The economic history of Sioux Falls is characterized by its strategic geographic location, critical transportation infrastructure, and an inherently adaptive regulatory environment that has allowed diverse industries to flourish over the past century. To understand how modern enterprises in Sioux Falls qualify for the United States federal Research and Development (R&D) tax credit under Internal Revenue Code (IRC) Section 41, it is essential to analyze the historical development, operational complexities, and specific technological advancements of the city’s foundational industries. The following five case studies detail unique sectors specific to Sioux Falls, exploring their origins, their contemporary technological challenges, and the specific examples of how their operations meet the rigorous requirements of United States federal tax laws and South Dakota state economic development incentives.

Food Processing and Meatpacking: The Legacy of John Morrell & Co. and Smithfield Foods

The meatpacking industry is a foundational pillar of the Sioux Falls economy, with roots that stretch back to the pioneer era. In the late nineteenth century, the rapid expansion of railroads into the fertile Midwest prairies enabled the mass transport of livestock to central processing points, moving the industry away from localized butcher shops toward massive industrial slaughterhouses. Sioux Falls, situated strategically near the borders of Iowa and Minnesota, provided an ideal geographic nexus for agricultural commerce. In 1909, John Morrell & Co., an enterprise that originally began in England in 1827 selling fruit before pivoting to cured hams, opened a test plant in Sioux Falls to capitalize on the robust local hog supply and strong rail lines. The success of this test plant led to the construction of a massive, modern meatpacking facility by 1911, which was capable of processing five hundred cattle, six thousand hogs, and one thousand sheep every single day. This agriculturally based industry fueled the city’s population boom, transforming it from a modest pioneer settlement into a dominant industrial hub throughout the twentieth century. The facility, which was acquired by Smithfield Foods in 1995, remains the largest producer of packaged meats in the country, currently slaughtering twenty thousand hogs daily. Recently, the company announced a monumental one billion, three hundred million dollar relocation project to an advanced two-hundred-acre industrial park in northwestern Sioux Falls, facilitated in part by a fifty million dollar philanthropic gift from billionaire Denny Sanford.

Modern food processing requires intense scientific engineering, extending far beyond traditional slaughtering and butchery. Meatpacking and food processing entities in Sioux Falls generate significant federal qualified research expenses through a variety of eligible activities. The development of new or improved food products to stay current with consumer trends, such as organic or gluten-free formulations, requires extensive experimentation with ingredients to extend shelf life without compromising safety. When Smithfield engineers develop automated or optimized processing and packaging systems for their new billion-dollar facility, they are engaging in process engineering that qualifies for the federal credit. This involves evaluating alternative pneumatic, robotic, and sensory systems to eliminate technical uncertainty regarding mechanical capability and production line efficiency. Furthermore, the creation of sustainable packaging solutions, such as biodegradable materials or smart packaging equipped with sensors to detect spoilage, relies heavily on the hard sciences of biology, chemistry, and materials engineering, thereby satisfying the federal requirement that the research be technological in nature.

To claim these credits successfully, food processing companies must navigate specific Internal Revenue Service administration guidance. The Internal Revenue Service evaluates food science research closely under the process of experimentation test. Aesthetic improvements, such as merely changing the flavor profile of a sausage to match a seasonal market taste, are explicitly excluded from the credit. However, as reinforced by the Internal Revenue Service Audit Techniques Guide, if a taste change is necessitated by a new, healthier chemical formulation that introduces uncertainty regarding the product’s physical stability, bacterial resistance, or shelf-life, the subsequent experimentation process qualifies for the credit. Furthermore, Sioux Falls meatpackers designing new massive facilities must meticulously separate routine commercial construction costs from the experimental engineering wages and prototyping supplies required to design the facility’s proprietary automated processes, ensuring they meet the stringent burden of proof required by federal auditors.

