# Title 81 — Tax Commissioner

## Article 81-03 — Income Taxes and Privilege Taxes Based on Income

## Chapter 81-03-01.1 — General Considerations

Subdivisions
Additional Tax Found Due Through Audit or Mathematical Verification [Repealed]
### § 81-03-01.1-01. Reaudit and reassessment.

Repealed effective May 1, 1991.
### § 81-03-01.1-02. Taxpayer may be required to file a pro forma federal income tax return.

1. A taxpayer who does not have a federal income tax filing requirement but who has income
taxable in this state and is, therefore, required to file a North Dakota income tax return, must
prepare a pro forma federal income tax or information return to determine a starting point for
the North Dakota tax return. The pro forma federal income tax or information return must be
filed with the state tax commissioner together with the taxpayer's North Dakota income tax
return.
2. "Pro forma federal income tax return" for purposes of this article and North Dakota Century
Code chapter 57-38 means a federal income tax return prepared in accordance with the
provisions of the Internal Revenue Code of 1954 as amended and effective during the period
covered in the tax return. The tax return must contain complete and accurate information on
the taxpayer's income and deductions and must be prepared as though the taxpayer were
required to file it with the internal revenue service.
History: Effective July 1, 1985.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 57-38-30.3, 57-38-31, 57-38-32, 57-38-34, 57-38-42
### § 81-03-01.1-03. Interest on obligations of the United States and of the states and their

political subdivisions.
Interest received from obligations of the United States or of its possessions and from this state or
its political subdivisions is not subject to income tax imposed by this state.
Interest received from obligations of any other state or its political subdivisions is subject to income
tax imposed by this state for a taxpayer who files an individual income tax return form ND-2 or form 37,
but is not subject to income tax imposed by this state for a taxpayer who files an individual income tax
return form ND-1 or form 37-S.
"Obligations" as used in this section means only those obligations, such as municipal or other
government bonds, arising out of the borrowing power of the federal government or a state government
or its political subdivisions.

History: Effective July 1, 1985; amended effective June 1, 2002.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 57-38-01.2, 57-38-01.3, 57-38-30.3
### § 81-03-01.1-04. Computation of interest on refunds.

Repealed effective March 1, 1990.
### § 81-03-01.1-05. Computation of interest on an extension, a late payment, underpayment, and

additional tax found due through audit or mathematical verification.
Repealed effective September 1, 1997.
### § 81-03-01.1-06. Income tax exemption for new and expanding business.

1. When a taxpayer is granted an exemption from income tax pursuant to North Dakota Century
Code chapter 40-57.1, the exemption must be prorated, when necessary, in the first and last
years in order to exempt income for a period not to exceed sixty months.
2. The amount of the yearly income tax exemption for new and expanding business is limited to
income earned from the new business or expansion in each tax year that was included in
federal taxable income.
3. When the project operator is a passthrough entity, the income tax exemption flows through to
the partners, shareholders, and members.
4. The conditions for reapplication set forth in North Dakota Century Code chapter 40-57.1 apply
to the income tax exemption. A project operator must reapply for the income tax exemption if
these conditions are met.
5. The office of the state tax commissioner shall be notified of any changes in ownership of a
new industry which has been granted an income tax exemption. A change of ownership
includes transfer of a partnership interest, a stock interest in a subchapter S corporation, or a
membership in a limited liability company.
6. A taxpayer with both exempt and nonexempt activities shall prorate its income pursuant to the
provisions of North Dakota Century Code chapter 57-38.1.
a. If the taxpayer has only North Dakota activity, exempt income must be determined by
multiplying income from all activities, exempt and nonexempt, by a fraction, the
numerator of which is the sum of its exempt property, sales, and payroll factors and the
denominator of which is three.
Total North Dakota
Facts: Exempt Plant Other North Dakota Activity Activity
Property $5,000,000 $10,000,000 $15,000,000
Payroll $750,000 $1,000,000 $1,750,000
Sales $20,000,000 $35,000,000 $55,000,000
Apportionable $50,000,000
income
Determine North Dakota exempt income:

