Technological in Nature

To be technological in nature under the New York Research and Development tax credit, a project must fundamentally rely on the principles of physical science, biological science, engineering, or computer science. This requirement ensures that the state’s fiscal incentives support hard technical innovation rather than market research, aesthetic design, or social science investigations.

The “technological in nature” standard serves as the intellectual cornerstone of both federal and New York State research and development (R&D) tax incentives. While the phrase may appear deceptively simple, it acts as a critical filter that separates qualifying technical breakthroughs from non-qualifying business activities. In the context of New York’s complex tax landscape—which includes the Excelsior Jobs Program, the Life Sciences Research and Development Tax Credit, and various sales tax exemptions—this standard requires a business to demonstrate that its process of experimentation is rooted in the “hard” sciences. This report provides an exhaustive analysis of how New York State identifies, interprets, and applies this standard to domestic businesses, drawing on statutory law, Department of Taxation and Finance (DTF) guidance, and administrative requirements from Empire State Development (ESD).

The Federal Foundation and New York State Alignment

New York State’s R&D tax credit programs do not operate in isolation; they are largely tethered to the definitions established in the Internal Revenue Code (IRC), specifically Sections 41 and 174. Because the New York tax law frequently adopts the federal definition of “qualified research” and “qualified research expenses” (QREs), the technological in nature requirement is interpreted through the lens of federal treasury regulations while being applied within the state’s specific economic development frameworks.

The IRC Section 41 Four-Part Test

To understand the New York application, a taxpayer must first satisfy the federal “Four-Part Test” at the level of the “business component.” The business component refers to any product, process, computer software, technique, formula, or invention held for sale, lease, or license, or used by the taxpayer in its trade or business.

Test Component	Objective and Requirement
Section 174 Test	Expenditures must be incurred in connection with the taxpayer’s trade or business and represent R&D in the experimental or laboratory sense, aiming to eliminate technical uncertainty.
Technological in Nature Test	The research must be undertaken to discover information that is technological in nature, relying on physical, biological, engineering, or computer science.
Business Component Test	The intention must be to apply the discovered information to develop a new or improved business component’s function, performance, reliability, or quality.
Process of Experimentation	Substantially all (80% or more) of the activities must involve a systematic process of evaluating alternatives, such as modeling, simulation, or trial and error.

The technological in nature test specifically mandates that the “discovery of information” must be achieved through a methodology based on the hard sciences. It is important to note that the “discovery” does not require the information to be new to the world or the industry; it only needs to be “new to the taxpayer”. This allows a New York company to qualify for the credit even if it is using existing scientific principles to solve a technical challenge that is unique to its own specific environment or product development lifecycle.

Defining the Scientific Principles

The “technological in nature” requirement is only met if the research fundamentally relies on one or more of four specific scientific domains. New York revenue authorities and the IRS strictly exclude activities that rely on “soft” sciences, such as economics, management, or psychology.

Physical Sciences

Research in the physical sciences encompasses the study of non-living systems. In the industrial context of New York, this frequently includes chemistry, physics, and materials science. A manufacturer developing a more durable glass for mobile devices or a chemical company formulating a new biodegradable plastic is engaged in research that is technological in nature because the success of the project depends on chemical and physical reactions and properties.

Biological Sciences

Biological sciences involve the study of life and living organisms. This is the primary domain of the New York Life Sciences Research and Development Tax Credit. Qualified research in this area includes drug discovery, genomics, proteomics, and the development of medical devices that interact with biological systems. If a biotechnology firm in New York City is testing how a specific protein interacts with a cell receptor, the technological in nature standard is met through the application of biological and biochemical principles.

Engineering

Engineering is the application of scientific and mathematical principles to design and build structures, machines, and systems. In New York’s manufacturing corridor, engineering-based R&D is highly prevalent. This includes mechanical, electrical, and civil engineering. For example, designing a more efficient heat exchanger or a novel sensor for an autonomous vehicle involves overcoming technical uncertainties through engineering analysis and prototyping.

Computer Science

In the digital economy, computer science is a dominant field for R&D claims. However, it is also subject to significant scrutiny. To be technological in nature, software development must go beyond routine coding or the simple assembly of existing software components. It must involve the application of computer science principles to solve problems related to architecture, algorithms, scalability, or performance. Routine data entry, website design using standard templates, and basic database management do not satisfy the standard because they do not rely on the fundamental principles of computer science to discover new information.

New York State Statutory Framework for R&D Credits

New York provides several avenues for businesses to monetize their R&D activities, provided they meet the technological in nature threshold. These programs are primarily governed by the New York Tax Law and administered by Empire State Development (ESD).

The Excelsior Jobs Program R&D Credit

The Excelsior Jobs Program is a performance-based incentive designed to encourage expansion in New York State. The R&D credit component of this program is calculated as a percentage of qualified research expenses incurred in the state.

