Act 221 tax credit applicants drop

By Sean Hao
Advertiser Staff Writer

The state Department of Taxation granted fewer preliminary clearances to companies seeking technology tax credits last year as the program underwent closer scrutiny and the number of applicants fell.

Sixty-one tax credit "comfort letters" were issued by the department through December compared to 80 in 2002. The letters essentially are conditional rulings on whether the companies are likely to qualify for tax breaks under Act 221.

A favorable ruling doesn't necessarily mean that a technology investment will materialize or that credits will be granted. But the lower numbers for 2003 could be seen as a measure of interest in the program and might reflect companies' declining hopes of getting the credits following the controversy surrounding the program.

The Act 221 credits have come under intense review as the cost of the program to the state escalates and critics question the eligibility of some of the recipients, including nonprofits and movie productions.

The decline in the number of comfort letters issued also results from the department's efforts to cut down on alleged abuses of the program, said Tax Director Kurt Kawafuchi.

Tax officials received 70 requests for comfort letters last year, compared with 93 the prior year. Rulings on nine requests from 2003 are pending. The status of the 13 remaining requests from 2002 was unavailable, although some were likely to have been processed last year while others were withdrawn, according to the department.

"People haven't been coming in for a one-shot movie deal, whereas in prior years they would have," Kawafuchi said.

"And also we're scrutinizing because the taxpayers are responsible for subsidizing this."

The tax credit amounts and the number of Act 221 claims for 2003 won't be available for at least another year. But such information for 2002 is being compiled and could be available within months, Kawafuchi said.

So far, claims for 2002 are running higher that those in 2001, he said.

"About 45 to 60 days ago, we were double (the amount claimed) on one credit," Kawafuchi said. "I would expect we're going to be more than 2001 because more people know about it."

During Act 221's first year in 2001, businesses and investors claimed an estimated $46 million in tax breaks under a provision covering technology investment. The program provides a 100 percent credit for money put into a qualifying technology venture, which has been broadly defined as anything from software development to film and video production.

The $46 million was nearly triple the estimated cost of the program. The tax credits are spread over five years, so the program saw a reduction of $9.6 million in state revenue in 2001 alone.

Also that year, companies received another $14.5 million on their taxes under another provision covering research.

While the program has helped technology companies land much-needed investment capital, it had the unintended consequence of financing non-tech ventures such as movie deals. The deal-makers also leveraged the tax credits into claims as large as four times the original value of the investment.

Criticism of the program prompted Gov. Linda Lingle's unsuccessful attempt last year to get the Legislature to scale back the credits.

The Department of Taxation also issued new guidelines restricting the program and launched audits into Act 221 tax credit claims.

"All that cast doubt on Act 221 last summer," said Ann Chung, executive director of the Hawai'i Technology Trade Association. "I don't think that was a boost for the technology industry at all."

However, Chung disagreed that there may be less interest in the program. "I don't think it's a good indicator of activity," she said. "Heading into 2004, everybody in the tech industry was upbeat."

Chung said technology company executives have complained about long delays in receiving approvals from the department.

But she doubts there was a deliberate agenda to curb use of Act 221 credits by not granting comfort letters.

"Probably it's a reflection of the fact that there's less staff" at the department to process letters, she said.

Kawafuchi said any delays are a result of new, more stringent guidelines issued last spring.

"We are trying to be as timely and pro-business as we can, but obviously we have to be comfortable with the ruling," he said.

"Some of it, we're still waiting for information, so we can't process it until we get the information."

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