Technical Framework and Strategic Application of Machinery and Equipment Used Directly and Exclusively in Research and Development within the Maine Tax System

Machinery and equipment used directly and exclusively in research and development comprises tangible assets utilized 100% of the time for scientific experimentation and technological innovation to eliminate technical uncertainty. Under Maine law, these assets qualify for specific sales tax exemptions and income tax credits when they are integral to activities conducted in the experimental or laboratory sense. 1

The distinction between assets used in R&D and those used in general manufacturing or administration is the cornerstone of Maine’s innovation-focused tax policy. For a business operating within the state, understanding the rigorous “direct and exclusive” standard is not merely a matter of compliance but a critical component of capital budgeting and long-term tax planning. While many states offer broad exemptions for “manufacturing” equipment, Maine carves out a specific, more restrictive niche for research equipment, requiring that the asset be used solely for the discovery of new information or the improvement of products and processes without any diversion to commercial production. 1 This standard is codified in 36 M.R.S. § 1760(32) for sales and use tax and is mirrored in the eligibility criteria for the Research Expense Tax Credit (RETC) under 36 M.R.S. § 5219-K, creating a synchronized but multi-layered incentive structure. 1

The Statutory Landscape: Definitions and Legal Standards

To navigate the Maine R&D tax framework, one must first master the statutory definitions provided by the Maine Revised Statutes and the subsequent interpretations issued by Maine Revenue Services (MRS). The law recognizes two primary types of incentives: consumption-based (Sales and Use Tax) and income-based (Research Expense Tax Credit). 1 Both rely on the threshold definition of what constitutes qualified research and development.

Defining Machinery and Equipment for R&D

Under Title 36, “machinery and equipment” encompasses not only the primary apparatus used in a laboratory but also the parts, attachments, and repair components necessary for its operation. 8 Maine Revenue Services Instructional Bulletin No. 22 clarifies that the term includes both new and used machinery. 8 However, the physical context of the equipment is critical. Foundations that are permanent, such as concrete pillars, are generally excluded from the definition of machinery and are treated as real property, whereas movable steel supports or frames are considered part of the equipment they support and may thus qualify for exemption. 8

Furthermore, the assets must qualify as “tangible personal property.” Maine defines this as property that can be seen, weighed, measured, felt, or perceived by the senses. 9 In the modern R&D environment, this definition specifically includes electricity and computer software. 9 Notably, “canned” or prewritten software is considered tangible personal property, while “custom computer software” written specifically for a single client is exempt under a separate provision of the law, 36 M.R.S. § 1760(80). 1

The Direct and Exclusive Threshold

The “directly and exclusively” standard is the most rigorous requirement in Maine’s tax code for research assets. According to 36 M.R.S. § 1752(2-A), the term “directly” refers to those activities or operations that constitute an integral and essential part of the production or research process. 8 This is contrasted with activities that are merely incidental, convenient, or remote. 11

The term “exclusively” dictates a 100% usage requirement. 3 In practice, this means that if a piece of equipment is used even nominally for a non-exempt purpose—such as general administrative work, marketing, or the production of goods for sale—the entire exemption for that asset is disqualified. 3 This “all-or-nothing” approach differs significantly from the “primarily” standard (greater than 50%) applied to manufacturing equipment under 36 M.R.S. § 1760(31). 3

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Unpacking Research and Development in the Experimental Sense

Maine’s interpretation of research and development is deeply rooted in the “experimental and laboratory sense.” 1 This phrase serves to limit the incentives to true scientific and technological innovation rather than general business improvements. The state aligns its definition with the federal standards set forth in Internal Revenue Code (IRC) Section 41 and Treasury Regulation § 1.174-2. 5

The Scope of Qualified Research Activities (QRA)

To be considered R&D in the experimental sense, an activity must meet a four-part test derived from federal law but applied to Maine-specific expenditures:

1. Section 174 Test: The expenditures must be eligible for expensing under IRC Section 174, meaning they are incurred in connection with the taxpayer’s trade or business and represent research and development costs in the experimental or laboratory sense. 14
2. Technological Information Test: The research must be undertaken to discover information that is technological in nature, relying on principles of physical or biological sciences, engineering, or computer science. 17
3. Business Component Test: The research must be intended to be useful in the development of a new or improved business component of the taxpayer, such as a product, process, formula, or software. 15
4. Process of Experimentation Test: Substantially all of the activities must constitute a process of experimentation involving the evaluation of alternatives and the testing of hypotheses to resolve technical uncertainty. 15

Statutory Exclusions from R&D

The Maine Legislature has explicitly excluded several activities from being considered R&D. These exclusions are critical because any equipment used in these activities fails the “exclusivity” test. 3 Excluded activities include:

