08 May 2025 Arkansas enacts economic nexus and market-based sourcing provisions, among other corporate income tax changes
On April 16, 2025, Arkansas Governor Sarah Huckabee Sanders signed into law SB 567 (Act 719), which updates Arkansas statutes to align with the most recent provisions of Article IV of the Multistate Tax Compact (MTC), (the Uniform Division of Income for Tax Purposes Act), most notably adopting market-based sourcing for receipts other than from the sale of tangible personal property. SB 567 also adopts a new bright-line economic nexus provision, incorporates the MTC "apportionable" and "nonapportionable" income definitions, modifies alternative apportionment provisions, adopts a throwout rule, and excludes certain hedging and cash or securities transactions from the definition of receipts. The changes take effect for tax years beginning on and after January 1, 2026.1 SB 567 adopts a bright-line economic nexus provision under which a nonresident corporation or partnership lacking physical presence in Arkansas will be subject to tax if its Arkansas receipts exceed $250,000 for the current or the immediately preceding tax year. Taxpayers that meet the bright-line nexus threshold will be subject to tax starting no earlier than the tax year beginning on or after January 1, 2026, even if such receipts threshold is met for the immediately preceding tax year, occurring during 2025. SB 567 repeals the state's modified cost of performance method for sourcing receipts other than from the sale of tangible personal property and enacts a market-based sourcing method. Under this new method, receipts from sales other than from the sale of tangible personal property are sourced to Arkansas if the taxpayer's market for the sales is in Arkansas. The amendment includes the following examples to illustrate when the taxpayer's market is in Arkansas:
Concerning receipts from sales other than the sales of tangible personal property, Arkansas will allow for the state or states of assignment to be reasonably approximated when such location(s) cannot otherwise be determined under the previously mentioned methodologies. SB 567 does not amend Arkansas' current throwback rule, applicable to the sale of tangible personal property, when the property is shipped from a location within Arkansas and the taxpayer is not taxable in the state of the purchaser. The throwback rule will continue to phase out, where no sales of tangible personal property would be thrown back to the Arkansas numerator beginning on or after January 1, 2030. SB 567 introduces the following four scenarios in which certain receipts should be excluded from the Arkansas numerator and denominator of the receipts factor:
For tax years beginning on or after January 1, 2026 but before December 31, 2035, taxpayers principally engaged in the sale of telecommunications services, mobile telecommunications services, internet access services, cable television services, community antenna television services, or direct-to-home satellite television programming services, or a combination of such services, may elect to source sales, other than the sale of tangible personal property, using the cost of performance method. The election should be made on the taxpayer's return for the first year in which the taxpayer is eligible for the election. Once made, the election cannot be changed without written approval from the Secretary of the Arkansas Department of Finance and Administration (the Department). SB 567 does not change Arkansas' historic rules related to allocating or apportioning business activities from railroads or public utilities. Additionally, SB 567 does not amend the apportionment and allocation provisions applicable to financial institutions, which is separately governed by Ark. Code Ann. Section 25-51-1401. SB 567 amends Arkansas' alternative apportionment provisions to require the party petitioning for, or the Department requiring, the use of any alternative methods to effectuate an equitable allocation and apportionment of income to prove 1) Arkansas' allocation and apportionment provisions do not fairly represent the extent of the taxpayer's business activity in Arkansas, and 2) the alternative method being requested to allocate or apportion such income is reasonable. The same burden of proof applies whether the taxpayer is petitioning for, or if the Department is requiring, the use of any alternative methods, except in circumstances in which the Department demonstrates that in any two of the previous five tax years, the taxpayer used inconsistent allocation or apportionment methods. In those circumstances, the Department will not bear the burden of proof in imposing a different allocation or apportionment method. The law also allows the Department to establish rules for determining alternative allocation and apportionment methods when the statutory provisions do not fairly represent the extent of business activity in the state for a particular industry or in a particular transaction or activity. Such rules are required to be applied uniformly but a taxpayer may petition for, or the Department may require, an adjustment. Further, if the Department requires a taxpayer to use an alternative allocation or apportionment method, civil or criminal penalties should not be imposed on the taxpayer with regard to any additional taxes due that are attributable to the taxpayer's reasonable reliance on Arkansas' allocation and apportionment provisions. SB 567 replaces definitions of "business" and "nonbusiness" income with the MTC's definitions of "apportionable" and "nonapportionable" income. Apportionable income includes income from: (1) transactions and activity in the regular course of the taxpayer's trade or business; and (2) tangible or intangible property if the acquisition, management, employment, development or disposition of the property is related to the operation of the taxpayer's trade or business. Apportionable income also includes income that would be allocable to Arkansas under US Constitutional law but is instead apportioned to Arkansas under Arkansas law. Arkansas' previous definition of business income required income from tangible or intangible property to be considered apportionable business income only when the acquisition, management, and disposition of the property constituted integral parts of the taxpayer's regular trade or business operations.2 The amended law includes two additional factors (the employment or development of the property), replaces the "and" conjugation with "or" and removes the reference to the taxpayer's "regular trade or business" and now uses a more expansive reference to "the operation of the taxpayer's trade or business." Such seemingly minor wording changes have the effect of greatly expanding the application of the business income (now "apportionable income") definition. The definition of "receipts" is modified to mean all gross receipts not allocated under Ark. Code Ann. Section 26-5-101, Article IV, (4) — (8) that are from transactions and activity in the regular course of the taxpayer's trade or business. As previously noted, the law excludes from the definition of "receipts," receipts derived from hedging transactions and from the maturity, redemption, sale, exchange, loan or other disposition of cash or securities. SB 567 modifies the definition of "taxable in another state" for allocation and apportionment purposes. Similar to the prior law, a taxpayer is taxable in another state if they are subject to a net income tax or a franchise tax measured by net income. Under the modified law, a taxpayer will also be taxable in another state if:
or
For financial statement purposes, the effects of SB 567 should be accounted for in a company's interim period, which includes April 16, 2025, the date it was signed into law. With the enactment of SB 567, Arkansas is now among the states that have moved away from using a cost of performance method of sourcing receipts to predominately using market-based sourcing coupled with a bright-line economic nexus threshold. Arkansas had historically adopted the use of a single sales factor apportionment method, which took effect in 2021. Taxpayers with activities or customers within Arkansas should review these changes and consider modeling the potential tax implications and determining whether potential new Arkansas filing obligations may be required due to the new economic nexus provisions and market-based sourcing requirements. Although future regulatory guidance is anticipated, taxpayers engaged in complex service or intangible transactions should consider which potential allocation and apportionment methods would be reasonable approximations to mitigate potential throwout implications. When determining and utilizing allocation and apportionment methodologies, taxpayers should keep in mind that using inconsistent methodologies going forward will reduce the Department's burden of proof when considering potential discretionary alternative allocation and apportionment adjustments. Taxpayers considering potential nonbusiness income or expense positions after the recent taxpayer win in the Murphy Oil USA, Inc. case4 should be cautious as the amendments to the definitions of business income (now "apportionable income") have been greatly expanded such that qualifying items of income or expense as nonbusiness (now "nonapportionable") will be much more challenging. Lastly, telecommunications taxpayers should consider the available election to continue utilizing the cost of performance sourcing methodology as such election is required to be made within the first year the taxpayer is eligible, after the January 1, 2026 effective date.
Document ID: 2025-1011 | ||||||||
