HOUSE OF REPRESENTATIVES	H.B. NO.	1410
TWENTY-SEVENTH LEGISLATURE, 2013
STATE OF HAWAII

A BILL FOR AN ACT

 

 

relating to energy.

 

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 

     SECTION 1.  The legislature finds that, in addition to ethanol, pyrolysis oil, renewable diesel, bio-gasoline and bio-jet fuel are examples of potential fuels that could be produced in Hawaii from locally grown agricultural feedstock.

     Despite Hawaii's favorable climate and biomass growth potential, commercial-scale biofuels production is constrained, largely because of limited land availability.  The non-contiguous nature of land parcels and competing land uses make maximizing biofuel production per unit of land and water critical.  First generation feedstocks including sugar and oilseed crops combined with conventional fermentation or transesterification conversion technology presently produce no greater than one hundred gallons per acre.  Second generation biofuels produced from dedicated energy crops, however, produce roughly five times the volume of output on a per acre basis.  Further, second-generation conversion technologies can produce high-energy-density fuels that are compatible with existing infrastructure.  Given the State's limited land, these second generation technologies offer the best hope of substantially increasing local biofuel production while minimizing the impact on land and resources.  With these second-generation benefits, however, comes increased capital costs and investment risk.  A biofuel production facility credit targeting second-generation production could help ameliorate this risk while helping to jumpstart a new, bio-based industry for the Hawaii.

     Applying a tax credit to biofuel production facilities that commence construction on or after January 1, 2014, would help to foster new investment and construction in the State.  Facilities that have already commenced construction have likely secured the necessary financing and would be moving forward regardless of the credit.  Applying a tax credit to new construction would help jumpstart an advanced, high-tech industry while creating demand from other sectors of the local economy, including construction, which have been badly hit by the economic slowdown.

     Advanced feedstock and conversion technologies will help minimize the land, water, and resource footprint of biofuel operations while generating a portfolio of energy outputs and value-added co-products.  Encouraging advanced technology would enhance sustainability, attract higher levels of capital investment, and help establish Hawaii as a center for bio-based innovation.

     At present, a tax credit is allowed based on the percentage of nameplate capacity up to a limit of less than fifteen million gallons.  Amending the language to provide for a 30 cents per one hundred fifteen thousand British thermal units of renewable biofuels would enhance administrative efficiency and provide incentive for the production of higher-density fuels.  Further, removing the fifteen million gallon per year facility cap would allow larger-scale facilities to also benefit from the incentive.  Maintaining the statutory requirement that the facility must operate at or above seventy-five per cent capacity in order to claim the credit would also help to ensure the credit helps bring the greatest volume of fuels to market.

     Finally, incorporating a sunrise date that applies a tax credit to taxable years after December 31, 2014, would help to provide assurance to investors and project developers that support would be available, while not unnecessarily tying up state funds.

     The purpose of this Act is to modify the existing ethanol facility tax credit to include other liquid biofuels and to enable larger facilities to be eligible for the tax incentive, without changing the level of incentive or cap per facility.  Amending the current statute to incorporate biofuels and to foster advanced technology is key to supporting a broader range of high-density biofuels producers, enhancing land use and production efficiency, attracting high-tech investment to the State, spurring agricultural and economic development, and minimizing the State's petroleum dependence and emissions.

     SECTION 2.  Section 235-110.3, Hawaii Revised Statutes, is amended to read as follows:

     "§235-110.3  [Ethanol] Biofuel production facility tax credit.  (a)  Each year during the credit period, there shall be allowed to each taxpayer subject to the taxes imposed by this chapter, [an ethanol] a biofuel production facility tax credit that shall be applied to the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed.

     For each [qualified ethanol] qualifying biofuel production facility, the annual dollar amount of the [ethanol] biofuel production facility tax credit during the eight-year period shall be equal to [thirty per cent of its nameplate capacity if the nameplate capacity is greater than five hundred thousand but less than fifteen million gallons.] 30 cents per one hundred fifteen thousand British thermal units of biofuels; provided that the biofuel production facility's capacity is not less than five hundred seventy-five billion British thermal units of biofuel per year; provided further that the amount of the tax credit claimed under this section by a taxpayer shall not exceed $3,000,000 per taxable year.   A taxpayer may claim this credit for each qualifying [ethanol] biofuel production facility; provided that:

     (1)  The claim for this credit by any taxpayer of a qualifying [ethanol] biofuel production facility shall not exceed one hundred per cent of the total of all investments made by the taxpayer in the qualifying [ethanol] biofuel production facility during the credit period;

     (2)  The qualifying [ethanol] biofuel production facility operated at a level of production of at least seventy-five per cent of its nameplate capacity on an annualized basis;

     (3)  The qualifying biofuel production facility is located within the State and, if available, uses agricultural feedstock for at least seventy-five per cent of its production output;

    [(3)] (4)  The qualifying [ethanol] biofuel production facility [is in production on or before January 1, 2017;] commences construction on or after January 1, 2014; and

    [(4)] (5)  No taxpayer that claims the credit under this section shall claim any other tax credit under this chapter for the same taxable year.