Financial Services and Financial Technology: The Citibank Catalyst and First PREMIER Bank

The transformation of Sioux Falls into a major center for banking and financial services is the direct result of a calculated and historic regulatory maneuver. In the late 1970s, the United States suffered from severe stagflation, characterized by double-digit inflation and skyrocketing interest rates. Nationally, the cost of funds for banks often exceeded the legal limits they could charge consumers on loans and credit cards due to strict state usury laws. Banks were effectively losing money on consumer credit, leading to a severe tightening of lending markets. In 1981, South Dakota Governor Bill Janklow partnered with Citibank executives to enact groundbreaking state legislation that eliminated the state’s historic cap on interest rates. Relying on a foundational principle of banking law that allowed national banks to export the interest rates of their home state to customers nationwide, Citibank relocated its massive credit card processing operations from New York to Sioux Falls. This decisive legislative action transformed Sioux Falls into a global financial center almost overnight. Over subsequent decades, the financial sector diversified extensively, drawing other major institutions like Wells Fargo and fostering the growth of local powerhouses like First PREMIER Bank, eventually evolving from a physical paper-processing hub into a highly digitized, technology-driven financial technology ecosystem.

Today, the banking and financial services sector in Sioux Falls acts essentially as a software development and technology industry, dedicating massive resources to digital modernization. Financial institutions conduct qualifying research and development by engineering proprietary software architectures, machine learning algorithms, and advanced cybersecurity protocols. Examples of qualifying activities include the design and development of new software architectures intended to improve the scalability, security, or performance of mobile banking applications. When a Sioux Falls bank develops algorithms or data processing techniques for fraud detection, credit risk modeling, and advanced predictive analytics, it is relying on the hard science of computer science to eliminate technical uncertainty, thereby generating qualified research expenses in the form of software engineer wages and cloud-hosting supply costs. Redesigning legacy mainframe banking systems into modern, secure platforms using new frameworks or cloud technologies also constitutes a major area of qualifying experimentation for the financial sector.

The eligibility of banking software for the federal research and development tax credit is governed by complex regulations regarding internal use software. Historically, the Internal Revenue Service presumed that software developed by a bank for its own administrative functions was disqualified from the credit, as it was viewed as merely supporting general management operations. However, final regulations issued by the Treasury Department clarified that software developed to enable a taxpayer to interact with third parties, such as online customer banking portals or mobile deposit applications, is not considered internal use software and is subject only to the standard four-part test. If a Sioux Falls bank develops software strictly for internal back-office functions, it must meet the standard four-part test in addition to a stringent three-part High Threshold of Innovation test, which requires the software to be highly innovative, entail significant economic risk, and not be commercially available for use by the taxpayer. The Internal Revenue Service Audit Guidelines on Software dictate that auditors heavily scrutinize financial software to ensure that routine bug fixes, maintenance, and data conversion activities are strictly excluded from the tax credit calculations.

Biomedical and Clinical Research: The Evolution of Sanford Health and Avera Health

The roots of the Sioux Falls healthcare and biomedical sector trace back to the late nineteenth century. In 1893, local residents returning from the World’s Fair in Chicago brought back tales of modern medical progress, inspiring local clergy and physicians, led by Dr. Arne Zetlitz, to establish the city’s first formal medical facility. In 1894, the Seney House became the first location of the Sioux Falls Hospital, treating its first patient, Rachel Mansaker, who initially requested to be sent to the penitentiary instead, as hospitals were widely viewed at the time merely as places to die. Over a century later, this modest community hospital model has evolved into massive, vertically integrated health systems that dominate the local economy. Today, Sanford Health and Avera Health employ nearly twenty thousand people combined in the Sioux Falls region, acting as the primary economic engines for the municipality. Driven by substantial philanthropic investments, including a monumental four hundred million dollar gift from billionaire Denny Sanford in 2007, Sanford Health expanded rapidly into a global clinical research powerhouse. Concurrently, the Avera Research Institute established a profound commitment to population health, securing national clinical trials with a particular focus on pediatrics and American Indian health initiatives, and collaborating extensively with the National Institutes of Health.

Biomedical research inherently aligns with the core legislative intent of Internal Revenue Code Section 41, providing massive opportunities for federal tax credits. Sioux Falls health systems, alongside affiliated biotechnology startups and university research spin-offs, engage in complex clinical trials and the development of novel therapies. When researchers at the Avera Research Institute participate in the Environmental Influences on Child Health Outcomes program or the IDeA States Pediatric Clinical Trials Network, they are conducting rigorous scientific experiments relying on the biological sciences to discover technological information. Furthermore, the development of proprietary methodologies for integrating advanced medical devices with patient monitoring software to improve diagnostic accuracy represents a significant cross-disciplinary research effort that generates qualified research expenses, primarily through the wages of clinical scientists, biologists, and laboratory technicians.

