Did you know that North Dakota produces almost 14 times as many sunflowers as the Sunflower State? If endless fields of sunflowers doesn’t make you want to move your company to the Peace Garden State, maybe the New or Expanding Business Income Tax Exemption will lure you to the Badlands. Here are four things you should know about North Dakota’s one-of-a-kind tax exemption.
1. A variety of industries have benefitted from the exemption.
Since its inception in 1969, North Dakota has granted taxpayers millions of dollars in tax exemptions under the New or Expanding Business Income Tax Exemption, according to information provided by the North Dakota Office of State Tax Commissioner.
Exemption amounts for individuals from 2006 to 2015 that are publicly available come to over $3.5 million dollars, claimed on 305 tax returns. Those amounts do not include some exemptions because of confidentiality requirements.
Recipients of the exemption include a software manufacturer, an ATM manufacturer, a pasta manufacturer, a defense contractor, a steel company, a large-scale bakery, a corn-based ethanol plant, a fiber optics producer and a truck accessories store. Eligibility is limited to a new business or to an existing business that expands its operations in North Dakota.
2. Your business may be a “New or Expanding Business.”
Eligible businesses receive an exemption from North Dakota income taxes for five years. To qualify a business must:
• engage in either a new or expanding primary sector business, or tourism;
• have not received exemption from property taxes under the increment financing statute; and
• be able to demonstrate that all state or local tax obligations and tax liens of record for delinquent property, income, income withholding, sales or use taxes owed to the state or municipality have been satisfied in full.
“The main criteria for a business to qualify is that it must be a ‘primary sector’ or tourism business. An in-state manufacturer or a business engaged in a value-added process would be a typical primary business,” Matt Peyerl, Associate Director of Tax Administration at the North Dakota Office of State Tax Commissioner, told Bloomberg BNA.
"Primary sector" refers to a business that adds value to a product, process, or service that produces new wealth in North Dakota, according to the website of the Office of State Tax Commissioner. “Tourism” refers to a tourism-related business including recreation, historical and cultural events, guide services, and unique lodging and food services which serve as destination attractions.
3. But … not everyone makes the cut.
“What makes the statute unique is that it allows the State Board of Equalization to make the determination of qualification,” said James Maring, attorney at Serkland Law Firm’s Fargo, N. D., office and author of the Bloomberg BNA North Dakota Corporate Income Tax Navigator (subscription required).
The Department of Commerce Division of Economic Development and Finance reviews applications and makes a recommendation to the State Board of Equalization, which makes the final determination of approval or denial to grant the exemption. Twelve taxpayers were denied the exemption over the past 10 years for unspecified reasons, according to documents provided to Bloomberg BNA by the Office of State Tax Commissioner.
“The North Dakota Department of Commerce makes the determination for whether a business meets [the] criteria,” said Peyerl. “If the business meets the criteria and there are no extraordinary considerations to indicate an exemption shouldn’t be allowed, an exemption is granted if the stated criteria are met and complied with.”
4. Taxpayers utilizing the exemption must notify competitors.
Maring also pointed out North Dakota’s unusual requirement of having companies provide notice to competitors. Companies must notify self-identified competition that they have applied for and have utilized the exemption.
“The application asks the company to list any competitors engaged in a similar business. Notification of competitors is generally accomplished with a public notice in various newspapers,” explained Peyerl. The Office of State Tax Commissioner indicated that some competitors receive written notification as well.
“Based on my review of the statute, it appears the ideal client would be someone in the tourism business that has something unique to offer to tourists in North Dakota that does not already exist. This would clearly meet the requirements of the statute and would likely reduce any chance of being denied due to unfair competition concerns,” said Maring, who has not used the statute for clients.
Maybe your North Dakota tourism business could take tourists for rides on the Enchanted Highway, 32 miles of some of the world’s largest scrap metal sculptures. Historical tourists will want to learn about Sakagawea and Sitting Bull’s gravesite. Is the North Dakota New or Expanding Business Income Tax Exemption just as big of an attraction to your business? Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.
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