     (b)  As used in this section:

     "Agricultural feedstock" includes but is not limited to:  sugar cane; byproducts from sugar cane; sweet sorghum; sugar beets; biomass; renewable oils; fiber; algae; woody biomass; and other biological materials.

     "Biofuel" means ethanol; pyrolysis oil; renewable diesel; bio-gasoline; bio-jet fuel; or any other liquid fuel that meets the relevant biofuel specifications of ASTM International and is produced from agricultural feedstock.

     "Credit period" means a maximum period of eight years beginning from the first taxable year in which the qualifying [ethanol] biofuel production facility begins production even if actual production is not at seventy-five per cent of nameplate capacity.

     "Investment" means a nonrefundable capital expenditure related to the development and construction of any new qualifying [ethanol] biofuel production facility, including processing equipment, waste treatment systems, pipelines, and liquid storage tanks at the facility or remote locations, including expansions or modifications.  Direct capital expenditures in agricultural infrastructure, including irrigation and drainage systems, land clearing and leveling, establishment of crops, planting, and cultivation where the qualifying biofuel production facility and agricultural operations are integrated shall be eligible.  Capital expenditures shall be those direct and certain indirect costs determined in accordance with section 263A of the Internal Revenue Code, relating to uniform capitalization costs, but shall not include expenses for compensation paid to officers of the taxpayer, pension and other related costs, rent for land, the costs of repairing and maintaining the equipment or facilities, training of operating personnel, utility costs during construction, property taxes, costs relating to negotiation of commercial agreements not related to development or construction, or service costs that can be identified specifically with a service department or function or that directly benefit or are incurred by reason of a service department or function.  For the purposes of determining a capital expenditure under this section, the provisions of section 263A of the Internal Revenue Code shall apply as it read on March 1, 2004.  For purposes of this section, investment excludes land costs and includes any investment for which the taxpayer is at risk, as that term is used in section 465 of the Internal Revenue Code (with respect to deductions limited to amount at risk).

     ["Nameplate capacity" means the qualifying ethanol production facility's production design capacity, in gallons of motor fuel grade ethanol per year.]

     "Net income tax liability" means net income tax liability reduced by all other credits allowed under this chapter.

     "Qualifying [ethanol] biofuel production" means [ethanol] biofuel produced from [renewable, organic feedstocks, or waste materials, including municipal solid waste.  All qualifying production shall be fermented, distilled, gasified, or produced by physical chemical conversion methods such as reformation and catalytic conversion and dehydrated at the facility.] renewable feedstocks produced within the State; provided that the renewable transportation fuel shall be sold in the State.

     "Qualifying [ethanol] biofuel production facility" or "facility" means a facility located in Hawaii [which] that produces [motor] fuel grade [ethanol meeting the minimum specifications by the American Society of Testing and Materials standard D-4806, as amended.] biofuel from renewable feedstocks and that meets the relevant ASTM International specifications for that particular fuel or other industry specifications for the production of:

     (1)  Methanol, ethanol, or other alcohols;

     (2)  Hydrogen;

     (3)  Biodiesel or renewable diesel;

     (4)  Biofuels derived from biological materials, including algae; or

     (5)  Renewable jet fuel, renewable gasoline, or liquid or gaseous fuels.

     (c)  In the case of a taxable year in which the cumulative claims for the credit by the taxpayer of a qualifying [ethanol] biofuel production facility exceeds the cumulative investment made in the qualifying [ethanol] biofuel production facility by the taxpayer, only that portion that does not exceed the cumulative investment shall be claimed and allowed.

     (d)  The department of business, economic development, and tourism shall:

     (1)  Maintain records of the total amount of investment made by each taxpayer in a facility;

     (2)  Verify the amount [of the qualifying investment;] and type of biofuel produced;

     (3)  Total all qualifying [and cumulative investments] biofuel production facilities that the department of business, economic development, and tourism certifies; and

     (4)  Certify the total amount of the tax credit for each taxable year and the cumulative amount of the tax credit during the credit period.

     Upon each determination, the department of business, economic development, and tourism shall issue a certificate to the taxpayer verifying the qualifying [investment amounts,] volume of biofuel production, the credit amount certified for each taxable year, and the cumulative amount of the tax credit during the credit period.  The taxpayer shall file the certificate with the taxpayer's tax return with the department of taxation.  Notwithstanding the department of business, economic development, and tourism's certification authority under this section, the director of taxation may audit and adjust certification to conform to the facts.

     If in any year, the annual amount of certified credits reaches [$12,000,000] $           in the aggregate, the department of business, economic development, and tourism [shall] may immediately discontinue certifying credits and notify the department of taxation.  [In no instance shall the total amount of certified credits exceed $12,000,000 per year.]  Alternatively, the department of business, economic development, and tourism may increase the cap according to the level of demand for qualified biofuel production; provided that the department of business, economic development, and tourism shall report to the legislature the rationale and justification for any such increase in its next annual report to the legislature.  Notwithstanding any other law to the contrary, this information shall be available for public inspection and dissemination under chapter 92F.