• Quality Control: Ordinary testing or inspecting of materials or products for quality control purposes. 3
• Efficiency and Management: Efficiency surveys, management studies, and consumer surveys. 3
• Promotion: Advertising or promotional activities. 3
• Non-Scientific Research: Research in connection with literary, historical, or similar projects. 3
• Acquisition: The cost of acquiring another person’s patent, model, production, or process. 14

Local Revenue Office Guidance: MRS Bulletins and Rules

Maine Revenue Services provides guidance through Instructional Bulletins and Administrative Rules. While these documents do not have the same legal force as statutes, the MRS emphasizes that “justifiable reliance” upon them will be considered in the mitigation of penalties for any underpayment of tax. 8

Instructional Bulletin No. 22: Manufacturers

Instructional Bulletin No. 22 is the primary source of guidance for equipment exemptions. It provides a detailed breakdown of “direct” use. 8 For instance, equipment used to move materials between two exempt R&D processes is itself considered used “directly.” 8 However, equipment used to handle materials prior to the first R&D operation or after the final R&D operation is typically considered “incidental” and thus taxable. 8

The bulletin also clarifies the treatment of “Safety and Fire Protection” equipment. Generally, fire extinguishers, sprinkler systems, and standard safety clothing are considered taxable unless they are physically attached to or incorporated into an exempt piece of machinery. 8 In an R&D context, this means a specialized fume hood used exclusively for a chemical experiment is exempt, but a general fire suppression system for the laboratory is not. 8

Administrative Rule 104: Electronic Filing Mandates

MRS Rule 104 describes the requirements for the electronic submission of tax returns. 19 For companies claiming the R&D tax credit, electronic filing is often mandatory. Corporations with total assets of $5 million or more, as well as tax-exempt entities with similar asset levels, must file their Form 1120ME electronically. 19 This rule also applies to tax return preparers who handle more than 10 individual or corporate returns in a calendar year. 19

The 2025 Conformity Updates

In late 2025, Maine Revenue Services issued guidance regarding conformity with federal tax changes, particularly the “One, Big, Beautiful Bill Act” (P.L. 119-21). 16 Notably, Maine has chosen not to conform to certain federal R&D expense provisions, specifically regarding accelerated depreciation. 16 Instead, Maine will require that taxable income include tangible and intangible (amortization) deductions for R&D expenditures claimed under IRC Sections 174 or 59(E). 16 An additional state-level deduction is allowed, but it cannot exceed 20% of the qualified R&D expenditures for the tax year. 16

The Research Expense Tax Credit (RETC) Calculation

The Research Expense Tax Credit (36 M.R.S. § 5219-K) is a non-refundable income tax credit intended to incentivize incremental R&D spending within the state. 5 The credit applies only to research conducted in Maine. 7

The Two Components of the Credit

The total RETC is the sum of two distinct calculations:

1. Incremental Research Credit: 5% of the excess (if any) of the qualified research expenses (QREs) for the taxable year over the “base amount.” 5
2. Basic Research Credit: 7.5% of the basic research payments as determined under IRC Section 41(e)(1)(A). 5

The “base amount” is defined as the average annual QREs incurred by the taxpayer in Maine over the previous three taxable years. 5 For a new entity or a company starting its first R&D project in Maine, the base amount is effectively zero, making the entire first year of QREs eligible for the 5% credit. 17

Determining Qualified Research Expenses (QREs)

QREs are divided into in-house research expenses and contract research expenses. 7

• Wages: Salaries and wages paid to employees for “qualified services,” which include engaging in research, supervising research, or directly supporting research (e.g., a lab technician). 7
• Supplies: Amounts paid for any tangible property (other than land or depreciable property) that is used in the conduct of qualified research. 7
• Contract Research: 65% of any amount paid to a person (other than an employee) for qualified research. 7

Limitation and Carryover Mechanics

The credit is limited by the taxpayer’s total tax liability and a specific corporate threshold. 5 For corporations, the credit cannot exceed:

• 100% of the first $25,000 of tax due. 1
• 75% of the tax due that exceeds $25,000. 1

Any unused portion of the credit may be carried forward for up to 15 years. 1 However, the credit cannot be carried back to previous tax years. 1

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The Biotechnology Exception: Lowering the Hurdle

One of the most significant nuances in the Maine tax code is the preferential treatment given to the biotechnology sector. 1 Under the second part of 36 M.R.S. § 1760(32), the usage standard is relaxed from “exclusively” to “primarily.” 1

Definition of Biotechnology Applications

The “directly and primarily” standard applies to machinery, equipment, instruments, and supplies used in “biotechnology applications.” 1 These applications are defined as the application of technologies such as:

• Genetics: Recombinant DNA techniques and genetic engineering. 3
• Biology: Molecular and cellular biology, immunology, and biological cell fusion techniques. 3
• Biochemistry: New bioprocesses using living organisms or parts of organisms to produce or modify products. 3