The Internal Revenue Service provides highly specific administrative guidance for the biomedical sector, most notably through the Research Credit Audit Techniques Guide for the Pharmaceutical Industry and various directives regarding branded pharmaceutical companies. A critical compliance area for Sioux Falls clinical research involves the rigorous classification of clinical trial phases. Internal Revenue Service guidance stipulates that activities conducted during the discovery phase, the preclinical stage, and Phase I, Phase II, and Phase III clinical trials generally satisfy the statutory tests for the credit, provided they are evaluating pharmacokinetics, efficacy, and safety. However, Phase IV clinical trials, which occur post-market after the Food and Drug Administration has already approved the drug, are heavily scrutinized and generally disqualified if they are conducted merely for marketing or consumer demographic purposes. Additionally, if a Sioux Falls healthcare entity performs contract research for an external pharmaceutical conglomerate, it must carefully navigate the funded research exclusion. Under the Treasury Regulations, the Sioux Falls entity can only claim the credit if it retains substantial rights to the research results and if its payment is strictly contingent upon the scientific success of the research. If the sponsor pays for the trial regardless of the outcome, the research is deemed funded, and the local entity cannot claim the federal tax credit.

Advanced Manufacturing and Electronic Displays: The Daktronics Phenomenon

While headquartered slightly north of the city limits in Brookings, South Dakota, Daktronics is deeply integrated into the Sioux Falls industrial, economic, and engineering talent ecosystem, serving as a premier example of advanced manufacturing in the region. The company was founded in 1968 by Al Kurtenbach and Duane Sander, two electrical engineering professors from South Dakota State University. The enterprise was explicitly created as a localized economic development engine with the dream of retaining brilliant engineering students who were otherwise leaving the state of South Dakota for employment on the coasts. Starting with an initial capital investment of merely three thousand dollars, the company originally attempted to design medical instruments before pivoting to build electronic voting systems for state legislatures, securing their first client in the State of Utah in 1970. Shortly thereafter, the local university wrestling coach requested a better scoreboard, leading to the development of the Matside wrestling scoreboard and marking the company’s entry into the sports display market. Over the next fifty years, the company capitalized on its engineering prowess, providing scoring equipment for the 1980 Winter Olympics in Lake Placid, going public on the NASDAQ exchange in 1994, and ultimately evolving into the world’s largest supplier of large-screen LED video displays and programmable control systems.

Daktronics and similar advanced manufacturing firms operating within the Sioux Falls regional footprint operate at the bleeding edge of hardware and software integration. Their qualified research expenses are extensive, driven by complex hardware engineering and software development. Engineers generate credits by designing new thermal management systems and heat sinks for massive outdoor LED displays that are subjected to extreme weather conditions, representing a clear attempt to eliminate technical uncertainty regarding product reliability. Furthermore, the development of proprietary software architectures required to synchronize millions of individual light-emitting diodes in real-time without latency during live Olympic broadcasts or professional sporting events constitutes a massive software engineering effort. The fabrication of experimental pilot models of new display technologies to physically test power efficiency and luminance degradation serves as a textbook example of the process of experimentation required by the federal tax code.

Advanced engineering and manufacturing firms face intense Internal Revenue Service scrutiny regarding the contemporaneous documentation of their experimentation processes. Taxpayers cannot simply claim that designing a custom stadium screen is inherently experimental; they must document the specific design alternatives evaluated and the scientific testing utilized to resolve the specific uncertainty. Manufacturers designing custom electronic solutions for clients must also ensure their service agreements are structured appropriately to avoid the funded research exclusion, ensuring that the manufacturer bears the economic risk of failure during the development phase, thereby protecting their right to claim the research and development credit.

