Regulatory Oversight and Administrative Implementation of the Maine Research Expense Tax Credit

The State Tax Assessor’s authority to adopt rules signifies the legally delegated power of Maine Revenue Services to promulgate administrative regulations that interpret and implement the broad mandates of state tax statutes. In the specific context of the Maine Research Expense Tax Credit, this authority enables the Assessor to define the procedural requirements, documentation standards, and entity aggregation rules necessary for businesses to claim incentives for innovation. 1

This administrative framework is essential for transforming the high-level legislative intent of the Maine Revised Statutes into a functional, predictable system for corporate and individual taxpayers. The authority is not merely a clerical function; it represents the executive branch’s ability to respond to shifting economic conditions, evolving federal tax code changes, and the technical complexities inherent in defining “qualified research” within the geographic borders of the state. 3 By analyzing the statutory basis of this authority alongside the specific guidance issued by Maine Revenue Services (MRS), businesses can gain a nuanced understanding of how to navigate the R&D tax credit landscape and ensure compliance with the Assessor’s expectations. 6

The Statutory Foundation of Rule-Making Authority

The State Tax Assessor is the administrative head of the Bureau of Revenue Services, often referred to as Maine Revenue Services (MRS), within the Department of Administrative and Financial Services. 2 The Assessor’s primary mandate is to “fairly and efficiently administer the State’s tax laws with integrity and professionalism.” 7 To achieve this, the Maine Legislature has granted the Assessor broad powers under Title 36 of the Maine Revised Statutes (M.R.S.). 1

General Powers and Duties under Section 112

The core of the Assessor’s rule-making power is found in 36 M.R.S. § 112. This section stipulates that the Assessor “shall administer and enforce the tax laws enacted under this Title” and “may adopt rules and require such information to be reported as necessary.” 2 This general grant of authority is the “enabling act” that allows the Assessor to create the administrative infrastructure required for any tax credit, including the Research Expense Tax Credit. 1

Beyond simple regulation, the Assessor’s duties include:

• Providing economic and legal policy analysis on tax issues. 2
• Oversight of tax legislation review. 2
• Providing revenue forecasting analysis to the Revenue Forecasting Committee. 2
• Preparation of tax expenditure reports, which analyze the cost and effectiveness of credits like the R&D incentive. 2

Delegation in the Context of Specific Statutes

While Section 112 provides general authority, specific tax programs often contain their own “delegation clauses.” 1 For the Maine Research Expense Tax Credit, 36 M.R.S. § 5219-K(6) explicitly states: “The State Tax Assessor shall adopt such rules as are necessary to implement this section.” 1 This ensures that the Assessor has the specific legal standing to create regulations tailored to the technical nuances of research and development activities. 1

Similarly, other sections of Title 36 empower the Assessor to establish procedures that support tax administration. For example, Section 1104 grants the power to adopt rules for the administration of property tax regulations, and Section 383 allows the Assessor to adopt rules in accordance with the Maine Administrative Procedure Act (MAPA) to ensure accurate property assessment ratios. 11

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The Maine Research Expense Tax Credit: A Regulatory Overview

The Maine Research Expense Tax Credit, codified at 36 M.R.S. § 5219-K, provides a nonrefundable income tax credit to taxpayers who invest in qualified research conducted within the state. 1 The credit is designed to reduce the financial risk of innovation, thereby encouraging businesses to maintain high-skilled jobs and scientific infrastructure in Maine. 4

Structural Dependency on the Internal Revenue Code

A defining feature of Maine’s R&D credit is its reliance on federal standards. The statute stipulates that terms such as “qualified research expenses,” “basic research,” and “qualified organization base period amount” have the same meanings as they do under Section 41 of the Internal Revenue Code (IRC). 1 However, the Assessor’s authority is critical in interpreting how these federal definitions apply to the “Maine-specific” context. 6

For research to qualify for the Maine credit, the expenses must be:

1. Incremental: The credit only applies to expenses that exceed a historical “base amount.” 3
2. Technological: The activity must meet the “four-part test” defined by the IRS and interpreted by MRS. 16
3. Geographically Bound: Unlike the federal credit, which applies to research anywhere in the United States, the Maine credit is strictly limited to expenditures for research conducted within the state of Maine. 1

Components of the Credit Calculation

Under the Assessor’s implementation guidance, the total R&D credit is the sum of two distinct calculations. 1

1. The Incremental Research Expense Credit

This component equals 5% of the excess (if any) of the qualified research expenses for the taxable year over the “base amount.” 1 The base amount is calculated as the average annual qualified research expenses over the previous three taxable years. 1

$$Credit_{Incremental} = 0.05 \times (QRE_{Current} – \frac{QRE_{n-1} + QRE_{n-2} + QRE_{n-3}}{3})$$

If a taxpayer is in their first three years of conducting research in Maine, the base amount may effectively be zero, allowing for a 5% credit on the entirety of their initial investment. 15

2. The Basic Research Credit

This component provides a 7.5% credit for “basic research payments” as determined under IRC Section 41(e)(1)(A). 1 Basic research refers to original investigation for the advancement of scientific knowledge that does not have a specific commercial objective. 3 To qualify, these payments must be made to a “qualified organization,” such as an institution of higher learning or a nonprofit scientific research organization. 6

Administrative Rulemaking and Local Guidance

The State Tax Assessor exercises authority through the adoption of formal “Rules” and the issuance of “Instructional Bulletins.” 2 These documents provide the specific “how-to” for businesses attempting to claim the R&D credit. 6

Rule 101: General Administrative Provisions

Adopted in April 2024, Rule 101 provides essential guidance on the “reconsideration process” for tax assessments. 7 If the Assessor audits a business and disallows a portion of their claimed R&D credit, the taxpayer has the right to petition for reconsideration. 21

Key provisions of Rule 101 include:

• Interest Accrual: Interest continues to accrue on any disputed tax liability during the entire reconsideration process until it is either paid or abated. 21
• Penalty Abatement: In a move that favors taxpayers who act in good faith, the Assessor will permanently waive or abate penalties that would otherwise accrue during the reconsideration process if the taxpayer timely files a petition. 7
• Finality: The rule defines a liability as “final” only when the taxpayer has no further right of administrative or judicial review. 21

Rule 806: Nonresident Individual Income Tax

Rule 806 is particularly significant for Maine-based research facilities that employ out-of-state specialists. 8 Under the Assessor’s authority, certain R&D-related services are excluded from the standard “minimum taxability thresholds” for nonresidents. 8

Generally, a nonresident must file a Maine return if they work in the state for more than 10 or 12 days (depending on the year) or earn more than $3,000. 8 However, the Assessor has established by rule that personal services performed in Maine in connection with research and development at a facility based in Maine are not counted toward these thresholds. 23 This includes:

• Conducting direct laboratory research. 23
• Installing or repairing new or upgraded equipment or systems at an R&D facility. 23

This exclusion acts as a regulatory incentive for companies to bring top-tier scientific talent into Maine for specialized projects without burdening the employees with state tax filing requirements for short-term visits. 22

Rule 801: Apportionment

For businesses operating in multiple states, the Assessor’s rules on apportionment are critical. 19 Rule 801 explains how income is sourced to Maine for corporations and pass-through entities. 25 Because the R&D credit is limited to Maine-source expenditures, Rule 801 provides the framework for determining what portion of a company’s global activity is attributable to its Maine operations. 6

Limitations on the Credit and Aggregation Rules

The Assessor’s authority is most visible in the enforcement of credit limitations. 1 Unlike federal R&D credits, which can be used to offset large portions of federal liability, the Maine credit is subject to strict tiered caps. 1

The $25,000 Tiered Limit

For corporations, the R&D credit is limited based on the total tax due before any other credits are applied. 1

