Arkansas Shifts to Market-Based Sourcing for Some Sales, Adds Factor-Based Nexus Standard

On April 16, Arkansas Gov. Sarah Huckabee Sanders signed S.B. 567 (Act 719) to amend the state’s sourcing rules for receipts from sales of services and intangible property and install a factor-based nexus standard for income of nonresident corporations or partnerships with no physical presence in Arkansas.

The changes are effective for tax years beginning on and after January 1, 2026.

New Sourcing for Income From Sales of Other Than Tangible Personal Property

Before changing to a market-based approach for sales of services and intangible property, Arkansas sourced such sales using the cost-of-performance (COP) method. Under COP, receipts are sourced to Arkansas if the income-producing activities, measured by costs, are performed in Arkansas. 

With the passage of S.B. 567, Arkansas receipts will now be sourced there to the extent the services are delivered to a location in Arkansas. Intangible property that is rented, leased, licensed, or sold generally will be sourced to Arkansas based on the extent to which it is used in the state.

S.B. 567 modifies Arkansas sourcing language in two important ways. First, it replaces the terms “business income” and “nonbusiness income” with “apportionable income” and “nonapportionable income.” It also replaces the word “sales” with “receipts.” 

The legislation includes a throw-out rule for receipts from the sale of services or intangibles. If Arkansas’s sourcing rule assigns the receipts to a state where the taxpayer is not taxable or if the state of assignment cannot be determined or reasonably approximated, then the receipts must be excluded from the denominator of the receipts factor.

There is an exception for taxpayers engaged in selling some services, such as those for telecommunications and television. The legislation allows those companies to elect to use COP for receipts from sales of other than tangible personal property.

S.B. 567 does not affect Arkansas’s phase out of its throwback rule by a percentage reduction of sales included in the numerator each year. The throwback rule is fully eliminated for tax years beginning on or after January 1, 2030.

Factor-Based Nexus Standard

Arkansas has not historically had a bright-line sales threshold that created nexus in the state. Under the new standard, nonresident corporations or partnerships with no physical presence in Arkansas will be subject to income tax when they have Arkansas receipts of at least $250,000 in the current or preceding year.