Precision Agriculture and Ag-Tech: Raven Industries and CNH Industrial

Raven Industries embodies the technological evolution of the Great Plains, seamlessly blending aerospace engineering with the agricultural demands of the American Midwest. Founded in Sioux Falls in 1956, the company originally focused on the design and manufacture of high-altitude research balloons for space and atmospheric exploration, establishing a deep corporate culture of engineering excellence and ingenuity. Recognizing the needs of the surrounding agricultural heartland, Raven executed a strategic pivot in 1978, applying their complex control systems and aerospace technology to agricultural spraying, thereby pioneering the modern precision agriculture, or ag-tech, industry. Operating from an expansive, revitalized innovation campus located in the historic Manchester Biscuit Company building in downtown Sioux Falls along the banks of the Big Sioux River, the company develops technologies designed to maximize crop yields while minimizing chemical inputs and environmental impact. In 2021, Raven was acquired by CNH Industrial, a global agricultural machinery conglomerate, a move that rapidly accelerated Raven’s transformation into a worldwide leader in autonomous farming technologies.

The agricultural technology sector merges heavy physical machinery with artificial intelligence, creating a incredibly robust profile for federal research and development tax credits. Sioux Falls ag-tech engineers generate qualifying expenses through the development of autonomous navigation systems. This involves creating complex perception algorithms, machine learning models, and computer vision software that allow massive driverless tractors and combines to safely and efficiently navigate diverse agricultural fields without human intervention. The engineering of agronomic flow control systems, which utilize electromechanical hardware to adjust fertilizer and pesticide spraying rates in real-time based on live GPS mapping and soil sensor data, represents another massive area of ongoing scientific research.

The fusion of advanced software and physical agricultural machinery brings unique tax compliance considerations. When ag-tech engineers write code for autonomous tractors, they must navigate the Internal Revenue Service guidelines for software development, ensuring the software qualifies because it is embedded in a physical product and fundamentally relies on the principles of computer science and engineering. A critical aspect of agricultural research involves the deployment of pilot models for physical field testing. Engineers routinely test perception algorithms on actual farmlands surrounding the Sioux Falls innovation campus. Under the Section 174 regulations, the costs associated with building and operating an experimental pilot model are eligible for the credit, provided the primary purpose of the activity is to evaluate and resolve technical uncertainty, rather than to simply produce a commercial crop for sale. Ag-tech companies must meticulously document their field trials, demonstrating the iterative code adjustments made in response to specific test failures, such as a tractor’s camera failing to detect a specific type of obstacle in low light, to prove that a true scientific process of experimentation occurred prior to commercialization.

The evaluation of Research and Development tax credits for businesses operating in Sioux Falls requires a highly technical and nuanced understanding of federal statutes. The United States federal government incentivizes domestic innovation primarily through Internal Revenue Code Section 41, commonly known as the research and development tax credit. This credit was established to help United States businesses remain competitive in the global market by encouraging long-term investment in technological innovation within the country’s borders.

The Statutory Framework: IRC Section 41 and the Four-Part Test

To qualify for the federal research and development tax credit, a taxpayer’s activities must satisfy a rigorous, cumulative four-part test as defined under Internal Revenue Code Section 41(d). This test must be applied separately to each specific business component of the taxpayer. The Internal Revenue Service utilizes the shrink back rule, which dictates that if the overall requirements are not met at the level of the entire discrete business component, the test must be applied to the most significant subset of elements, continuously shrinking back until either a subset satisfies the requirements or the most basic element is reached and fails.

Critical Exclusions and Qualifying Research Expenses

The federal tax code strictly limits what types of financial expenditures can be claimed as qualified research expenses. Generally, these expenses are categorized into three primary buckets: wages, supplies, and contract research expenses. Wages must be taxable under Section 3401(a) and reported on a Form W-2, encompassing the compensation paid to employees for the direct engagement in qualified research, the direct supervision of qualified research, or the direct support of qualified research. Direct support includes activities such as a machinist fabricating a part for an experimental model or a clerk compiling research data, while general administrative services like payroll processing and janitorial duties are excluded. Supply expenses must be tangible property other than land, improvements to land, or property subject to depreciation, and they must be used directly in the conduct of qualified research. Finally, contract research expenses represent sixty-five percent of any amount paid to a third-party person or entity for qualified research, provided the expense is incurred pursuant to a written agreement entered into prior to the performance of the research.