     (e)  If the credit under this section exceeds the taxpayer's income tax liability, the excess of credit over liability shall be refunded to the taxpayer; provided that no refunds or payments on account of the tax credit allowed by this section shall be made for amounts less than $1.  All claims for a credit under this section must be properly filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed.  Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

     (f)  If a qualifying [ethanol] biofuel production facility or an interest therein is acquired by a taxpayer prior to the expiration of the credit period, the credit allowable under subsection (a) for any period after such acquisition shall be equal to the credit that would have been allowable under subsection (a) to the prior taxpayer had the taxpayer not disposed of the interest.  If an interest is disposed of during any year for which the credit is allowable under subsection (a), the credit shall be allowable between the parties on the basis of the number of days during the year the interest was held by each taxpayer.  In no case shall the credit allowed under subsection (a) be allowed after the expiration of the credit period.

     [(g)  Once the total nameplate capacities of qualifying ethanol production facilities built within the State reaches or exceeds a level of forty million gallons per year, credits under this section shall not be allowed for new ethanol production facilities.  If a new facility's production capacity would cause the statewide ethanol production capacity to exceed forty million gallons per year, only the ethanol production capacity that does not exceed the statewide forty million gallon per year level shall be eligible for the credit.

     (h)] (g)  Prior to construction of any new qualifying [ethanol] biofuel production facility, the taxpayer shall provide written notice of the taxpayer's intention to begin construction of a qualifying [ethanol] biofuel production facility.  The information shall be provided to the department of taxation and the department of business, economic development, and tourism on forms provided by the department of business, economic development, and tourism, and shall include information on the taxpayer, facility location, facility production capacity, anticipated production start date, and the taxpayer's contact information.  Notwithstanding any other law to the contrary, this information shall be available for public inspection and dissemination under chapter 92F.

     [(i)] (h)  The taxpayer shall provide written notice to the director of taxation and the director of business, economic development, and tourism within thirty days following the start of production.  The notice shall include the production start date and expected [ethanol fuel] biofuel production for the next twenty-four months.  Notwithstanding any other law to the contrary, this information shall be available for public inspection and dissemination under chapter 92F.

     [(j)  If a qualifying ethanol production facility fails to achieve an average annual production of at least seventy-five per cent of its nameplate capacity for two consecutive years, the stated capacity of that facility may be revised by the director of business, economic development, and tourism to reflect actual production for the purposes of determining statewide production capacity under subsection (g) and allowable credits for that facility under subsection (a).  Notwithstanding any other law to the contrary, this information shall be available for public inspection and dissemination under chapter 92F.

     (k)] (i)  Each calendar year during the credit period, the taxpayer shall provide information to the director of business, economic development, and tourism on the number of [gallons] British thermal units of [ethanol] biofuel produced and sold during the previous calendar year, how much was sold in Hawaii versus overseas, [feedstocks] the percentage of Hawaii-grown feedstock and other feedstock used for [ethanol] biofuel production, the number of employees of the facility, and the projected number of [gallons] British thermal units of [ethanol] biofuel production for the succeeding year.

     [(l)] (j)  In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for every qualifying [ethanol] biofuel production facility.  The cost upon which the tax credit is computed shall be determined at the entity level.  Distribution and share of credit shall be determined pursuant to section 235-110.7(a).

     [(m)] (k)  Following each year in which a credit under this section has been claimed, the director of business, economic development, and tourism shall [submit a written] include in its annual report to the governor and legislature [regarding the production and sale of ethanol.  The report shall include:] the following:

     (1)  The number, location, and nameplate capacities of qualifying [ethanol] biofuel production facilities in the State;

     (2)  The total number of [gallons] British thermal units of [ethanol] biofuel produced and sold during the previous year; and

     (3)  The projected number of [gallons] British thermal units of [ethanol] biofuel production for the succeeding year.

    [(n)] (l)  The director of taxation shall prepare forms that may be necessary to claim a credit under this section.  Notwithstanding the department of business, economic development, and tourism's certification authority under this section, the director of taxation may audit and adjust certification to conform to the facts.  The director may also require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91."

     SECTION 3.  This Act does not affect rights and duties that matured, penalties that were incurred, and proceedings that were begun before its effective date.

     SECTION 4.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 5.  This Act, upon its approval, shall apply to taxable years beginning after December 31, 2014.

 

INTRODUCED BY:

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Report Title:

Renewable Fuels; Biofuels; Ethanol; Tax Credits

 

Description:

Replaces the ethanol facility tax credit with the biofuel production facility tax credit.  Expands tax credit eligibility to include larger facilities and production of multiple types of biofuel.  Changes the formula for calculating the amount of tax credit allowed and caps the amount of tax credits allowed.  Limits the credit to Hawaii biofuel production facilities.  Allows the Department of Business, Economic Development, and Tourism to increase the aggregate tax cap with reporting requirements.  Applies to taxable years beginning after December 31, 2014.

 

 

 

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