North Dakota Department of Commerce

The North Dakota Department of Commerce acts as the primary certifying authority for businesses seeking to monetize unused research credits through strategic transfer or assignment. It evaluates whether a company constitutes a primary sector entity that generates new wealth for the state, serving as a mandatory gatekeeper for startups and small businesses wishing to sell tax credits to third parties for immediate liquidity.

This administrative structure places the Department of Commerce at the intersection of economic development and fiscal policy. While the North Dakota Office of State Tax Commissioner handles the collection of revenue and the auditing of tax returns, the Department of Commerce determines which entities qualify for the state’s most aggressive innovation incentives. The North Dakota Research and Experimental Expenditure Tax Credit, primarily governed by North Dakota Century Code (N.D.C.C.) § 57-38-30.5, represents a permanent commitment by the state to foster technological advancement. By aligning state definitions with federal Internal Revenue Code (IRC) Section 41, the legislature has created a framework that is both familiar to tax professionals and tailored to the unique economic landscape of the Upper Midwest. The significance of the Department of Commerce in this context cannot be overstated; for many emerging technology and value-added agricultural firms, the ability to transfer credits—certified by Commerce—is the difference between a sustainable research budget and a capital shortfall.

Administrative Oversight and Agency Interconnectivity

The administration of the North Dakota R&D tax credit is a bifurcated process involving two distinct state agencies: the North Dakota Department of Commerce and the Office of the State Tax Commissioner. Understanding the nuances of this relationship is essential for any business planning to claim or transfer research-related incentives. The Department of Commerce, specifically through its Division of Economic Development and Finance, handles the qualitative and strategic aspects of the program, such as certifying primary sector status and qualifying research and development companies. Conversely, the Tax Commissioner manages the quantitative and compliance aspects, including the calculation of tax liability, the processing of tax returns, and the oversight of credit carryovers and transfers.

The Role of the Department of Commerce in Strategic Certification

The North Dakota Department of Commerce serves as the strategic evaluator for the state’s economic development tools. Its primary mission in the context of the R&D tax credit is to ensure that the businesses receiving enhanced benefits—specifically the right to sell or transfer credits—are those that contribute to the creation of “new wealth” in the state. The Department’s certification process is rigorous and requires a demonstration that the business adds value to a product, process, or service through the employment of knowledge or labor.

The Department of Commerce is responsible for managing several critical certification forms. The most relevant for research-heavy firms is SFN 58638, the “Application for Certification as a Research and Development Company Qualified to Sell, Transfer or Assign Unused Research and Experimental Expenditure Tax Credit”. Without an approved SFN 58638 on file, a company remains tethered to its own tax liability and cannot access the broader market for tax credit transfers. Furthermore, the Department maintains the authority to audit the figures presented during the certification process and requires recertification every four years.

The Office of the State Tax Commissioner and Revenue Guidance

The North Dakota Office of State Tax Commissioner is the final arbiter of tax law application. While the Department of Commerce certifies a company as being “Primary Sector,” the Tax Commissioner ensures that the expenses claimed by that company meet the legal definitions of “qualified research” and that the mathematical calculations on the tax return are accurate. The Tax Commissioner’s guidance is primarily found in the North Dakota Administrative Code (N.D.A.C.) and through published guidelines such as the “Research and Experimental Expenditure Tax Credit” medium.

One of the most critical functions of the Tax Commissioner is the oversight of the “Credit Transfer Statement” (Form CTS). After the Department of Commerce has issued a certification under SFN 58638, the transferor and the transferee must jointly file Form CTS with the Tax Commissioner within thirty days of the transfer agreement. The Tax Commissioner’s office then verifies that the credit being transferred was legitimately earned and that the purchaser has the right to apply it against their own North Dakota income tax liability.