The Internal Revenue Service Audit Techniques Guide explicitly highlights several categorical exclusions that routinely result in the disallowance of claimed credits. Foreign research conducted outside the United States, Puerto Rico, or any United States possession is completely excluded from the credit, applying to both in-house and contract research regardless of whether the research is performed by American citizens. For multinational entities operating out of Sioux Falls, corporate accounting departments must meticulously quarantine the wages of South Dakota-based engineers from their overseas counterparts to ensure compliance. Additionally, routine data collection, efficiency surveys, market research, and ordinary quality control testing are explicitly barred from generating qualified research expenses, as they lack the requisite technological uncertainty mandated by the statute.

The application of the federal research and development tax credit relies heavily on how the Internal Revenue Service and the United States Tax Court interpret the highly technical statutory language of Internal Revenue Code Section 41. Recent judicial activity signals a distinct and aggressive tightening of substantiation standards by the government, directly impacting how businesses in Sioux Falls must prepare, document, and defend their tax claims.

Judicial Scrutiny of the Process of Experimentation

The United States Tax Court has consistently ruled against taxpayers who fail to maintain rigorous, contemporaneous documentation of their scientific processes. In the pivotal December 2024 case of Phoenix Design Group, Inc. v. Commissioner, the court disallowed the research credits of a mechanical and electrical engineering firm across multiple design projects and imposed a harsh twenty percent accuracy-related penalty. The court ruled that the taxpayer failed to prove that a systematic process of experimentation occurred because they lacked activity-level, contemporaneous documentation and relied instead on post-hoc estimates of employee time. For Sioux Falls engineering and manufacturing firms, this ruling dictates that employees must map their time directly to specific iterative testing records as the work occurs, rendering end-of-year percentage estimations entirely invalid.

Similarly, in the 2021 case of Little Sandy Coal Company v. Commissioner, the Tax Court ruled in favor of the Internal Revenue Service because the taxpayer failed to meet the substantially all requirement associated with the process of experimentation test. The statute requires that eighty percent or more of the taxpayer’s research activities must constitute elements of a process of experimentation. Because the taxpayer utilized an all-or-nothing approach to claiming the credit for a massive project and failed to sufficiently document the specific experimental activities of individual employees, the entire tax credit claim was rejected.

The concept of evaluating experimental pilot models was heavily scrutinized in the 2023 case of Betz v. Commissioner. The court determined that the taxpayer’s projects failed to rise to the level of a pilot model designed to resolve true technical uncertainty, noting that the mere existence of post-installation testing and commercial validation does not satisfy the requirement for a systematic process of experimentation. For agricultural technology and heavy manufacturing firms in Sioux Falls, this establishes that trial-and-error documentation must be generated during the initial design and fabrication phases, rather than simply relying on commissioning tests performed after the physical product has been built and deployed to a customer.

The Funded Research Doctrine

The funded research exclusion is one of the most heavily litigated aspects of the federal tax credit. Internal Revenue Code Section 41(d)(4)(H) stipulates that the credit is unavailable for any qualified research to the extent it is funded by any grant, contract, or otherwise by another person or governmental entity. In determining whether research is funded, the Internal Revenue Service examines whether the payment to the taxpayer is strictly contingent upon the scientific success of the research, and whether the taxpayer retains substantial rights in the intellectual property generated by the research.

In the 2024 case of Meyer, Borgman & Johnson, Inc. v. Commissioner, the United States Court of Appeals for the Eighth Circuit upheld the Tax Court’s decision to deny research credits to a structural engineering firm. The courts found that while the engineering contracts involved providing designs that met specific criteria and codes, the payment terms were not truly contingent on the scientific success of the research, thereby classifying the work as funded. Conversely, in Smith v. Commissioner and System Technologies, Inc. v. Commissioner, the Tax Court denied the Internal Revenue Service’s motions for summary judgment, allowing the taxpayers’ claims to proceed because their client contracts specifically tied financial payment to the successful completion of highly technical design milestones, which the court agreed could imply a true contingency on success. Sioux Falls contract research firms, architects, and custom manufacturers must audit their client service agreements to ensure they are structured as fixed-price contracts where the local manufacturer bears the total economic risk of technical failure, thereby protecting their legal right to claim the credit.

