North Dakota Office of State Tax Commissioner

The North Dakota Office of State Tax Commissioner serves as the executive authority responsible for the administration, auditing, and processing of the state’s Research and Experimental Expenditure Tax Credit. By overseeing compliance with Section 57-38-30.5 of the North Dakota Century Code, this office ensures that technological investments translate into valid tax offsets for eligible business entities and individuals.

The Office of State Tax Commissioner functions as the primary regulatory body for the state’s revenue landscape, operating under a mandate to administer tax laws with fairness and efficacy while maintaining a digital-first approach to customer service. Within the specific context of the Research and Development (R&D) tax credit, the Commissioner’s office bridges the gap between the legislative intent of encouraging innovation and the practical reality of tax collection and refund management. This administrative framework is built upon the “perpetual federalization” of North Dakota’s tax code, where the starting point for state taxable income is the federal taxable income defined by the Internal Revenue Code (IRC). This alignment necessitates a nuanced understanding of how federal definitions of qualified research are adapted to a state-specific environment, particularly regarding the geographic limitation that mandates all research activities be conducted within the borders of North Dakota to qualify for the credit.

The Role of the Office of State Tax Commissioner in R&D Incentivization

The Office of State Tax Commissioner (OSTC) does not merely collect taxes; it serves as a sophisticated data warehouse and interpretive agency that provides the official guidance necessary for businesses to leverage statutory incentives. The Commissioner, currently Brian Kroshus, oversees the publication of various resources such as the “Red Book” and the “Biennial Report,” which serve as the definitive guides for tax professionals and corporate entities seeking to understand the historical and current state of North Dakota’s fiscal policy. In the realm of R&D, the OSTC’s role is characterized by several critical functions: the creation and distribution of tax forms, the verification of eligibility through property tax clearance records, and the management of credit transfers in coordination with the North Dakota Department of Commerce.

Administrative guidance issued by the OSTC emphasizes that the Research and Experimental Expenditure Tax Credit is available to a broad spectrum of taxpayers, including C-corporations, individuals, estates, and trusts, as well as participants in passthrough entities such as S-corporations and partnerships. The office mandates that any taxpayer claiming the credit must attach a detailed schedule or worksheet to their return, outlining the specific calculation of the credit and providing documentation for any unused credit being carried over from prior years. This requirement for detailed substantiation reflects the OSTC’s commitment to protecting the state’s general fund while still providing a robust incentive for those who meet the strict statutory criteria.

Coordination with the Department of Commerce

A unique aspect of North Dakota’s R&D tax credit environment is the division of labor between the OSTC and the North Dakota Department of Commerce. While the OSTC manages the tax reporting and auditing phases, the Department of Commerce is responsible for certifying entities as “qualified research and development companies”. This certification is a prerequisite for businesses wishing to sell or transfer their unused credits, a provision intended to provide liquidity to startups and primary sector businesses with gross revenues under $750,000. The OSTC relies on these certifications to process Form CTS (Credit Transfer Statement), which must be filed jointly by the transferor and transferee within 30 days of a credit sale. This inter-agency workflow ensures that only verified, value-adding businesses can access the transferability market, thereby aligning the state’s tax incentives with its broader economic development goals.

Statutory Analysis: North Dakota Century Code Section 57-38-30.5

The legal foundation for the R&D incentive is found in N.D.C.C. § 57-38-30.5, a statute that has evolved significantly since its inception in 1987. Originally modeled after successful Minnesota legislation, the North Dakota credit was designed to stimulate investment in the state’s burgeoning technology and primary sectors. The statute defines the amount of the credit as a percentage of “qualified research expenses” (QREs) that exceed a specific “base amount,” both of which are primarily defined by referencing Section 41 of the IRC.

Statute Component	Regulatory Reference	Application to North Dakota Law
Qualified Research	IRC § 41(d)	Must be conducted within North Dakota; excludes out-of-state research.
Base Amount	IRC § 41(c)	Excludes sales and research conducted outside the state.
Qualified Expenses	IRC § 41(b)	Includes wages, supplies, and contract research within state borders.
Carryback Period	N.D.C.C. § 57-38-30.5(6)	3-year carryback for unused credits.
Carryforward Period	N.D.C.C. § 57-38-30.5(6)	15-year carryforward for unused credits.

The interaction between state and federal law is the cornerstone of the OSTC’s guidance. While the federal government provides the framework for what constitutes “research,” the state of North Dakota adds a rigorous geographic filter. This means that a corporation with a national R&D budget must perform a “nexus study” or a specific state-level accounting to isolate the costs associated with its North Dakota facilities. The OSTC’s “perpetual federalization” ensures that even as federal tax laws change—such as those included in the One Big Beautiful Bill Act of 2025—the North Dakota return remains anchored to the federal starting point, though the state credit itself remains a distinct calculation.