(1) Compute apportionment factor of exempt
activities.
Property factor = $5,000,000/$15,000,000 = .333333
Payroll factor = $750,000/$1,750,000 = .428571
Sales factor = $20,000,000/$55,000,000 = .363636
1.125540/3 = .375180
(2) Compute exempt income.
Apportionable income $50,000,000
Apportionment factor of exempt activities .375180
Exempt income $18,759,000
b. If the taxpayer has multistate business activity, North Dakota income must first be
determined by including all exempt and nonexempt activity in apportionable income and
in the apportionment factor. North Dakota exempt income is then determined as in
subdivision a.
Multistate corporation
Facts: Utilize the same facts in the prior example, and add:
Total activity within and without North Dakota
Property $100,000,000
Payroll $5,000,000
Sales $200,000,000
Determine North Dakota exempt income:
(1) Compute the North Dakota apportionment factor, including
tax-exempt activity.
Property factor = $15,000,000/$100,000,000 = .150000
Payroll factor = $1,750,000/$5,000,000 = .350000
Sales factor = $55,000,000/$200,000,000 = .275000
.775000/3 = .258333
(2) Compute the apportionment factor of the North Dakota exempt
activities. For this example, the computation would be the same
as that in paragraph 1 of subdivision a and would yield a factor
of .375180.
(3) Compute exempt income.
Apportionable income $50,000,000
North Dakota apportionment factor .258333
Income apportioned to North $12,916,650
Dakota
Apportionment factor of exempt .375180
activities

Exempt income $4,846,069
c. When a partial exemption on a project or plant has been granted, the percentage of the
project's nonexempt property, payroll, and sales would be added to the other North
Dakota taxable activity's factors. For instance, a twenty percent exemption would mean
eighty percent of the project's property, payroll, and sales would be added to the other
North Dakota factors creating a taxable activity.
d. When a company has only one operating facility which has been granted a partial
exemption, North Dakota taxable income shall be computed based on total income of the
operation, and a percentage of the income which is equal to the percentage of the
exemption shall be deducted from the total.
e. For determining the apportionment factor of exempt activities in subdivision b, the
weighting of the three factors must be the same weighting as used to determine the
apportionment factor for the taxable year.
History: Effective March 1, 1990; amended effective June 1, 1992; August 1, 1994; April 1, 1995;
July 1, 1998; June 1, 2002; July 1, 2016.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 40-57.1, 57-38.1
### § 81-03-01.1-07. Venture capital corporation.

Repealed effective July 1, 2016.
### § 81-03-01.1-08. Tax credits.

Tax 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.
If there is more than one tax credit having the same priority, the tax credits must be allowed in the order
that is most beneficial to the taxpayer.
History: Effective May 1, 1991.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 57-38-01.8, 57-38-01.16, 57-38-01.17, 57-38-30.1, 57-38-30.4, 57-38-30.5,
57-38.1-07
### § 81-03-01.1-09. Requirement to report federal changes.

1. The following provisions are applicable for purposes of interpreting subsection 1 of North
Dakota Century Code section 57-38-34.4:
a. If a change or correction to federal taxable income or federal income tax liability is
initiated by the United States internal revenue service, the change or correction must be
reported to the commissioner even if it does not result in an underpayment or an
overpayment of federal income tax.
b. "Final determination" means a decision, action, or date from which no further action is
taken by the taxpayer or the United States internal revenue service to resolve any