Internal Use Software Regulations and the High Threshold of Innovation

The Internal Revenue Service finalized comprehensive regulations regarding internal use software in 2016 through Treasury Decision 9786. These regulations represent a critical piece of tax administration guidance for the booming financial technology and banking sectors in Sioux Falls. The regulations clarify that software is not considered internal use if it is developed to be commercially sold, leased, or licensed, or if it is developed to enable a taxpayer to interact directly with third parties, such as customers or vendors.

However, if a taxpayer develops software primarily for internal administrative functions, such as financial management, human resources, or backend support services, the software must meet the High Threshold of Innovation test in addition to the standard four-part test. This additional test requires the taxpayer to prove that the software represents a significant and highly innovative leap in technology, that the development effort entails substantial economic risk, and that the software cannot be purchased commercially off the shelf.

IRS Audit Techniques Guides and the Consistency Requirement

To ensure uniform enforcement of the tax code, the Internal Revenue Service publishes Audit Techniques Guides tailored to specific industries, providing examiners with detailed instructions on how to scrutinize claims. For Sioux Falls biomedical firms, the Audit Techniques Guide for the Pharmaceutical Industry and the related Large and Mid-Size Business Directive provide a framework for examining the complex stages of drug discovery and clinical trials. For software developers, the Audit Guidelines on the Application of the Process of Experimentation for All Software categorizes development activities into high, moderate, and low risk profiles, guiding auditors to focus on activities that merely adapt existing software rather than creating fundamentally new technological information.

A paramount administrative hurdle for legacy corporations is the consistency requirement mandated by Section 41(c)(5)(A). This rule requires that the qualified research expenses and gross receipts used to compute a taxpayer’s historical fixed-base percentage must be determined on a basis that is entirely consistent with the determination of qualified research expenses in the current credit year. Because the research credit is designed to reward incremental increases in research spending, a taxpayer must prove an increase relative to a base period, which for many established companies stretches back to the years 1984 through 1988. If a Sioux Falls meatpacking company claims a new type of expense, such as complex software engineering, as a qualified research expense in 2025, it must comb through its historical archives and adjust its 1980s base period to reflect any similar expenses incurred during that era. Taxpayers are required to establish these base year expenses through an analysis of historical records and cannot simply rely on the mathematical extrapolation of recent data.

The burden of proof rests entirely on the taxpayer. The Internal Revenue Service has formalized this intense expectation of substantiation with the introduction of new, highly detailed reporting requirements on Form 6765, effective for tax year 2024 and beyond. Sioux Falls businesses must now analyze and document the specific business components driving the credit, the specific scientific uncertainties faced, and the precise process of experimentation utilized directly on their tax returns to avoid severe penalties.

The State of South Dakota operates under a unique fiscal structure that deeply influences corporate strategy regarding research and development. Unlike the vast majority of jurisdictions in the United States, South Dakota is one of the few states that does not levy a corporate income tax or a personal income tax. Consequently, the state inherently does not offer a state-level income tax credit for research and development, as there is no income tax liability against which such a credit could be mathematically applied.

For Sioux Falls-based startups and established corporations alike, this lack of a state income tax actually presents a significant administrative advantage. It allows for a seamless application of federal tax credits without the complex necessity of performing state-level apportionment calculations, offset limitations, or navigating conflicting state tax definitions. For qualified small businesses and early-stage startups operating in the Sioux Falls technology or biomedical sectors, the federal tax code provides an alternative mechanism to utilize the research credit. The Protecting Americans from Tax Hikes Act allows eligible startups with less than five million dollars in gross receipts, and no gross receipts for any taxable year preceding the five-year period ending with the credit year, to apply up to five hundred thousand dollars of their federal research and development credit annually directly against their federal payroll tax liabilities, providing immediate, critical cash flow preservation.

While a direct state research and development income tax credit is absent, the South Dakota Department of Revenue and the Governor’s Office of Economic Development offer a suite of highly aggressive alternative tax incentives. These state programs specifically target the massive capital expenditure burdens associated with building the physical infrastructure required to conduct advanced research, development, and high-tech manufacturing within the state’s borders.

