Supplies used in research are defined as tangible personal property, other than land or depreciable assets, that is consumed or used up during the performance of qualified experimental activities within North Dakota. These expenditures qualify for a substantial income tax credit designed to offset the inherent financial risks of innovation by providing a dollar-for-dollar reduction in state tax liability for businesses conducting in-state research.

The Evolution and Intent of North Dakota’s Research Incentive Landscape

The North Dakota Research and Experimental Expenditure Tax Credit, codified under North Dakota Century Code (N.D.C.C.) § 57-38-30.5, represents one of the state’s most enduring and strategically significant economic development tools. Originally enacted in 1987 through the passage of House Bill 1645, the credit was patterned after successful legislation in Minnesota, reflecting a broader regional effort to transition the Northern Plains economy toward high-value, knowledge-based industries. The primary objective of the Legislative Assembly was to stimulate new and existing corporations to undertake research and development (R&D) within state borders, thereby fostering a “primary sector” ecosystem characterized by wealth creation through the application of labor and technology to raw materials or processes.

Since its inception, the statute has undergone several critical transformations to maintain its competitiveness. In 1993, Senate Bill Nos. 2222 and 2223 modernized the credit’s application, and further substantive changes in 2007 and 2011 adjusted the credit percentages to better incentivize startups and established firms alike. The current framework provides a tiered credit structure that is particularly aggressive for the first $100,000 of excess research expenses, signaling the state’s intent to support small-scale innovation and the entrepreneurial efforts of primary sector businesses.

Statutory Definition of Qualified Research Supplies

North Dakota law incorporates the federal definitions found in Section 41 of the Internal Revenue Code (I.R.C.), specifically I.R.C. § 41(b)(2)(C), while imposing strict geographic limitations. For a supply to be considered a “qualified research expense” (QRE) in North Dakota, it must meet three primary criteria: it must be tangible property, it must not be land or improvements to land, and it must not be property of a character subject to the allowance for depreciation.

The Consumability Mandate

The defining characteristic of a qualified supply is its consumability during the research process. Unlike capital equipment—such as laboratory benches, tractors, or computers—which provide utility over multiple years and are recovered through depreciation, supplies are “used up” during experimentation. This includes materials used to construct prototypes or pilot models, chemicals consumed in laboratory reactions, and specialized components that may be destroyed during stress testing.

The “Used in the Conduct of” Standard

The North Dakota Office of State Tax Commissioner emphasizes that supplies must be used directly in the conduct of qualified research. This means there must be a clear nexus between the purchase of the material and the specific experimental activity. For example, electricity and water (utilities) are generally excluded because they are considered indirect overhead, even if consumed in a laboratory, unless they are used in an extraordinary manner directly in an experiment. Similarly, general administrative items such as printer paper or pens do not qualify, as they support the business functions surrounding the research rather than the research itself.

Local State Revenue Office Guidance and Administrative Application

The administration of the R&D credit is overseen by the North Dakota Office of State Tax Commissioner, which provides guidance through the North Dakota Administrative Code and various biennial reports. Taxpayers must adhere to both the statutory language and the Commissioner’s regulatory interpretations to successfully claim and defend their credit.

Administrative Code and Sourcing Rules

N.D. Admin Code 81-03-05.1-06 stipulates that when calculating the tax credit provided for in N.D.C.C. § 57-38-30.5, the taxpayer may include in the base amount only those amounts that were incurred in or attributable to North Dakota. This geographic restriction is absolute; even if a company conducts high-level research, only the supplies physically consumed within the state’s borders are eligible for the credit.

This sourcing requirement necessitates meticulous record-keeping. Multi-state entities must be able to demonstrate that supply invoices coded as QREs were delivered to and used by North Dakota-based facilities. If a manufacturer in Fargo receives a shipment of specialty alloy for a prototype being developed by its Bismarck team, the entire cost qualifies. However, if that same alloy is diverted to a facility in Minnesota for final assembly, that portion of the cost must be excluded from the North Dakota filing.

Procedural Requirements for Claiming the Credit

The Commissioner’s office requires specific documentation and forms depending on the taxpayer’s legal structure. The credit is not a standalone “check,” but a calculated component of the state income tax return.

• C Corporations: Must use Form 40 and attach Schedule TC (Tax Credits) to report the research expenditures.
• Passthrough Entities (S Corps, Partnerships): The credit is calculated at the entity level and passed through to individual owners based on their respective interests, reported via Form 60 or Form 58, Schedule K.
• Individuals and Sole Proprietors: Claim the credit on Schedule ND-1TC.

