The government-funded Callaghan Innovation is under fire for spending more than $300,000 on entertainment in the 2015/2016 financial year.
More than $2000 was spent on an evening with drag queens at Auckland's Caluzzi cabaret bar, known as "sluts with nuts".
Jordan Williams of the Taxpayers' Union said this was unacceptable.
"You don't pay your taxes for a government agency to go out and spend it on drag queens."
The Union said it's working through tens of thousands of transactions that make up this $300,000, and that this is "just one of the first ones we've found that's totally inappropriate".
It obtained the figures under the Official Information Act.
Mr Williams said he's got nothing against drag queens, but it's "just one of many blatant abuses of taxpayer money by the Crown Agency".
"Callaghan Innovation clearly have a culture of entitlement and going out on the government credit card," he said. "They need to be reined in."
The Minister responsible, Dr Megan Woods, said it's not good enough.
"I made it really clear this was below my level of expectation as responsible minister," she told Newshub.
"I received assurances from Callaghan that there had been a change in policy setting and this kind of expenditure couldn't happen currently".
Callaghan Innovation boasts 300 researchers, engineers, scientists, technologists, designers and advisors. Its purpose is stated as helping New Zealand businesses through technology.
In a statement Callaghan told Newshub:
"The total spending is… not unreasonable for a client-facing organisation of our size. However, there were a few cases of spending… which were not appropriate.
"Since then we have tightened relevant policies to ensure work-related spending by staff is modest and appropriate for the public sector."
"For $300,000 you could take the whole of Invercargill out for a barbecue," Mr Williams said.
Callaghan Innovation initially insisted on Wednesday that the $300,000 included travel and accommodation, but later apologised to Newshub, admitting it only related to staff and customer entertainment, meals and drinks.