Feature	Excelsior R&D Credit Detail
Standard Credit Rate	6% of New York QREs
Green Project Rate	8% for environmentally sustainable projects (e.g., clean energy)
Annual Limit	Capped at 50% of the taxpayer’s federal R&D credit relating to NY
Benefit Period	Typically available for up to 10 years after certification
Refundability	Fully refundable for qualified participants

The formula for the standard Excelsior R&D credit is:

Credit_Excelsior = QRE_NY × 0.06

Where QRE_NY is the sum of wages, supplies, and computer use expenses that meet the federal definition and were incurred within New York State. For “green projects”—defined as those reducing greenhouse gases or creating clean energy solutions—the multiplier increases to 0.08, providing a substantial premium for environmental technology.

The Life Sciences Research and Development Tax Credit

In addition to the general Excelsior program, New York offers a targeted credit for “new” life sciences businesses. This program is specifically focused on biopharmaceuticals, genomics, and medical devices.

Entity Size	Credit Percentage of NY QREs
Fewer than 10 Employees	20%
10 or More Employees	15%

This program features an annual cap of $500,000 per taxpayer and a lifetime cap of $1.5 million over a three-year benefit period. Crucially, the Life Sciences credit excludes “contract research expenses” (payments to third parties), meaning the credit is strictly limited to in-house innovation. This highlights the state’s intent to foster a permanent, skilled technical workforce within New York borders.

Revenue Office Guidance on Ineligible Activities

The New York State Department of Taxation and Finance (DTF) and the IRS provide clear guidance on what does not constitute research that is technological in nature. Understanding these exclusions is vital for avoiding audit pitfalls.

Excluded “Soft” Science and Administrative Activities

Activities that do not fundamentally rely on hard science are disqualified even if they are experimental in a business sense. These include:

• Efficiency Surveys and Management Studies: Research into how to better organize a workforce or streamline administrative workflows.
• Market Research and Consumer Surveys: Efforts to determine whether consumers prefer a specific product feature or price point.
• Advertising and Promotions: Creative work aimed at selling a product rather than improving its technical function.
• Social Science Research: Studies in economics, psychology, or sociology.
• Routine Quality Control: Standard testing of materials or products to ensure they meet existing specifications.

Aesthetic vs. Functional Improvements

To be technological in nature, the research must focus on the functional aspects of a business component, such as its performance, reliability, or quality. If the goal of the research is purely aesthetic—such as changing the color, style, or “look and feel” of a product without altering its underlying technical performance—the activity is excluded from the R&D credit.

Sales Tax Exemptions and the “Experimental Sense”

A significant but often overlooked benefit in New York is the sales and use tax exemption for property used in R&D. Tax Bulletin ST-773 (TB-ST-773) provides the revenue office’s interpretation of “research and development in the experimental or laboratory sense,” which mirrors the technological in nature standard.

Direct and Predominant Use

Purchases of tangible personal property are exempt from sales tax if they are used “directly and predominantly” (more than 50% of the time) in qualified R&D. This includes:

• Materials worked on during experiments.
• Machinery and equipment used to perform research (including CAD/CAM systems).
• Supplies used in the laboratory.

The Strict Utility Standard

While general equipment requires 50% usage, utilities (gas, electricity, refrigeration, and steam) are only exempt if they are used “directly and exclusively” (100%) in the R&D process. This necessitates that the taxpayer maintain rigorous records, often including engineering surveys, to prove the exact portion of utility consumption dedicated to technical experimentation.

Case Study: Application in the New York Bio-Tech Sector

To illustrate the application of the technological in nature standard, consider a hypothetical medical device company, “Hudson Robotics,” based in the Mid-Hudson Valley.

The Innovation: Haptic Feedback Surgical Tools

Hudson Robotics is developing a robotic surgical arm that provides real-time haptic (tactile) feedback to surgeons during minimally invasive procedures. The goal is to allow a surgeon to “feel” the resistance of the tissue they are cutting, even though they are operating through a computer interface.

Meeting the Technological Standard

The project meets the technological in nature standard through multiple disciplines:

1. Engineering: The design of the robotic arm requires advanced mechanical and electrical engineering to ensure precise movement and high-fidelity sensor integration.
2. Computer Science: The software that translates sensor data into physical feedback for the surgeon’s hand involves solving significant latency and data processing challenges using computer science principles.
3. Biology: The tool must be designed to interact with human tissues of varying densities, requiring a fundamental understanding of biological properties.

Qualifying Expenses and Credit Calculation

Hudson Robotics is a “new business” (under five years old) and employs eight people. In 2023, the company incurred the following expenses in New York:

• Wages: $600,000 for engineers and software developers.
• Supplies: $150,000 for sensor prototypes and mechanical parts.
• Contract Research: $100,000 (paid to a third-party testing lab).

For the New York Life Sciences Research and Development Tax Credit, the contract research is excluded.

Expense Category	Amount	Qualified for NY Life Sciences Credit?
Wages	$600,000	Yes (performing technical research)
Supplies	$150,000	Yes (used in experimentation)
Contract Research	$100,000	No (excluded by NY statute)
Total NY QREs	$750,000

Because the company has fewer than 10 employees, it qualifies for the 20% credit rate.

