Surf’s Up; Taxes Are Down

A favorable investing climate has many tech companies saying ''Mahalo'' to Hawaii.
Alix StuartMarch 1, 2003

Spectacular beaches and topnotch surfing opportunities weren’t the reasons Landmark Networks Inc., a Silicon Valley, Calif.-based wireless start-up with no profits or customers, decided to move to Hawaii late last year.

Instead it was the favorable investing climate, including a 100 percent state tax credit for high-tech investments (Act 221 credit), that prompted the relocation. “Moving to Hawaii gave us the best chance of succeeding, because the credit reduces the risk for early-stage investors,” says CEO Tareq Hoque, who helped raise $1.5 million from Hawaiian investors.

Along with such recently instituted incentives as a 20 percent tax refund for research-and-development activities (paid regardless of tax liability), nonexpiring net-loss carryforwards, and no state taxes on stock-option gains, the credits are designed to draw more ventures, as well as R&D units of established firms, to the Aloha State.

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“The whole purpose of the incentives is to nurture business in Hawaii, so that more companies will think about moving part or all of their business here,” says John Maughan, a tax partner in KPMG LLP’s Honolulu office. More than 100 firms, mostly in software and biotech, have officially qualified for the Act 221 credits.

Even if a company doesn’t have taxable operations in Hawaii, it can benefit from the investment credits, he says, thanks to partnership mechanisms that allow the credits to be swapped for cash or larger equity stakes.

So far, though, the hoped-for tsunami of venture funding hasn’t yet flooded the state — just over $240 million was invested in four businesses in 2002, according to VentureOne, including one $224 million infusion into Pihana Pacific Inc. (now part of Equinix Inc.) by Goldman Sachs, GE Capital, and others.

In fact, most of the money offered so far has gone into movies filmed in the state — like 2001’s Blue Crush — rather than into start-ups. As a result, the state legislature is expected to tighten the language this year to make the credit more specific to development-oriented ventures. It is also expected to crack down on other types of abuses, such as shell companies that are used solely for funneling capital expenditures. Mainland companies “would probably have a hard time if they were trying to carve out their IT departments as qualified high-tech enterprises,” says Maughan.

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