This lower standard (greater than 50%) is designed to support the development of pharmaceuticals, improved agricultural plants, and advanced medical diagnostics. 3 By allowing mixed-use of equipment—provided the primary use is in biotech R&D—Maine significantly reduces the audit risk for life sciences companies compared to general technology firms. 1

Procedural Compliance: Exemption Certificates and Refunds

Taxpayers have two primary methods for securing the sales tax exemption: point-of-purchase certificates or post-purchase refunds. 1

Form ST-A-117: The Industrial Users Blanket Certificate

The most common method is the use of the “Industrial Users Blanket Sales Tax Certificate of Exemption” (Form ST-A-117). 30 When a business purchases machinery for R&D, it must check box (d) on the form, which certifies that the asset will be used “directly and exclusively” in R&D in the experimental sense or “directly and primarily” in biotechnology. 30

The purchaser must hold a valid Maine Seller’s Registration Certificate and must assume full liability for any use taxes if the property is later diverted to a non-exempt use. 30 Retailers are required to mark invoices as “Maine Sales Tax Exempt” and retain a copy of the certificate in their files for audit purposes. 13

Post-Purchase Refunds

If a business pays sales tax at the time of purchase, it can file a refund claim with Maine Revenue Services. 1 This requires:

1. Detailed Invoices: Clearly showing the tax paid. 13
2. Functionality Report: A document explaining the machinery’s function, how it operates, and its direct relationship to the R&D process. 34
3. Usage Evidence: Demonstration that the “direct and exclusive” standard will be met. 3

Recordkeeping for Audit Defense

MRS has the authority to audit claims for at least six years. 17 For “exclusive use” assets, a lack of documentation is often fatal to an exemption claim. OPEGA and MRS have noted that “little or no data” is often available for some programs, making robust internal tracking essential. 3 Recommended records include:

• Lab Notes: Documenting every experiment performed on the equipment. 15
• Software Logs: Showing user access and application usage for R&D vs. administrative tasks. 15
• Repair Records: Proof that parts and maintenance were for exempt equipment. 8
• Patent Applications: Corroborating the innovative nature of the research. 15

Detailed Example: Precision Aerospace Composites Inc.

To illustrate the practical application of the Maine R&D framework, consider the hypothetical scenario of Precision Aerospace Composites Inc. (PACI), a startup based in Brunswick, Maine.

Scenario Phase 1: Capital Acquisition

In January 2024, PACI purchases a specialized high-temperature autoclave for stress-testing new carbon-fiber wing segments. The cost of the autoclave is $1,200,000.

• Sales Tax Analysis: PACI intends to use this autoclave 100% of the time for R&D to determine the point of failure for new composite weaves. They provide Form ST-A-117 to the vendor. By claiming the § 1760(32) exemption, PACI saves $66,000 (5.5% of $1.2M) in upfront sales tax. 1
• Ancillary Costs: PACI also buys $50,000 in specialized digital sensors that are incorporated into the autoclave. These are also exempt as “attachments or repair parts” for exempt machinery. 8

Scenario Phase 2: Operational R&D Spending

Throughout 2024, PACI employs three engineers with a combined R&D-allocated salary of $300,000. They also spend $80,000 on “single-use” resin supplies consumed during testing.

• QRE Determination: The total Maine QREs for the year are $380,000 (Wages + Supplies). 7
• Base Amount: PACI was founded in 2022. Their QREs were $100,000 in 2022 and $200,000 in 2023.

• Base = ($0 + $100,000 + $200,000) / 3 = $100,000. 5

Scenario Phase 3: Credit Calculation

• Incremental Credit: 5% of ($380,000 – $100,000) = $14,000. 5
• Basic Research: PACI paid $20,000 to the University of Maine for a physics study.

• Basic Research Credit = 7.5% of $20,000 = $1,500. 5

• Total Earned RETC: $15,500. 5

Scenario Phase 4: Tax Application

PACI has a corporate income tax liability of $20,000.

• Corporate Limitation: The credit is limited to 100% of the first $25,000. Since $20,000 < $25,000, PACI can use the full $15,500. 1
• Final Result: PACI pays $4,500 in state income tax and has effectively saved $81,500 ($66,000 sales tax + $15,500 income tax) through the R&D incentives.