• Tier 1: The credit can offset 100% of the first $25,000 of tax due. 1
• Tier 2: For any tax liability exceeding $25,000, the credit is limited to 75% of that excess amount. 1

The Assessor’s authority is specifically invoked here to prevent groups of related corporations from each claiming the 100% Tier 1 limit. 1 The statute directs the Assessor to adopt rules similar to those in IRC Section 38(c)(5)(B) to apportion the $25,000 threshold among members of a “controlled group.” 1

Aggregation of Entities

To prevent taxpayers from artificially splitting their research activities to maximize credit generation or avoid the Tier 2 limitation, the Assessor has the authority to “aggregate the activities of all corporations that are members of a controlled group.” 1 This aggregation power extends to all entities under common control, regardless of their corporate form (e.g., partnerships or LLCs). 1

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Practical Application: A Manufacturing Example

To understand the real-world application of the Assessor’s authority, consider a mid-sized Maine manufacturing company specializing in aerospace components. 15

Scenario: The Augusta Engineering Project

The company, a C-corporation, is developing a new lightweight alloy for engine housings. The research is conducted exclusively at their facility in Augusta. 18

Step 1: Determine Maine QREs

The company identifies $800,000 in current-year qualified expenses, including:

• $500,000 in wages for Maine-based engineers. 6
• $200,000 in specialized supplies consumed in the research. 6
• $100,000 for a contract research study performed by the University of Maine. 6

Step 2: Calculate the Base Amount

The Assessor’s rules require a 3-year average. The company’s Maine QREs for the previous three years were:

• Year -1: $600,000
• Year -2: $500,000
• Year -3: $400,000
• Average (Base Amount): $500,000 1

Step 3: Calculate the Gross Credit

• Incremental Credit: 5% of ($800,000 – $500,000) = $15,000. 1
• Basic Research Credit: 7.5% of the $100,000 university payment = $7,500. 1
• Total Gross Credit: $22,500. 6

Step 4: Apply Limitations

Assume the company has a Maine tax liability of $20,000. 6

• The credit is limited to the tax liability ($20,000). 1
• The company uses $20,000 to eliminate its tax for the year. 6
• Carryforward: $2,500 of unused credit is carried forward to the next year. 1

If the company’s tax liability had been $50,000, the limitation would be:

• 100% of first $25,000 ($25,000) + 75% of remaining $25,000 ($18,750) = $43,750. 1
• Since $22,500 is less than $43,750, the company could have used the entire credit in the current year. 6

Documentation Standards and Audit Preparedness

The State Tax Assessor has the authority to “summon and examine under oath any person” and require the production of books and documents related to the proper discharge of their duties. 2 For R&D credits, this means that the Assessor’s “rules” for documentation are as important as the calculation themselves. 16

The Burden of Proof

Maine Revenue Services emphasizes that the taxpayer must maintain records sufficient to prove that the research activities occurred in Maine and met the “four-part test.” 6 The Assessor typically expects to see:

• Project Records and Lab Notes: Evidence of a systematic process of experimentation. 16
• Payroll Records: Documentation linking specific employees and their time to Maine-based research projects. 6
• Supplies and Invoices: Proof that materials were used exclusively for research. 16
• Contract Agreements: Detailed scopes of work for third-party research conducted in Maine. 6

Interaction with Federal Audits

Under the Assessor’s guidance, if a taxpayer is subject to an IRS audit that results in adjustments to their federal R&D credit, they must file an amended Maine return to reflect those changes. 20 This is particularly important under the new federal centralized partnership audit rules, where the Assessor has the authority to tax the partnership directly on positive adjustments sourced to Maine. 20

Economic Performance Data and OPEGA Evaluation

The Office of Program Evaluation and Government Accountability (OPEGA) provides critical oversight of the State Tax Assessor’s administration of tax expenditures. 3 In a 2022 evaluation, OPEGA analyzed a decade of R&D credit data provided by MRS. 10