Navigating the South Dakota Sales and Use Tax System

To understand the value of South Dakota’s economic development programs, one must understand the state’s reliance on transactional taxes. The State of South Dakota relies heavily upon sales and use tax revenues to fund public services. The state imposes a base sales and use tax rate of 4.2 percent on the gross receipts of all retail sales, including the sale, lease, or rental of tangible personal property, products transferred electronically, and the sale of services. Furthermore, municipalities impose their own localized sales and use taxes ranging from one to two percent, and specific jurisdictions impose additional levies, such as the one percent Sioux Falls lodging tax and various municipal gross receipts taxes.

When a Sioux Falls food processing plant, advanced manufacturer, or clinical research facility designs an experimental pilot model or constructs a new testing laboratory, they must purchase highly specialized robotics, advanced sensors, and expensive structural materials. Under normal circumstances, these capital purchases would be subject to the combined state and municipal sales and use tax rates, creating a significant upfront financial burden on the innovation process.

The Manufacturing Equipment Sales Tax Extension

To alleviate this burden, the South Dakota legislature enacted South Dakota Codified Law 10-45-100, which provides a critical extension for remitting sales and use tax on manufacturing equipment. Any manufacturing, fabricating, or processing business may apply for and obtain a delay pay permit. This program provides for a six-month extension to pay the sales or use tax on equipment or machinery purchased for direct use in the business, provided the project cost exceeds twenty thousand dollars and the application is filed thirty days prior to the commencement of the project. For a Sioux Falls engineering firm purchasing a million-dollar computer numerical control machine to fabricate experimental aerospace components, this extension provides immediate, tangible cash flow relief during the critical early phases of the research and development lifecycle.

The Governor’s Office of Economic Development Reinvestment Payment Program

For larger, transformational corporate research facilities, the Governor’s Office of Economic Development administers the Reinvestment Payment Program, which serves as the state’s premier economic incentive for massive infrastructure investments. The Board of Economic Development may provide reinvestment payments to assist companies in offsetting the massive upfront costs associated with relocating operations, expanding existing facilities, or implementing major equipment upgrades in South Dakota.

The program allows project owners to receive a direct reinvestment payment that effectively acts as a comprehensive refund, not to exceed the total South Dakota sales and use tax paid on the eligible project costs. To qualify for this highly competitive, discretionary program, the project must involve new or expanded facilities with total project costs in excess of twenty million dollars, or involve specialized equipment upgrades with project costs in excess of two million dollars. For example, when a massive food processing conglomerate executes a one billion, three hundred million dollar facility relocation in Sioux Falls, the Reinvestment Payment Program provides a mechanism to legally recover the millions of dollars in sales and use taxes paid on the construction materials and automated robotic processing equipment required to build the state-of-the-art facility.

This creates a powerful, integrated dual-axis financial strategy for highly innovative enterprises operating in Sioux Falls. On the state axis, the enterprise utilizes the Reinvestment Payment Program and the Delay Pay Permit to systematically eliminate or completely refund the sales and use tax burden associated with purchasing the physical machinery, construction materials, and tangible assets required to build the research and testing environment. Simultaneously, on the federal axis, the enterprise meticulously documents its scientific processes to claim the Internal Revenue Code Section 41 federal research and development tax credit on the human capital, specifically the W-2 wages of the scientists and engineers, and the consumable supplies utilized to operate that machinery during the active experimental phase.

Sales Tax Exemptions for Governmental and Exempt Entities

Finally, South Dakota law provides absolute sales and use tax exemptions for specific types of entities that conduct significant amounts of foundational research. Under South Dakota Codified Law 10-45-10, the sale of products and services to United States government agencies, the State of South Dakota, public or municipal corporations, Indian tribes, and public schools including state-supported universities and technical institutes are completely exempt from taxation. Furthermore, non-profit charitable organizations that have been recognized as exempt organizations under Section 501(c)(3) of the Internal Revenue Code, such as specific non-profit biomedical research institutes or designated relief agencies, can apply to the Department of Revenue for exempt entity status. When researchers at state-supported institutions, such as the faculty of the University of South Dakota’s medical programs operating in Sioux Falls, or non-profit clinical trial networks purchase highly expensive electron microscopes, chemical reagents, or biological samples for use in their laboratories, these transactions are entirely exempt from state and municipal sales taxes, further driving the efficiency of the region’s biomedical innovation engine.

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.