Legislative Evolution and Protective Measures

The history of N.D.C.C. § 57-38-30.5 reveals a legislative trend toward expanding the credit’s accessibility while maintaining safeguards against federal legislative volatility. In 2013, Senate Bill 2207 was passed to ensure that references to federal definitions in state law would remain effective even if the federal R&D tax credit were discontinued. This protective measure provides long-term certainty for businesses planning multi-year R&D projects. Furthermore, the 2007 legislative session (House Bills 1412 and 1018) marked a major restructuring that expanded the credit to individuals and passthrough entities, recognizing that innovation is often driven by smaller, more agile firms rather than just large corporations.

Methodologies for Credit Computation

The Office of State Tax Commissioner provides guidance for two distinct methods of credit calculation: the Regular Method and the Alternative Simplified Computation (ASC) method. The selection of a method depends on the taxpayer’s historical research data and the volatility of their annual R&D spending.

The Regular Method

The Regular Method is the traditional approach, favored by companies with a long history of research in North Dakota and a stable “base amount.” The credit is calculated using a tiered percentage structure based on expenses that exceed the base amount. For taxpayers who first claimed the credit after January 1, 2007, the rates are highly competitive:

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

For legacy taxpayers who claimed the credit before 2007, the calculation is subject to a $2 million annual cap, and any excess cannot be carried over. This distinction in the OSTC guidance effectively creates two classes of claimants, encouraging newer businesses with uncapped growth potential while maintaining a predictable fiscal impact from older, established entities.

The Alternative Simplified Computation (ASC) Method

Introduced in tax year 2019 via House Bill 1111, the ASC method provides a streamlined calculation that does not require the extensive historical data needed for the Regular Method’s base amount. The ASC credit is equal to the sum of:

• 17.5% of the first $100,000 of “North Dakota alternative excess research and development expenses”.
• 5.6% of any amount over $100,000 of such alternative excess expenses.

The “alternative excess” is defined as the amount by which current year North Dakota QREs exceed 50% of the average North Dakota QREs for the three preceding tax years.

If a taxpayer had zero QREs in any of the three preceding years, the credit is calculated as 7.5% of the first $100,000 of QREs plus 2.4% of the excess. This method is annually elective and provides flexibility for businesses experiencing rapid scaling or those that have recently established operations in the state.

Compliance, Reporting, and Property Tax Clearance

The OSTC enforces strict reporting requirements to maintain the integrity of the R&D credit. Claimants must complete and attach Schedule ND-1TC (for individuals) or the relevant sections of Form 40 (for corporations). A significant administrative requirement that often surprises taxpayers is the Property Tax Clearance Record. According to N.D.C.C. § 57-01-15.1, before certain state tax incentives—including the R&D credit—can be claimed, the taxpayer must obtain a clearance record from each North Dakota county where they own a 50% or greater interest in real property. This record serves as certification that the taxpayer is in good standing with local property taxes, effectively linking state-level incentives to local tax compliance.

Form CTS and the Transferability Market

The ability to transfer R&D credits is a vital component of North Dakota’s strategy to attract early-stage technology companies. The OSTC’s instructions for Form CTS (Credit Transfer Statement) outline a rigorous process for these transactions. The transferor must be a primary sector business with annual gross revenues under $750,000 and must have conducted R&D for the first time in North Dakota after 2006.

Feature of Credit Transfer	Administrative Rule	Impact on Taxpayer
Transfer Limit	Up to $100,000 per year.	Immediate liquidity for small R&D firms.
Timeframe	Must file Form CTS within 30 days of transfer.	Requires rapid coordination between buyer and seller.
Taxability of Proceeds	Gross proceeds are taxable in North Dakota.	Transfer is a taxable sale of property; no apportionment allowed.
Purchaser Rights	Same as transferor, but no carryback allowed.	Buyer can carry forward for 15 years but cannot seek immediate refunds.

The OSTC provides specific guidance on the taxability of the proceeds from these transfers. For federal purposes, the sale is generally considered a taxable event. For North Dakota purposes, the entire gross proceeds are assignable to the state and must be reported on the transferor’s return (e.g., Schedule ND-1CS for individuals) without being reduced by losses or deductions. This ensures that while the state provides a mechanism for liquidity, it also captures a portion of the value created by the transfer as taxable income.