Agency	Primary Functional Responsibility	Relevant Statutory Authority	Key Forms
Department of Commerce	Certification of “Primary Sector” status and “Qualified R&D Company” eligibility.	N.D.C.C. § 1-01-49; N.D.C.C. § 57-38-30.5(5)	SFN 58638, SFN 52998
Office of State Tax Commissioner	Fiscal oversight, auditing of QREs, processing of Form CTS, and managing carryovers.	N.D.C.C. § 57-38-30.5; N.D.A.C. 81-03-01.1-06	Form 40, Schedule TC, Form CTS, Schedule ND-1TC

Defining the Qualified Research and Development Company

Under N.D.C.C. § 57-38-30.5(5), the law defines a “Qualified Research and Development Company” with significant precision. This definition is the bridge that allows the Department of Commerce to exert its certifying power. A taxpayer—limited to an individual, C corporation, estate, or trust—is considered a qualified research and development company if it meets three primary criteria: it is a primary sector business, it has annual gross revenues of less than $750,000, and it is planning to conduct new research and development within North Dakota.

The Primary Sector Requirement and New Wealth Creation

The term “primary sector business” is central to North Dakota’s economic strategy. It refers to an individual, corporation, limited liability company, partnership, or association that, through the employment of knowledge or labor, adds value to a product, process, or service, resulting in the creation of “new wealth”. The North Dakota Department of Commerce emphasizes that “new wealth” is not merely the redistribution of money within the state, but rather the generation of revenue from outside North Dakota or the creation of products that were previously unavailable or difficult to obtain within the state.

The Department of Commerce distinguishes between “Production Agriculture” and “Value-Added Processing.” Standard production agriculture, such as the growing of crops or raising of livestock on a farm, generally does not qualify for primary sector certification unless it involves a significant value-added component that creates new market opportunities. This distinction is vital for agricultural technology companies; a firm developing a new genetic strain of wheat would likely qualify for certification, whereas a farm simply growing that wheat would not.

Revenue Thresholds and Entity Restrictions

The $750,000 gross revenue threshold is a strict statutory requirement intended to target the transferability benefit at small, high-growth startups. To prove compliance with this limit, the Department of Commerce requires applicants to submit copies of their federal income tax returns for the preceding three years. For businesses in their first year of operation, the Department allows the use of projected revenue figures, provided the business can substantiate its growth trajectory.

Furthermore, the law imposes specific restrictions on the type of legal entities that can sell or transfer credits. While any business entity—including partnerships and S corporations—can earn the R&D tax credit, only individuals, C corporations, estates, and trusts can obtain the Department of Commerce certification required to sell those credits. Passthrough entities like S corporations and partnerships must pass the credit through to their owners, who then claim it on their individual tax returns (Schedule ND-1TC). The owners of a passthrough entity can only use the credit to offset their personal tax liability and cannot collectively sell the entity-level credit to a third party.

Statutory Framework and Credit Calculation Methodologies

The North Dakota R&D tax credit is an incremental credit, meaning it is designed to reward businesses for increasing their investment in research over time. The calculation is based on the amount by which “qualified research expenses” (QREs) exceed a “base amount”. North Dakota offers two primary methods for this calculation: the Regular Incremental Method and the Alternative Simplified Computation (ASC) Method.

The Regular Incremental Method

The regular method is the traditional way to calculate the credit and relies on a historical base period. For most taxpayers, the North Dakota credit under the regular method is structured in tiers:

• Tier 1: 25% of the first $100,000 of excess QREs.
• Tier 2: 8% of any excess QREs over $100,000.

For taxpayers who first earned or claimed a credit in North Dakota before January 1, 2007, the calculation is more complex and includes an annual cap of $2 million. However, for the vast majority of modern companies—those that began research in the state after 2007—there is no annual cap on the amount of credit that can be earned, and the tiered rates provide a powerful incentive for both small and large projects.

The “base amount” in the regular method is generally defined as a fixed percentage of the taxpayer’s average North Dakota gross receipts for the four preceding tax years. For startups in their first through tenth years of North Dakota activity, the law provides a phased fixed-base percentage that starts at 3% and gradually increases to 16%. If a company has no North Dakota gross receipts, the base amount defaults to 50% of the current year’s QREs.