Key Statistics (2010–2019)

OPEGA’s analysis of aggregate tax data shows that the R&D credit is a vital but relatively underutilized tool in the Maine economy. 4

• Annual Credit Claims: The total amount of credits claimed per year typically ranged from $2 million to $4.5 million. 10
• Number of Claimants: Approximately 35 unique businesses claim the credit in any given year. 4
• State Ranking: Despite the credit’s availability, Maine ranked 47th in the nation in total R&D performed as a percentage of GDP in 2018. 10
• Job Quality: Maine ranked 31st in science, engineering, and health (SEH) doctoral degree holders as a percentage of the total workforce. 10

Oversight and Transparency Issues

OPEGA noted that the current statute provides the Assessor with “no administrative responsibility for monitoring the use or effectiveness of the credit over time or for collecting data to support such monitoring.” 3 This has created a “data gap” where the state knows how much money is being given in credits, but has limited visibility into the specific investment dollars or the number of high-skilled jobs directly created by those credits. 4

OPEGA’s recommendations include:

1. Memorializing Goals: The Legislature should clearly define what success looks like for the R&D credit. 4
2. Expanding Data Collection: The Assessor should be given the authority (and the mandate) to collect more granular data on research investments and employee wages as part of the tax filing process. 4

Future Outlook: Legislative Proposals and Program Changes

The State Tax Assessor’s authority is constantly reshaped by the Maine Legislature. Recent legislative sessions have seen several bills aimed at significantly expanding the Research Expense Tax Credit to make Maine more competitive with neighbors like Massachusetts. 3

LD 308 and LD 926: Enhancing the Incentive

Proposed changes to 36 M.R.S. § 5219-K include:

• Doubling the Rates: Increasing the incremental credit from 5% to 10% and the basic research credit from 7.5% to 15%. 27
• Halving the Base Amount: Redefining the “base amount” as only 50% of the three-year average, which would drastically increase the amount of “excess” expenses eligible for the credit. 27
• Increasing the Cap: Doubling the Tier 1 threshold from $25,000 to $50,000. 27
• Annual Reporting: Mandating that the Assessor provide detailed annual reports to the Department of Economic and Community Development on the absolute value of R&D expenditures by industry sector. 28

The Dirigo Business Incentives Program (2025)

A significant shift in the Maine incentive landscape is the introduction of the Dirigo Business Incentives program (Rule 815/816), which takes effect for tax years beginning after 2024. 30 Administered jointly by the Department of Economic and Community Development (DECD) and the Assessor, this program provides credits for capital investments in eligible sectors, including “scientific research and development services.” 30

While the Dirigo program offers a refundable credit of up to $500,000, it includes a “layoff restriction”—businesses that undergo significant layoffs are disqualified from the credit. 30 The Assessor’s rules for the Dirigo program are more stringent regarding property usage, requiring that eligible business property be used 100% in the qualified business activity. 30

Conclusion: Navigating the Assessor’s Administrative State

The “State Tax Assessor’s authority to adopt rules” is the vital link between legislative policy and commercial reality. In the context of the Maine Research Expense Tax Credit, this authority creates the rigorous standards for geographic sourcing, entity aggregation, and documentation that determine the success of a tax claim. For businesses, the Assessor’s rules provide both a challenge and an opportunity. While the nonrefundable nature andtiered limits of the credit require strategic tax planning, the generous 15-year carryforward and the specific exclusions for nonresident researchers under Rule 806 demonstrate a regulatory environment that is designed to support long-term, sustained innovation.

As the Maine Legislature moves toward more robust reporting requirements and potentially higher credit rates, the Assessor’s role in data collection and economic analysis will only expand. Companies that proactively align their internal R&D tracking with the Assessor’s instructional bulletins and administrative rules will be best positioned to leverage these incentives, thereby reducing their effective tax burden and contributing to the growth of Maine’s high-tech economy. 1

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