Economic and Statistical Impact

The effectiveness of the Research and Experimental Expenditure Tax Credit is evaluated periodically by the North Dakota Legislative Management and the OSTC. While the credit represents a direct cost to the state’s general fund, it is widely viewed as a “net liability” that nonetheless yields significant positive externalities. A 2017-18 study revealed that between 2007 and 2016, approximately 1,800 taxpayers claimed the credit.

The economic impact of the credit is multifaceted, influencing employment, population, and the state’s Gross Domestic Product (GDP).

Impact Category	Statistical Value	Source
Job Creation (Peak)	1,100 jobs	13
Population Increase	1,000 individuals	13
Annual GDP Impact	$80,000,000	13
20-Year State Revenue	$213,000,000	13
20-Year State Cost	$248,000,000	13

Despite a projected net budget shortfall of $30 million over 20 years, the credit’s ability to anchor high-paying professional services jobs within the state is a key policy justification. The study noted that research activities typically do not result in “local displacement,” meaning that R&D firms do not take business away from existing local employers but rather create entirely new economic niches.

Sector-Specific Utilization

Data from the 2016 tax year provides a snapshot of the credit’s distribution: individuals claimed over $4.5 million, while corporations claimed over $500,000. Large-scale entities, such as the Basin Electric Power Cooperative, have used the credit extensively but often face “utilization barriers.” For instance, Basin Electric accumulated $10.3 million in credits but carried forward $8.7 million because high depreciation deductions and net operating losses (NOLs) reduced their state income tax liability to zero. This highlights the importance of the 15-year carryforward period, which allows capital-intensive firms to benefit from their innovation once they return to profitability.

The 2025 Legislative and Regulatory Environment

The 2025 legislative session, overseen by Governor Kelly Armstrong, has been defined by a focus on “historic” property tax relief, primarily through HB 1176. While the R&D credit itself remains a permanent fixture of the tax code, the broader fiscal environment is shifting. The state general fund is increasingly supported by earnings from the $12 billion Legacy Fund, which helps offset the costs of various tax incentives.

Impact of the One Big Beautiful Bill Act (OBBBA)

On July 4, 2025, the signing of the federal OBBBA introduced significant changes to the federal tax code that automatically trickle down to the North Dakota return due to the state’s federalized structure. Key provisions include:

• Permanent Expensing: Many elements of the 2017 Tax Cuts and Jobs Act were made permanent, affecting how R&D assets are depreciated.
• Standard Deduction Adjustments: For individuals, these changes alter the taxable income base upon which the R&D credit is applied.

The OSTC has been proactive in issuing guidance that federal tax credit changes do not directly impact state-level calculations, but the changes to federal taxable income mean that the effective value of the credit for a specific taxpayer may shift depending on their overall federal tax profile.

Legislative Recap and Future Outlook

The 2025 legislative session also saw the passage of SB 2038, which deals with the disclosure of tax incentive information. This highlights a growing trend toward transparency in North Dakota’s tax policy, where the Chairman of a standing committee or Legislative Management can request the OSTC to disclose the amount of credits claimed. For businesses, this means that while their tax returns remain confidential under general privacy laws, the aggregate and specific impacts of significant incentives like the R&D credit are subject to higher levels of public and legislative scrutiny.

Detailed Practical Example: The “Prairie Energy Tech” Scenario

To illustrate the application of OSTC guidance and the interaction between the Regular and ASC methods, consider a hypothetical North Dakota entity, “Prairie Energy Tech LLC.”

Scenario Overview

Prairie Energy Tech is a primary sector business based in Bismarck, specialized in developing advanced carbon capture technology. It began its research operations in North Dakota in 2021. For the 2024 tax year, the company is evaluating which method of credit calculation will yield the highest benefit.

Financial Data (North Dakota Source only):

• 2024 QREs: $500,000
• 2023 QREs: $300,000
• 2022 QREs: $200,000
• 2021 QREs: $100,000
• Average ND Gross Receipts (Prior 4 years): $2,000,000
• Calculated Base Amount (Regular Method): $300,000

Calculation 1: The Regular Method

Using the Regular Method, the credit is based on the excess of 2024 QREs over the base amount.

• Excess = $500,000 – $300,000 = $200,000.
• Tier 1 (First $100,000) @ 25% = $25,000.
• Tier 2 (Excess over $100,000) @ 8%: $100,000 * 8% = $8,000.
• Total Regular Credit: $33,000.

Calculation 2: The Alternative Simplified Computation (ASC) Method

Under the ASC method, the credit is based on the excess over 50% of the average of the prior three years’ expenses.