The Alternative Simplified Computation (ASC) Method

Beginning with the 2019 tax year, North Dakota introduced the ASC method, which is often easier for companies to calculate because it does not require historical gross receipts data. Instead, it focuses solely on the taxpayer’s research spending history.

Under the ASC method, the credit is calculated as:

• 17.5% of the first $100,000 of “alternative excess research and development”.
• 5.6% of the alternative excess over $100,000.

“Alternative excess” is defined as the amount by which current year QREs exceed 50% of the average QREs for the three preceding tax years. If the taxpayer had zero research expenses in any of the three prior years, the credit is calculated as 7.5% of the first $100,000 of current QREs and 2.4% of the amount over $100,000.

Calculation Method	Tier 1 Rate (First $100k Excess)	Tier 2 Rate (Over $100k Excess)	Base Definition
Regular Method	25.0%	8.0%	Fixed % of 4-yr average ND gross receipts
ASC Method	17.5%	5.6%	50% of 3-yr average ND research expenses
ASC (Zero-Year)	7.5%	2.4%	Applied to total current year research expenses

Local Revenue Office Guidance and Administrative Rules

The Office of State Tax Commissioner provides extensive guidance on how the R&D tax credit law applies to real-world business scenarios. This guidance is encapsulated in the North Dakota Administrative Code (N.D.A.C.) and through specific departmental publications.

N.D.A.C. 81-03-01.1-06: Proration for New and Expanding Businesses

Administrative Rule 81-03-01.1-06 provides essential instructions for businesses that operate both exempt and non-exempt activities or those that operate in multiple states. For companies with multistate business activity, North Dakota income must first be determined by including all activities in apportionable income and applying the state’s apportionment factors.

When a project has been granted a partial exemption (which can sometimes overlap with R&D incentives), the non-exempt portion of the project’s property, payroll, and sales must be added back to the other North Dakota factors to create a taxable activity. Furthermore, for businesses with both exempt and non-exempt lines of work, the exempt income is determined by multiplying the total income by a fraction based on the sum of exempt property, sales, and payroll factors.

The Order of Credits and Carryback/Carryforward Rules

The Tax Commissioner mandates a strict “pecking order” for tax credits to ensure that taxpayers do not lose the benefit of non-expiring incentives. According to N.D.A.C. 81-03-01.1-07, credits must be taken in the following order:

1. Tax credits with no carryback or carryforward provisions.
2. Tax credits with carryback provisions.
3. Tax credits with carryforward provisions (such as the Research Expense Credit).

The Research Expense Credit specifically allows for a three-year carryback and a fifteen-year carryforward. A claim to carry back credits must be filed within three years of the due date (including extensions) of the return for the taxable year in which the credit was earned. It is important to note that a purchaser of a tax credit through the transfer program cannot carry the credit back, even though the original transferor would have been able to do so.

Verification and the Four-Part Test

North Dakota guidance explicitly adopts the federal “Four-Part Test” for determining if an activity constitutes “qualified research.” For an activity to be eligible, it must:

1. Be for a Permitted Purpose: Intended to develop or improve the functionality, performance, reliability, or quality of a business component.
2. Eliminate Technological Uncertainty: Intended to discover information that would eliminate uncertainty regarding the capability, method, or appropriate design of a product or process.
3. Involve a Process of Experimentation: Substantially all activities must involve identifying hypotheses, testing, evaluating alternatives, and refining designs.
4. Be Technological in Nature: Fundamentally rely on principles of engineering, physics, biology, or computer science.

Documentation is critical for passing a state audit. The Tax Commissioner requires taxpayers to maintain records that substantiate the amount of the credit, including project descriptions, employee time logs, and supply invoices related to the research activity.

Case Study: Application of Law and Certification

To illustrate how these rules apply in a practical context, consider the hypothetical case of Red River Bio-Diagnostics, a startup based in Grand Forks that specializes in value-added agricultural testing.