A critical and often overlooked administrative hurdle is the requirement for a Property Tax Clearance Record form. According to the Tax Commissioner, taxpayers must obtain this clearance to be eligible for the research expense credit, ensuring that the business is not delinquent on local property tax obligations.

Industry-Specific Analysis: Agriculture, Energy, and Manufacturing

The application of the “supplies” definition varies significantly across North Dakota’s key economic sectors. Understanding these nuances is essential for local businesses to maximize their claims.

Agricultural Research and Development

In North Dakota, agricultural innovation is a primary driver of the R&D credit. Because the state’s economy is rooted in crop science and livestock production, many “farm-level” experiments qualify for the credit. Supply expenses in this sector are diverse and highly specific.

A key distinction in agriculture is the “test plot” versus “commercial field” boundary. If a seed company uses 100 acres to test a new soybean strain, the seeds and chemicals used on those 100 acres are qualifying supplies. However, if the company sells the resulting harvest, they must ensure the original intent of the planting was research-oriented (to eliminate a technical uncertainty) rather than commercial production.

Energy and Sustainable Technology

North Dakota’s energy sector, including oil and gas, biofuels, and renewable energy, utilizes the R&D credit for significant technological advancements. Supplies in this context often involve high-cost materials used in prototypes for carbon capture, hydrogen conversion, or enhanced oil recovery.

For example, the development of a hydrogen fuel cell requires various precious metals and chemical catalysts. While the equipment used to measure the output is depreciable and therefore not a supply, the catalysts that are chemically altered or consumed during the testing phase are fully qualifying QREs. Furthermore, the state provides specific incentives for biodiesel and green diesel fuel production, which can sometimes overlap with R&D activities if the blending process involves novel formulations or engineering uncertainties.

Manufacturing and Automation

Manufacturing remains the most common sector for North Dakota R&D credit claims, particularly concerning the 21st Century Manufacturing Workforce Incentive (Automation Tax Credit). While the Automation Tax Credit targets the purchase of equipment (robotics), the Research Expense Credit targets the design and testing of that equipment.

Supply expenses in manufacturing often include:

• Prototypes and Pilot Models: Raw steel, plastic resins for 3D printing, and fasteners used to create physical representations of a new product.
• Sacrificial Tooling: Dies or molds that are created for a single research run and are not intended for long-term production use.
• Integration Components: Sensors and logic controllers used during the “trial and error” phase of integrating new robotics into an existing line.

The Mechanics of the Credit Calculation

North Dakota’s tiered credit system and the option for an Alternative Simplified Computation (ASC) provide flexibility for different business lifecycles.

Standard Method Calculation

The regular method is incremental, comparing current spending to a “base amount” (the greater of a historical spending percentage or 50% of current QREs).

For tax years beginning after December 31, 2016, the rates are:

• 25% of the first $100,000 in excess QREs.
• 8% of any excess over $100,000.

Alternative Simplified Computation (ASC) Method

Beginning in 2019, North Dakota allows an ASC method, which is often easier to document for businesses with fluctuating spending.

The ASC rates are:

• 17.5% of the first $100,000 of alternative excess (Current QREs – 50% of the 3-year average).
• 5.6% of any alternative excess over $100,000.

If the taxpayer has zero research expenses in any of the prior three years, the rate is 7.5% of the first $100,000 of current expenses plus 2.4% of the excess.

Detailed Example: Manufacturing Automation Prototype

To clarify how these rules apply in a real-world scenario, consider “Dakota Dynamics,” a manufacturer in Grand Forks developing an automated drone for monitoring wind turbine health.

Current Year Expenditures in North Dakota:

1. Engineer Salaries: $120,000 (direct conduct and supervision of R&D).
2. Prototype Materials: $60,000 (carbon fiber, motors, specialized circuit boards used in 5 iterations).
3. Lab Computer: $15,000 (depreciable asset, not a supply).
4. Contract Testing: $30,000 (paid to an outside lab for wind tunnel testing – 65% qualifying).

Step 1: Calculate Total North Dakota QREs

• Wages: $120,000
• Supplies: $60,000
• Contract Research: $19,500 ($30,000 \times 0.65$)
• Total QREs = $199,500.