• 3-Year Average QREs = ($300,000 + $200,000 + $100,000) / 3 = $200,000.
• ASC Base (50% of Average) = $100,000.
• Alternative Excess = $500,000 – $100,000 = $400,000.
• Tier 1 (First $100,000) @ 17.5% = $17,500.
• Tier 2 (Excess over $100,000) @ 5.6%: $300,000 * 5.6% = $16,800.
• Total ASC Credit: $34,300.

Conclusion of Example:

In this scenario, Prairie Energy Tech would elect the ASC method for 2024, as it provides an additional $1,300 in tax savings. The company would then need to ensure it has a Property Tax Clearance Record from Burleigh County to claim the credit on its North Dakota return. If the company’s tax liability was only $20,000, the unused $14,300 could be carried back to 2021 or carried forward to 2039.

Procedural Guidelines for Fiduciaries and Passthrough Entities

The OSTC provides specialized instructions for estates, trusts, and passthrough entities, which are significant users of the R&D credit in North Dakota’s agricultural and energy research sectors.

Fiduciary Reporting on Form 38

Fiduciaries must report the R&D credit on Schedule 38-TC, which is attached to the North Dakota Fiduciary Income Tax Return (Form 38). The OSTC clarifies that if the estate or trust does not have sufficient tax liability to use the credit, the credit remains at the fiduciary level unless the governing instrument or state law requires it to be distributed to the beneficiaries.

Passthrough Entity Allocation

For S-corporations and partnerships, the R&D credit is calculated at the entity level and then allocated to owners based on their distributive share of income or loss. The OSTC requires that the entity provide each owner with a North Dakota Schedule K-1, which specifies the owner’s share of the credit. Individual owners then report this on their Schedule ND-1TC. This decentralized reporting mechanism allows for a broad distribution of the incentive’s benefits, reflecting the OSTC’s commitment to supporting diverse business structures.

Audit and Record-Keeping Best Practices

The North Dakota Office of State Tax Commissioner emphasizes that the burden of proof for the R&D credit rests entirely with the taxpayer. Official guidelines suggest a “Four-Part Test” substantiation approach similar to the federal requirements, but with a specific focus on “North Dakota-only” documentation.

Critical Documentation Requirements

1. Project Logs: Detailed records of research activities, including unsuccessful experiments, to prove a “process of experimentation”.
2. Wage Allocation: Time tracking records that distinguish between qualified research time and non-qualified administrative or production time for North Dakota employees.
3. Supply Invoices: Documentation of materials consumed during the R&D process within the state.
4. Contract Research Agreements: Contracts with North Dakota-based third-party researchers, ensuring the taxpayer retains substantial rights and bears the financial risk of the research.

Records should be retained for at least four years, although the OSTC has the authority to audit returns beyond this period if substantial errors or fraud are suspected. Given the “perpetual federalization” of the code, a federal audit that results in a change to the R&D credit will almost always trigger a corresponding adjustment to the North Dakota credit, necessitating the filing of an amended return (Form 40X or ND-1X).

Summary of Regulatory Guidance

The following table summarizes the key administrative requirements for the North Dakota Research and Experimental Expenditure Tax Credit as of the 2024-2025 cycle.

Administrative Requirement	Prescribed Form/Process	Regulatory Deadline
Claiming the Credit	Schedule ND-1TC or Form 40	With the annual income tax return.
Credit Transfer	Form CTS	Within 30 days of the transfer agreement.
Transferor Certification	Dept. of Commerce SFN 58638	Prior to the credit transfer.
Property Tax Clearance	County-level Clearance Form	Must be attached to the return claiming the credit.
Carryback Claim	Amended Return	Within 3 years of the original return’s due date.

Final Thoughts

The North Dakota Office of State Tax Commissioner plays a vital role in the state’s economic ecosystem by providing the administrative infrastructure necessary for the Research and Experimental Expenditure Tax Credit to function. Through its rigorous guidance, coordination with the Department of Commerce, and adherence to the North Dakota Century Code, the office ensures that the R&D incentive is both accessible to legitimate innovators and protected against abuse. The credit’s structure—offering a choice between the Regular and ASC methods—reflects a modern, flexible approach to tax policy that accommodates both established industries and nascent startups.

While the 2025 legislative session has shifted the focus toward property tax relief, the R&D tax credit remains a critical tool for North Dakota’s long-term strategy of technological diversification. The documented positive impacts on GDP and high-skilled employment justify the state’s continued investment in the program, even in the face of federal legislative changes. For taxpayers, success in navigating this environment requires a disciplined approach to documentation, a clear understanding of state-specific geographic limitations, and proactive compliance with administrative requirements such as property tax clearance. Ultimately, the partnership between the Office of State Tax Commissioner and the state’s innovative business community continues to serve as a model for how targeted fiscal incentives can drive regional economic resilience.