The Company Profile

Red River Bio-Diagnostics was founded in 2023. In its first full year of operation (2024), it had the following financial profile:

• Total Revenue: $250,000 (all from sales to out-of-state pharmaceutical companies).
• Qualified Research Expenses (QREs): $400,000 (primarily wages for lab technicians and supplies for new diagnostic tests).
• Base Period: As a new company, its average North Dakota gross receipts for the prior four years are zero. Therefore, its base amount defaults to 50% of its current QREs.
• Entity Type: C Corporation.

Step 1: Department of Commerce Certification

Because Red River Bio-Diagnostics is pre-revenue (profit-wise) and has no state tax liability, it wants to sell its tax credits to a third party to gain operating capital. It first applies for certification from the Department of Commerce using SFN 58638.

The Department of Commerce reviews the application and determines:

1. The company is a Primary Sector Business because it adds value to agricultural products and generates “new wealth” by selling its services to out-of-state customers.
2. The company meets the Revenue Threshold ($250,000 is well below the $750,000 limit).
3. The company is conducting New Research in North Dakota (it started in 2023).

The Department of Commerce issues the certification.

Step 2: Calculating the Credit

Red River Bio-Diagnostics uses the Regular Incremental Method to calculate its credit:

• Current QREs: $400,000
• Base Amount: $200,000 (50% of $400,000).
• Excess QREs: $400,000 – $200,000 = $200,000.

Tier 1 Credit (First $100,000 of Excess):

$100,000 x 25% = $25,000

Tier 2 Credit (Remaining $100,000 of Excess):

$100,000 x 8% = $8,000

Total Tax Credit Earned: $33,000.

Step 3: Transferring the Credit

Red River Bio-Diagnostics finds a buyer, a profitable manufacturing firm in Bismarck, which agrees to purchase the $33,000 credit for $25,000 in cash.

1. They execute a purchase agreement.
2. Within thirty days, both companies jointly file Form CTS with the Tax Commissioner.
3. Red River Bio-Diagnostics receives $25,000 for its research budget. The Bismarck firm now has a $33,000 credit to use against its 2024 North Dakota tax liability.

Compliance and the State Tax Clearance Requirement

A critical administrative hurdle for any business claiming the R&D tax credit is the requirement for state and local tax clearance. Under N.D.C.C. § 54-35-26, the state may not grant or allow a taxpayer to claim specific tax incentives if that taxpayer is out of compliance with other tax obligations.

The Property Tax Clearance Record

Every year a taxpayer claims the Research Expense Tax Credit on their return, they must obtain and attach a Property Tax Clearance Record. This record serves as certification that the taxpayer (and any of its responsible officers who own at least 50% of the real property) is in good standing with each county where they own property in North Dakota.

The Office of State Tax Commissioner emphasizes that a new property tax clearance record must be obtained and attached for each year the incentive is claimed. Failure to attach the clearance record to a return (either physically or as a PDF for electronic filings) can lead to the disallowance of the credit. If a PDF cannot be provided during electronic filing, the taxpayer must retain the record and make it available to the Tax Commissioner upon request.

Reporting Requirements for Transferors

When a taxpayer sells an R&D credit, the gross proceeds from that sale must be reported on their North Dakota income tax return. For a C corporation, this amount is entered on Form 40, specifically in the adjustments section (Line 14 of the 2023 Form 40). This reporting ensures that the state can track the movement of credits and prevent double-claiming or unauthorized usage.

Economic and Statistical Insights (2023-2024)

The North Dakota R&D tax credit operates within a broader economic context of significant growth. According to the Tax Commissioner’s 2023 annual report, North Dakota’s taxable sales and purchases reached $26.7 billion, an 11.5% increase from 2022. This growth was particularly pronounced in sectors that are heavy users of the R&D tax credit, such as Mining and Oil Extraction (a 37.5% increase) and Wholesale Trade (a 14.4% increase).