dispute relating to the change or correction which was made to the taxpayer's federal
taxable income or federal income tax liability. A final determination has occurred if any of
the following circumstances apply:
(1) A taxpayer receives a notice or other correspondence from the United States
internal revenue service which makes an adjustment to the taxpayer's federal
taxable income based on:
(a) A mathematical or clerical error.
(b) Any other change or correction if the taxpayer has paid or arranged to pay the
underpayment of federal income tax, or if the United States internal revenue
service has credited or refunded to the taxpayer an overpayment of federal
income tax. A final determination does not occur, however, if a taxpayer pays
the tax and then files a claim for credit or refund with the United States internal
revenue service.
(2) A taxpayer waives the restrictions on assessment and collection of all or any part of
an underpayment of federal income tax by signing a federal form 870 or any other
form prescribed for this purpose by the United States internal revenue service. A
final determination does not occur with respect to any part of the underpayment
which is not covered by the waiver. If the signature of an authorized representative
of the United States internal revenue service is required to execute this waiver, the
date of final determination is when the taxpayer receives notice of the signing. A
final determination does not occur, however, if a taxpayer pays the tax and then files
a claim for credit or refund with the United States internal revenue service.
(3) A taxpayer receives a federal statutory notice of deficiency and does not timely file a
petition with the United States tax court for redetermination of the assessed
underpayment of federal income tax. The date of final determination is when the
time period within which to file the petition expires. A final determination does not
occur, however, if a taxpayer pays the tax and then files a claim for credit or refund
with the United States internal revenue service.
(4) A closing agreement is executed pursuant to United States Internal Revenue Code
section 7121 [26 U.S.C. 7121]. The date of final determination is when the taxpayer
receives notice of the signing of the closing agreement by an authorized
representative of the United States commissioner of internal revenue.
(5) A federal court of law issues a decision which is not appealed or is not subject to
appeal.
(6) A federal court of law approves a voluntary agreement stipulating final disposition of
a case.
(7) If a taxpayer files a claim for credit or refund of all or any part of an underpayment of
federal income tax, as described in paragraph 1, 2, or 3, a final determination has
occurred if any of the following circumstances apply:
(a) The taxpayer receives notice of the disallowance of the claim for credit or
refund from the United States internal revenue service and the taxpayer does
not appeal the disallowance or file a suit for refund.
(b) The taxpayer receives notice of the allowance of the claim for credit or refund
from the United States internal revenue service.

(c) Receipt of the refund from the United States internal revenue service, if no
prior notice is received.
(d) The provisions of paragraph 4, 5, or 6 apply.
2. The following provisions are applicable for purposes of interpreting subsection 2 of North
Dakota Century Code section 57-38-34.4:
a. If a taxpayer initiates the filing of the amended federal income tax return, the taxpayer
must also file an amended state income tax return even if it does not result in payment of
additional tax.
b. To request a credit or refund of tax, a taxpayer must file an amended state income tax
return either within the time period prescribed in subsection 1 of North Dakota Century
Code section 57-38-40 or within the ninety-day time period prescribed in subsection 2 of
North Dakota Century Code section 57-38-34.4.
3. a. A change or correction to federal taxable income or federal income tax liability must be
reported on an amended state income tax return except as provided in subdivision b.
b. An alternative report may be elected to report an increase in North Dakota tax liability as
a result of a change or correction to federal taxable income or federal income tax liability.
The alternative report must contain the following:
(1) A statement that the information is submitted in lieu of an amended return pursuant
to subdivision b of subsection 3 of section 81-03-01.1-09.
(2) A description of the change or correction to federal taxable income or federal tax
liability and the effect which the change or correction has on the statutory
adjustments provided for in North Dakota Century Code sections 57-38-01.2 and
57-38-01.3.
(3) An allocation or apportionment of the change to North Dakota tax liability and a
computation of the adjusted North Dakota tax liability.
This alternative report is subject to audit and assessment as if it were an amended
return.
c. When reporting a change or correction to federal taxable income or federal income tax
liability pursuant to subsection 1 of North Dakota Century Code section 57-38-34.4, a
taxpayer must also submit the following items:
(1) A copy of the applicable federal waivers.
(2) A copy of the documentation evidencing that a final determination has been made
with respect to the federal change or correction.
4. A change or correction to federal taxable income or federal income tax liability that affects a
year other than the year in which the change or correction occurs must also be reported in
accordance with subsection 3.
History: Effective November 1, 1991; amended effective November 1, 1992; June 1, 2002.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 57-38-34.4

### § 81-03-01.1-10. Employers required to file information returns.

Employers are subject to subsection 1 of North Dakota Century Code section 57-38-42 except with
respect to the payment of wages to an employee.
History: Effective November 1, 1992.
General Authority: NDCC 57-38-56
Law Implemented: NDCC 57-38-42