Statistical Overview and Economic Impact

The Maine State Tax Expenditure Reports provide a glimpse into the scale and utilization of these programs. 3

Revenue Loss and Taxpayer Participation

For the Research Expense Tax Credit (§ 5219-K), approximately 175 taxpayers claim the credit annually. 7 The estimated revenue loss to the state for the 2022-2023 fiscal period was approximately $3.8 million, growing to an estimated $4.1 million by FY25. 7

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The OPEGA reports highlight that while the R&D credit is common across 70% of states, the “incremental” structure in Maine is intended to ensure the credit acts as a “but for” incentive—meaning the research would not have happened at that scale but for the tax relief. 26 However, the lack of transparency in business data—Maine is cited as being among the “worst states” for transparency on who receives these credits—makes a full cost-benefit analysis difficult. 35

The “All Other” Expenditure Context

In the broader context of Maine’s $13 billion total annual expenditures, the R&D tax incentives are relatively small, representing less than 0.1% of the state budget. 25 This has led to recent legislative debates about whether the credits are aggressive enough to compete with Massachusetts, which doubles the credit rates for similar activities. 22

Appeals and Legal Oversight: The Board of Tax Appeals

When a taxpayer and Maine Revenue Services disagree on the “direct and exclusive” status of an asset, the dispute is typically resolved through the Maine Board of Tax Appeals (BTA). 41

The Reconsideration Process

Before an appeal can be filed with the BTA, the taxpayer must request a “reconsideration” by MRS within 60 days of receiving a notice of assessment or determination. 44 The MRS division has 90 days to approve or deny the request. 45 If the matter is not resolved, the taxpayer can then file a statement of appeal with the BTA for controversies involving $1,000 to $500,000. 43 Controversies exceeding $500,000 must be taken directly to the Maine Superior Court. 44

BTA Proceedings and Outcomes

The BTA conducts de novo hearings, meaning they review the facts as if for the first time rather than just reviewing the MRS decision for errors. 43 In 2023, the BTA closed fourteen appeals across all tax types. 43 Notably, of the seven written decisions issued in 2023, 100% were decided in favor of Maine Revenue Services. 43 This highlights the high burden of proof placed on taxpayers to demonstrate strict compliance with “exclusivity” and “direct use” standards. 13

Future Outlook: Legislative and Administrative Trends

The Maine tax landscape for R&D is currently in a state of flux due to both state-level evaluations and federal tax reform.

Proposed Credit Doubling (LD 643)

There is significant political pressure to increase the competitiveness of Maine’s R&D tax policy. Legislative Document 643 (LD 643) proposed:

• Doubling the Credits: Increasing the RETC from 5% to 10% and the basic research credit from 7.5% to 15%. 39
• Increasing the Liability Cap: Doubling the 100% threshold from the first $25,000 of tax due to the first $50,000. 39
• Lowering the Base: Reducing the investment threshold needed to receive the credit. 39

While this bill would double the estimated $6.3 million biennial cost of the credit, proponents argue it is necessary to stop the “brain drain” of tech talent to neighboring states. 39

The Dirigo Business Incentives Program

Starting in January 2025, Maine is transitioning some of its traditional incentives into the “Dirigo” program. 44 This new premier incentive program offers a 5% to 10% capital investment credit (depending on the county) for for-profit companies in manufacturing and scientific research. 46 Crucially, the Dirigo credit will be refundable, which marks a major departure from the non-refundable nature of the current RETC. 46 This change is expected to be a game-changer for early-stage startups that have high R&D equipment costs but no revenue—and thus no tax liability—to offset. 17

Conclusion: Strategic Summary for the Business Professional

The “Machinery and Equipment Used Directly and Exclusively in R&D” standard in Maine remains a high-value but high-risk tax incentive. 1 For general technology and manufacturing firms, the “exclusive use” requirement demands near-surgical precision in asset management and recordkeeping. 3 Any lapse into “incidental” use can trigger a full clawback of sales tax savings and the disqualification of income tax credits. 3

Conversely, the biotechnology sector enjoys a unique competitive advantage in Maine, with a “primarily” usage standard that acknowledges the overlapping nature of R&D and production in the life sciences. 1 For all innovative firms, the 15-year carryforward of the RETC and the upcoming shift toward refundable credits under the Dirigo program signal a clear legislative intent to maintain Maine as a viable, if fiscally cautious, home for technological advancement. 5

To maximize the benefits of these provisions, business leaders should:

1. Segregate R&D Assets: Physically and digitally isolate R&D equipment to satisfy the “exclusive” mandate. 3
2. Utilize Industry Carve-Outs: Biotech firms should aggressively document their “biotechnology applications” to benefit from the lower 50% usage threshold. 1
3. Monitor Conformity: Keep abreast of MRS’s annual adjustments to federal conformity, particularly regarding R&D amortization and depreciation. 16
4. Audit-Proof Records: Maintain usage logs and lab results for at least six years, preparing for the de novo review standards of the Board of Tax Appeals. 15

By integrating these tax strategies into the earliest phases of project planning, Maine businesses can significantly reduce the cost of discovery and accelerate the path from laboratory prototype to commercial success. 27

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