department announced its audits of Act 221 claims in mid-March, saying the credits were used in an "over aggressive" manner to cut corporate and individual tax bills rather than to stimulate economic activity.

At the time, Gov. Linda Lingle's administration blamed the state's budget woes on the cost of the credits — estimated at an unexpected $48 million in fiscal 2003.

With the state's revenue outlook now improving, some are questioning if Act 221 is as big a problem as the administration claimed.

If the five-year act that is now in its third year is being abused, the administration should provide evidence of it, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

"They should come forward with as much of the data as they can," said Kalapa, who favors placing some added restrictions on use of the credits.

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 that they pumped into projects such as the movies "Blue Crush" and "The Big Bounce."

Among the issues the tax department said it was investigating were claims for:

• Research credits by noneligible tax-exempt organizations. The state's research credit provides a refund valued at 20 percent of a company's qualifying research and development expenses.

• Financial institutions using the credits to offset franchise taxes.

• Research spending that was inflated.

In addition the department said it would look into allegations that a 100 percent investment tax credit provided in the act was:

• Used to pay for one-shot movie deals that didn't create permanent jobs.

• Claimed for investments that were repaid for services rendered.

• Claimed for tax credits based on related party transactions, such as receiving ownership in a company and getting a contract for services in exchange.

Another criticism of the act was that some investors were claiming credits valued at four times their original investment.

"When certain taxpayers become greedy, it's our job to just say no," Kawafuchi said in March, when the audits were announced. "That's what we are doing here."

Although the state is prevented from disclosing tax return information that would identify a particular company or individual, it can provide aggregate data on the number of false claims and the amount of money in question.

However, last week Kawafuchi declined to specify the amount of Act 221 tax-credit claims that are in dispute.

"I don't think I can do that at this point," he said. "We're looking at a number of them. I don't know if we've come to a final decision at this point."

Kawafuchi also could not say when the inquiry would be completed. The auditors' task is made difficult by language in the act requiring that the tax department interpret the law liberally, he said.

Lingle is expected to continue to push for a change in that language that would tighten the act. She is also seeking to limit the value of research credits to increases in research and development spending made by a company rather than ongoing expenditures.

Lawmakers earlier this year rejected the proposals by the administration saying the act should be given time to work.

Proposals to change the act are again expected at the next legislative session, but key supporters of the credits will likely attempt to block any amendments.

State Rep. Brian Schatz, chairman of the committee on economic and business concerns, said Lingle's administration should start providing evidence if it believes the act is being misused.

"It's certainly important to know whether there's any legitimacy to the allegations there's abuses," said Schatz, D-25th (Makiki, Tantalus). "The allegations are now several months old, if there's any truth to them we need to know now as we draft legislation."

Dustin Shindo, co-founder and president of Hoku Scientific, said the uncertainty created by the audits is making it difficult for companies to attract capital. He said he's not surprised the audits have yet to show widespread abuse by companies and investors.

"I think the law is written to allow what they did, so I don't think the audits will be all that useful," he said.