Mandatory Verification Review (Agreed Upon Procedures Report) for the Motion Picture, Digital Media, and Film Production Income Tax Credit

TAX INFORMATION RELEASE NO. 2019-04
RE: Mandatory Verification Review (Agreed Upon Procedures Report) for the Motion
Picture, Digital Media, and Film Production Income Tax Credit
I. BACKGROUND
Section 235-17, Hawaii Revised Statute (HRS), provides a refundable motion picture,
digital media, and film production income tax credit (film credit) to qualified productions for
qualified production costs incurred in the State of Hawaii (Hawaii). The amount of the film
credit is 20% of qualified production costs incurred the in the City and County of Honolulu and
25% of qualified production costs incurred in any other county.
Section 6 of Act 143, Session Laws of Hawaii 2017, and section 235-17(h), HRS, require
every taxpayer claiming the film credit to submit to the Hawaii Film Office a production report
and a verification review. The verification review and the production report must be submitted
no later than 90 days following the end of the calendar year in which the qualified production
costs were incurred.
Administrative rules governing the film credit were adopted and became effective on
November 17, 2019. Under section 18-235-17-14, Hawaii Administrative Rules (HAR), a
verification review is defined as an agreed-upon procedures report (AUPR) prepared by a
qualified certified public accountant (QCPA). The main purpose of the verification review is to
ensure that claims for the film credit are proper under section 235-17, HRS, and applicable
administrative rules. The purpose of this Tax Information Release is to clarify details regarding
the requirements of the AUPR.
II. GENERAL REQUIREMENTS
a. The AUPR shall:
i. Be prepared by a QCPA who:
1. Is licensed in the State of Hawaii;
2. Is registered with the Hawaii State Board of Accountancy;
3. Has a current valid permit to practice;
4. Is in good standing to provide accounting services; and
5. Does not have an ownership or pecuniary interest in the taxpayer or the
production;

ii. Contain the following:
1. QCPA’s name, address, and telephone number;
2. QCPA’s license number issued by the Professional & Vocational Licensing
Division of the Hawaii Department of Commerce and Consumer Affairs, license
status, and license expiration date;
3. A statement signed by the QCPA under the penalty of perjury stating that he or she
does not have an ownership or other pecuniary interest in the taxpayer or the
production and that he or she is qualified to produce the AUPR under section 235-
17, HRS, and its administrative rules;
4. Name of the Production Company (taxpayer);
5. Name of the Project; and
6. Date that the AUPR was completed;
iii. Be based on agreed-upon procedures conducted in accordance with attestation
standards as defined by the American Institute of Certified Public Accountants in ATC Section 215, Agreed-Upon Procedures Engagements.
iv. Be presented in United States dollars (USD). If production costs were paid in foreign
currency, the conversion rate to USD on the date that the cost was incurred must be
used to convert the cost from the foreign currency to USD;
v. Be prepared for all taxpayers on a calendar year basis;
1. For calendar year taxpayers, the first AUPR shall cover the production costs
incurred from January 1 to December 31 of 2019.
2. For fiscal year taxpayers, the first AUPR shall cover the first day of the tax year to
December 31, 2019. Subsequent AUPRs shall cover January 1 to December 31 of
the appropriate year, as if the fiscal year taxpayer were a calendar year taxpayer.
vi. State separately the:
1. Amount of qualified production costs asserted by the qualified production that
were incurred in the City and County of Honolulu;
2. Amount of qualified production costs asserted by the qualified production that
were incurred in any county other than the City and County of Honolulu;
3. Exceptions found in selected sample(s) for:
a. Transactions with a value of $10,000 or more; and
b. Transactions with a value of less than $10,000; and
4. Total asserted qualified production costs not tested.
vii. Provide a detailed explanation and/or list of the:
1. Procedures performed to produce the AUPR;
2. Sampling method if one was used; and
3. Exceptions found by exception type.

III. PROCEDURES
a. Required documentation.
i. The QCPA shall obtain a sworn statement signed by the taxpayer under the penalty of
perjury and containing the following statement:
1. “I declare, under the penalties set forth in section 231-36, HRS, that the
information furnished for the purpose of producing this Verification Review has
been examined by me and, to the best of my knowledge and belief, it is true and
correct for the calendar year stated, pursuant to the Hawaii Income Tax Law,
Chapter 235, HRS.”
ii. For the purpose of verifying expenditures, the QCPA shall obtain a:
1. Detailed expenditure report as described in section 18-235-17-03(b)(3), HAR,
and/or the taxpayer’s general ledger;
2. List of vendors as described in section 18-235-17-03(b)(4), HAR;
3. List of loan-out companies as described in section 18-235-17-03(b)(5), HAR;
4. List of costs for which use tax was paid and substantiation of such payments as
described in section 18-235-17-03(b)(6), HAR; and
5. List of crew members as described in section 18-235-17-03(b)(7), HAR; and
6. Payroll log.
b. Minimum expenditure threshold. The QCPA shall review the Hawaii expenditure report
and/or the taxpayer’s general ledger to ensure that the qualified production costs total
$200,000 or greater. If this threshold is not met, the taxpayer does not qualify for the
Hawaii film credit.
c. Verification of expenditures. The QCPA shall evaluate the taxpayer’s assertion of
amounts proposed as qualified production costs within the meaning of the definition of
“qualified production costs” in section 235-17, HRS, and the requirements of sections 18-
235-17-09 to 13, HAR, (as applicable) for the calendar year.
i. Ordinary and necessary. The QCPA shall verify that the asserted production costs are
costs that are ordinary and necessary in the motion picture or film production industry
through one of the following methods:
1. Verify that the asserted costs are among those specifically listed under the
definition of “qualified production costs” in section 235-17(m), HRS, paragraphs
(1) to (10); or
2. For an asserted cost other than a direct production cost specified in the definition
of “qualified production costs” in section 235-17(m), HRS, verify that the cost is
otherwise allowable under the administrative rules.
ii. Sampling. Using any reasonable method, the QCPA may perform the verification of
expenditures on a test basis with a sample selected according to applicable
professional standards for transactions with a value of less than $10,000. The selected
sample shall include all transactions with a value of $10,000 or more.