Credit = $750,000 × 0.20 = $150,000

The company receives a fully refundable credit of $150,000 from the State of New York. Additionally, since the $150,000 in supplies were used directly and predominantly in R&D, Hudson Robotics was exempt from paying the roughly 8% New York sales tax on those purchases, saving an additional $12,000 at the point of sale.

The “New Business” Requirement for Life Sciences

A critical nuance in New York law is the definition of a “new business” for the Life Sciences credit. This test is designed to ensure that the credit supports genuine startups rather than expansions of existing large corporations.

To qualify as a “new business,” the applicant must meet three criteria:

1. Ownership: If the applicant is a C-Corporation, less than 50% must be owned or controlled by another company that is already a taxpayer in New York State.
2. Similarity: The applicant cannot be “substantially similar” in ownership and operation to another company that is or was previously a taxpayer in New York.
3. Duration: The applicant must not have been a taxpayer in New York for more than five years prior to the application.

This “five-year rule” is a strict cutoff. If a company has been operating in New York for six years, even if it just started a new R&D project that is technological in nature, it would be ineligible for the Life Sciences credit, though it might still qualify for the Excelsior Jobs Program credit.

Documentation and Audit Defense Strategies

The technological in nature standard is often the first point of contention during a tax audit. New York State auditors and ESD officials require “contemporaneous” documentation—records created at the time the work was performed.

Demonstrating the Science

To defend the technological nature of a project, a business should maintain a “technical file” for each R&D project that includes:

• Scientific Hypotheses: Clear statements of the technical uncertainties and the scientific principles being tested.
• Engineering Notebooks: Dated entries showing the progression of technical work, formulas used, and results of trials.
• Prototypes and CAD Models: Evidence of physical or digital iterations used to evaluate technical alternatives.
• Test Results and Logs: Data from experiments that shows why a particular technical path was chosen or abandoned.
• Personnel Qualifications: Resumes or LinkedIn profiles of the R&D team demonstrating their expertise in physical, biological, engineering, or computer science.

The Danger of Reconstructive Documentation

A common mistake is attempting to reconstruct R&D records years after the work was completed. New York revenue guidance emphasizes that the bigger the claim, the more rigorous the documentation must be. Audits often result in the disallowance of credits if the company only provides high-level “marketing” descriptions of their innovation rather than granular “technical” evidence of their scientific process.

Software Development and the IUS High Threshold

Software developed for “internal use” (IUS)—software that supports the taxpayer’s internal administrative functions like accounting, HR, or supply chain management—must meet a higher standard than software developed for sale or license.

While IUS must still be technological in nature, it must also meet the “High Threshold of Innovation” test:

1. Innovative: The software must be intended to result in a reduction in cost or improvement in speed that is substantial and economically significant.
2. Significant Economic Risk: The taxpayer must commit substantial resources and face a real risk that the project will fail for technical reasons.
3. Commercial Unavailability: The software cannot be something that could be purchased off-the-shelf or modified with routine effort.

For New York software developers, this means that building a custom HR portal using standard web frameworks likely will not qualify, but developing a novel AI-driven algorithm to optimize a complex global supply chain likely will, provided the challenges are rooted in computer science.

Economic Impact and Future Outlook

New York’s investment in the technological in nature standard is paying dividends in terms of economic growth and cluster development. The state’s $620 million Life Science Initiative has positioned New York as a national leader in biotech innovation.

Economic Indicator (NY Life Science Sector)	Statistic
National Rank for R&D Spend	#2 in the U.S.
NIH Funding	~$3.6 Billion (#2 in U.S.)
Company Growth (2017-2022)	27.1% Increase
Job Growth Rate vs. State Average	18.5% Higher
Total Patents Filed/Granted	181 (via ESD programs)

The growth in New York City’s lab space, now exceeding 3.1 million square feet, is a direct result of these targeted tax incentives that reward technical and scientific experimentation. As emerging technologies like quantum computing and renewable energy storage become more prevalent, the state’s definitions of what constitutes a “qualified green project” (8% credit) or a “qualified research activity” will likely expand, further entrenching the technological in nature standard as the state’s primary engine for economic modernization.

Final Thoughts

The “technological in nature” standard is the essential filter that ensures New York State’s R&D tax credits are used to subsidize genuine scientific and technical progress. By anchoring the credit to the hard sciences—physical science, biological science, engineering, and computer science—the law provides a clear, if rigorous, pathway for innovative businesses to reduce their tax liability and increase their cash flow. Whether through the 6% Excelsior credit or the 20% Life Sciences refund, New York provides some of the most competitive innovation incentives in the United States. However, the reward comes with the responsibility of rigorous documentation and a commitment to the scientific method. For the modern business in New York, the ability to clearly articulate and prove the technological nature of their research is not just a tax requirement; it is a fundamental component of their technical and financial strategy. By aligning development goals with these scientific principles, companies can effectively leverage state support to transform technical uncertainty into commercial success.