Step 2: Determine Excess QREs (Standard Method)

Assuming a base amount of $50,000:

$199,500 – $50,000 = $149,500 in Excess QREs.

Step 3: Apply Tiered Rates

• First $100,000 @ 25% = $25,000
• Remaining $49,500 @ 8% = $3,960
• Total North Dakota Tax Credit = $28,960.

In this example, the $60,000 spent on supplies directly generated $15,000 of tax savings (at the 25% tier), highlighting the importance of capturing every consumable bolt and circuit board.

The Strategic Value of Transferability for Small Businesses

North Dakota offers a unique “liquidity” option for startups through the sale of tax credits. A “qualified research and development company”—defined as a primary sector business with annual gross revenues under $750,000 that began research in North Dakota after 2006—may sell up to $100,000 of its unused credits to another taxpayer.

This provision is critical for startups that are “supply-heavy” but “revenue-light.” For example, a biotech startup in Fargo may spend $200,000 on laboratory supplies and have no revenue. Instead of carrying that credit forward for 15 years, they can sell the credit to a larger North Dakota corporation, receiving immediate cash to reinvest in more supplies and research personnel. This transfer must be certified by the Department of Commerce and reported via Form CTS within 30 days of the agreement.

Impact of Federal Changes: OBBBA 2025 and Section 174A

A significant development for 2025 is the impact of the federal One Big Beautiful Bill Act (OBBBA). This legislation restored immediate expensing for domestic research costs under I.R.C. § 174A, reversing the unfavorable 2022 requirement to capitalize these costs over five years.

Because North Dakota taxable income is derived from federal taxable income, the restoration of immediate expensing for supplies means that businesses will see an immediate reduction in their state taxable base. However, the State Tax Commissioner warns that while federal deductions automatically affect North Dakota taxable income, federal tax credit changes (like those to I.R.C. § 41) do not directly impact the state’s calculation of its own 25%/8% research credit. This creates a “double benefit” environment where businesses can immediately deduct the cost of research supplies and also claim the North Dakota credit on those same expenditures.

Documentation and Audit Preparedness

The North Dakota Office of State Tax Commissioner emphasizes that the “burden of proof” lies with the taxpayer. During an audit, the Commissioner will evaluate supply expenses against the “Four-Part Test” to ensure they were truly used for experimentation rather than routine production or quality control.

Contemporary Record-Keeping

Taxpayers are advised to maintain “contemporaneous” records. This includes:

• Invoices and Purchase Orders: Coded specifically to R&D projects.
• Material Consumption Logs: Tracking how much of a raw material was used in a specific prototype.
• Engineering Notebooks: Documenting why a specific material was chosen to address a technical uncertainty.
• Inventory Records: Demonstrating that the supplies were indeed consumed and not simply sitting in general inventory for future commercial use.

If a business claims supplies but cannot provide an invoice or a link to a specific experiment, the Tax Commissioner has the authority to disallow the credit and assess penalties and interest (typically 12% per year in North Dakota).

Statistics and Economic Impact

While specific claimant-by-claimant data is confidential, the Office of State Tax Commissioner’s biennial reports and the 2024 Red Book provide a broader picture of the state’s tax environment. For the third quarter of 2025, North Dakota recorded $7.22 billion in taxable sales and purchases, reflecting a robust economy where primary sector innovation continues to play a central role.

The R&D credit remains a permanent fixture of North Dakota law precisely because of its measured success in attracting high-tech investment. In the agricultural sector alone, approximately 32.10% of total R&D expenses are typically qualifying, a figure that is heavily supported by the consumption of test-plot supplies and experimental formulations.

Final Thoughts

The North Dakota Research and Experimental Expenditure Tax Credit provides a highly favorable environment for innovation, particularly through its aggressive treatment of qualified supplies. By allowing businesses to recover up to 25% of their initial $100,000 in excess research materials, the state actively mitigates the cost of failure and the risk of experimental design.

Successful utilization of the credit requires a nuanced understanding of the “consumability” of supplies, a commitment to in-state sourcing, and rigorous administrative compliance—including the mandatory Property Tax Clearance. For small primary sector businesses, the transferability of these credits offers a unique lifeline of liquidity. As federal law shifts back toward immediate expensing in 2025, the synergy between North Dakota’s state-level credit and federal-level deductions creates a historic opportunity for businesses to scale their research operations and drive the next generation of Northern Plains innovation.