Arkansas Adopts Market-based Sourcing for Services and Intangibles Receipts, Makes Other Income Tax Changes

By James W. O’Brien

Arkansas Governor Sarah Huckabee Sanders has signed legislation revising the law on the apportionment of corporation income tax for multistate businesses. The legislation changes the method for sourcing receipts for services and intangibles from “cost of performance” to “market-based” sourcing. In addition, the legislation offers guidance for using an alternative apportionment method. The legislation also excludes the income of a nonresident corporation or partnership from income tax if the business has no physical presence in Arkansas and its Arkansas receipts for the preceding year were $250,000 or less. (L. 2025, S567 (Act 719, effective for tax years beginning on and after 01/01/2026.)

Background.

Arkansas adopted the Multistate Tax Compact (Compact) in 1961 and is a member state of the Multistate Tax Commission (Commission). The Commission amended the Compact in 2014 to: (1) change the method for sourcing of receipts for services and intangibles from “cost of performance” to “market-based” sourcing; (2) change all references to “business income” to “apportionable income”; (3) change all references to the “sales factor” to the “receipts factor”; and (4) clarify the rules concerning alternative apportionment methods. The legislation adopts these changes to bring Arkansas law more in line with the Compact.

Adoption of market-based sourcing.

The legislation adopts market-based sourcing for sales other than sales of tangible personal property. In determining its corporation income tax liability, a multi-state business must source its sales of services and other intangibles among the states where it operates. Currently, Arkansas uses a method called “cost of performance” to source these sales, which focuses on where a business incurs costs rather than the market in which it makes sales. The legislation introduces market-based sourcing as the primary method for sourcing income from sales other than tangible personal property. Market-based sourcing focuses on the market in which a business makes its sales.

Special election for certain service providers: The legislation allows providers of telecommunications service, internet access service, cable television service, community antenna television service, direct-to-home satellite television programming service, or a combination of these services, to elect to use the cost of performance sourcing method until December 31, 2035. This election is made on a taxpayer’s return for the first tax year for which the taxpayer is eligible for the election, and, once made, this election cannot be changed for subsequent years without written approval.

Alternative apportionment.

Arkansas law and the Compact allow the Department of Finance and Administration to use an alternative apportionment method to calculate a taxpayer’s corporation income tax if the apportionment provided by statute does not fairly represent the taxpayer’s business in Arkansas. The legislation provides guidance for using alternative apportionment, including requiring equal application of rules, standards of proof, and anti-penalty provisions.

Establishment of receipts-based income tax reporting threshold.

The legislation excludes the income of a non-resident corporation or partnership from income tax if the business has no physical presence in Arkansas and its Arkansas receipts for the preceding year were $250,000 or less.