Audits find
tech-tax abuse

The state tax director says
up to 20 percent of Act 221 claims
reviewed are fraudulent

Up to 20 percent of high-technology tax credit claims that have undergone state audit or review are fraudulent, state Tax Director Kurt Kawafuchi said yesterday.

The Tax Department has already consulted the state attorney general and expects to submit cases for civil or criminal legal action within a year, he said. But because tax information is confidential, only those cases that go to court will be made public.

The tax credit law, known as Act 221, has been touted by supporters as a tool to diversify Hawaii's tourism-dependent economy into high-tech businesses. But the law has come under severe criticism after millions of dollars in credits were claimed by movie productions that filmed in the islands for only a short time.

Kawafuchi's proclamation alarmed state lawmakers.

"If there's abuse, we need to stop it immediately, and we need to crack down on it immediately," said Rep. Brian Schatz (D, Tantalus-McCully), House Economic Development and Business Concerns Committee chairman.

Gov. Linda Lingle tried unsuccessfully last year to convince the state Legislature to repeal the law.

She said the law, enacted three years ago, is draining state coffers because it is too liberal, allowing non-high-tech businesses to receive millions of dollars in tax credits. Her Cabinet is working with lawmakers to tighten the qualifications for the credit.

Kawafuchi said his estimate of Act 221 "abuse" is based on audits and reviews of claims made for 2001 and 2002.

Schatz questioned Kawafuchi and state Department of Business, Economic Development & Tourism Director Ted Liu why the administration never mentioned the possibly fraudulent claims earlier.

Liu said lawmakers never asked for that information. But when Rep. Michael Magaoay (D, Laie-Kunia) said the House Finance Committee did ask last year, Kawafuchi said the administration did not have the information then.

"It takes a while to do the audits. They're very technical type of audits," Kawafuchi said.

Kawafuchi declined to elaborate on the types of abuse. However, he said companies that claimed the credit for altering software bought off the shelf accounted for $5 million of the $14.5 million diverted from state coffers in 2001 under Act 221.

For 2002, he said the state granted $48 million in tax credits. But because for some businesses the amount of credit exceeded their tax liability, $35 million in credits were claimed that year, he said.

Earlier this month, Kawafuchi said he was looking into whether a local insurance company turned a $2,000 investment into a $3.4 million claim for tax credits. He said the state can reject claims for tax credits if the investment lacks business purpose and economic substance.

One of the changes to Act 221 the Lingle administration is seeking is to remove from the law language that requires the state to liberally apply the law.

Schatz said the law does not have to be changed to crack down on abuse.

"If they're already doing things that are illegal, then that means the law isn't allowing for it."

He said the Lingle administration can exclude non-high-tech business ventures from the law by administratively tightening the qualifications.


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