Sectoral Growth and Credit Usage

The tiered structure of the R&D credit (25% for small excess amounts, 8% for larger amounts) is designed to provide meaningful relief to a wide range of industries. Small businesses in the agricultural sector benefit from the high tier-one rate, while large-scale energy companies utilize the tier-two rate for massive infrastructure and exploration innovations.

Industry Sector	2023 Sales Increase (%)	Notable R&D Activity
Mining & Oil Extraction	37.5%	Extraction efficiency, carbon sequestration, pipeline monitoring
Wholesale Trade	14.4%	Supply chain software, specialized transport machinery
Retail Trade	3.9%	Inventory management systems, e-commerce optimization
Ag-Processing	Varies	Value-added food production, biodiesel/green diesel development

Impact of Federal Legislation (OBBBA)

The 2025 legislative recap notes that North Dakota’s income tax landscape is influenced by federal changes, such as the “One Big Beautiful Bill Act” (OBBBA). Because North Dakota starts its tax calculation with federal taxable income, elements of the OBBBA that affect the federal standard deduction or itemized deductions automatically ripple into the North Dakota starting point. However, the North Dakota Research Expense Tax Credit itself is a state-specific credit that is calculated after the initial tax determination, providing a degree of insulation from federal credit expiration cycles.

Navigating the Filing Process: Forms and Instructions

Filing for the R&D tax credit requires specific forms depending on the entity type of the taxpayer. The Office of State Tax Commissioner has streamlined this process, though meticulous attention to documentation remains necessary.

For C Corporations (Form 40)

C corporations are the primary users of the R&D credit, as they are the only entity type that can both earn and sell the credit as a business unit. The credit is reported on Schedule TC and then carried to Line 19 of Form 40. The corporation must attach a worksheet detailing its QRE calculation and, if applicable, the SFN 58638 certification from the Department of Commerce.

For Individuals and Passthrough Owners (Schedule ND-1TC)

Individuals who earn the credit directly (as sole proprietors) or through their ownership in an S corporation or partnership must claim the credit on Schedule ND-1TC. The individual must enter the amount of credit received from a passthrough entity, often sourced from the North Dakota Schedule K-1 provided by the entity. If the individual purchased an R&D credit from another taxpayer, they report this on Line 1b of Schedule ND-1TC.

For Estates and Trusts (Schedule 38-TC)

Fiduciaries claiming the credit for an estate or trust must use Schedule 38-TC. Like corporations, estates and trusts must attach documentation supporting the eligibility for the credit and the specific calculation method used. If the credit is not fully utilized by the estate or trust, it may be carried forward for up to ten years (or fifteen years for post-2007 research).

Form / Schedule	Taxpayer Type	Core Purpose
Schedule TC	C Corporation	To calculate and report credits on Form 40
Schedule ND-1TC	Individual	To report credits on Form ND-1
Schedule 38-TC	Estate or Trust	To report credits on Form 38
Form 58/60 (Sch K)	Partnership/S-Corp	To distribute credit to owners
Form CTS	All (Transferors)	To document the sale/transfer of credits

Final Thoughts

The Research and Experimental Expenditure Tax Credit is a cornerstone of North Dakota’s economic policy, designed to bridge the gap between innovation and commercial viability. The Department of Commerce serves as the essential gatekeeper, ensuring that the most powerful features of the credit—such as its transferability—are directed toward primary sector businesses that bring new wealth and high-tech jobs to the state.

By adhering to federal IRC Section 41 standards while providing state-specific calculation options like the ASC method, North Dakota offers a flexible and robust incentive for businesses of all sizes. However, the complexity of the certification process, the strictness of the revenue thresholds, and the mandate for property tax clearance records require a high level of administrative coordination. For businesses that successfully navigate this nexus between the Department of Commerce and the Office of State Tax Commissioner, the rewards are significant: a substantial reduction in tax liability, a powerful tool for capital generation, and a clear path toward long-term growth in the competitive Upper Midwest economy.