iii. Application of the rate of exceptions. The QCPA shall perform the following
procedures in determining and applying the rate of exceptions:
1. If the rate of exception is 1% or less of the asserted qualified production costs, no
further action is required.
2. If the rate of exception exceeds 1% of asserted qualified production costs, select a
second sample from the untested costs according to the sampling methodology
previously utilized. Test the second sample to determine the rate of exception.
3. If the rate of exception for the second sample does not exceed 1%, document the
rate of exception in the AUPR and adjust for any errors found in the second
sample. No further action is required.
4. If the rate of exception for the second sample exceeds 1% of the asserted qualified
production costs, adjust for the errors found in the second sample and either:
a. Apply the average of the two rates of exception to the untested costs for the
purpose of determining the approximate dollar amount of exceptions; or
b. Use any other reasonable method of further identifying exceptions in the
untested costs.
iv. Tracing. The QCPA shall agree the amount of the payments for asserted production
costs to checks, bank statements, or other documentary evidence not created by the
taxpayer.
v. Wages. For wage payments paid to employees, the QCPA shall:
1. Verify that federal Form W-2 or paystubs show that Hawaii income tax was
withheld. If federal Form W-2 or paystubs do not show Hawaii income tax was
withheld, treat the amount paid as wages as an exception;
2. If the wages were paid through a payroll company:
a. Verify that the payroll company has an active general excise tax (GET) license;
and
b. If the payroll company does not have an active GET license, treat the fees paid
to the payroll company as an exception.
vi. Other Payments made-through payroll companies. For other payments made through
a payroll company or the like, the QCPA shall:
1. Verify that the amount that was ultimately paid to the payee, such as a loan-out
company, and the fee paid to the payroll company are stated separately;
2. Verify that the payee, such as a loan-out company, has an active GET license. If
the payee does not have an active GET license, treat the amount paid to the payee
as an exception; and
3. Verify that the payroll company has an active GET license. If the payroll company
does not have an active GET license, treat the fee paid to the payroll company as
an exception.
vii. Small purchases of goods. Section 18-235-17-03(b)(4), HAR, requires that the GET
license number of all vendors be provided as part of the post-production report.
However, the Department of Taxation recognizes that in certain instances the burden
of obtaining and reporting a vendor’s GET license number outweighs its utility. As a

result, the QCPA shall disregard section 18-235-17-03(b)(4), HAR, if the following
conditions are met:
1. Vendor/seller is physically located in Hawaii;
2. Purchase (transaction) is less than $100;
3. Following information is contained in the “Small Purchases” section of the
Expenditure Report (spreadsheet) and/or the taxpayer’s general ledger or other
supporting documentation such as invoices or receipts:
a. Name of the vendor/seller;
b. Address or location of vendor/seller;
c. Description of the purchase (please note: “Petty cash,” “merchandise,” and
other generic descriptions are not sufficient);
d. Date of the purchase; and
e. Amount of purchase.
viii. Direct costs. The QCPA shall verify that the asserted costs are directly related to the
qualified production for which the AUPR is being produced as required under section
18-235-17-10(a), HAR.
ix. Capital assets. Verify that the amount of capital (fixed) assets that were not sold or
destroyed are limited to the amount of the depreciation allowance for the time period
and prorated for the amount of time that the equipment was used in Hawaii.
x. Financial or in-kind contributions. The QCPA shall verify that contributions required
under section 18-235-17-17, HAR, are not asserted as qualified production costs.
xi. Workpapers. The QCPA shall maintain all workpapers that support the AUPR’s
results and make those workpapers available for review by the Department at the
offices of the taxpayer, at the Department, or any other reasonable place designated by
the Department. The QCPA shall retain workpapers until the period for an audit by
the Department has expired, but no longer than seven years from the date the AUPR is
submitted.
For questions regarding this Tax Information Release or whether costs qualify for the
film credit, please contact the Rules Office at (808) 587-1530 or by e-mail at
Tax.Rules.Office@hawaii.gov.
For questions regarding the post-production report please contact the Hawaii Film Office
at (808) 586-2570 or by email at DBEDT.film.incentives@hawaii.gov.
RONA M. SUZUKI
Director of Taxation