Arkansas adopts market-based sourcing and corporate nexus threshold

Executive summary

On April 16, 2025, Arkansas Gov. Sarah Huckabee Sanders signed Senate Bill 567, modernizing the state’s corporate income tax by amending provisions related to business income and adopting market-based sourcing to replace the current cost-of-performance sourcing methodology. The bill also follows a recent trend of states adopting economic corporate income tax nexus by establishing a $250,000 receipts threshold.

Market-based sourcing and corporate income tax changes

Effective for tax years beginning on and after Jan. 1, 2026, Senate Bill 567 adopts market-based sourcing for sales other than sales of tangible personal property for purposes of the corporate income tax receipts factor. The bill allows providers of telecommunications services, internet services and some television services to elect to use the cost-of-performance sourcing method until Dec. 31, 2035. The election cannot be later changed without written approval of the department.

The legislation also targets corporate tax modernization by adopting current references in the 2014 amended Article IV of the Multistate Tax Compact. These changes include replacing provisions related to ‘business income’ with ‘apportionable income’ and ‘receipts factor’ to ‘sales factor,’ as well as adopting clarifying rules addressing how either taxpayers or the state can utilize alternative apportionment.

Economic corporate income tax nexus threshold

Effective for tax years beginning on and after Jan. 1, 2026, Senate Bill 567 adopts an economic nexus threshold providing that non-resident corporations or partnerships without a physical presence in the state will be subject to the corporate income tax if Arkansas-sourced receipts exceed $250,000 annually.

Takeaways

The corporate income tax modernization is effective for tax years beginning on and after Jan. 1, 2026, allowing taxpayers additional time to consider the new provisions and the Arkansas Department of Finance and Administration to adopt corresponding regulations and system changes. Taxpayers that did not previously file an Arkansas corporate income tax return should consider the interplay between the application of the new market-based sourcing provisions, and the implementation of the bright-line receipts threshold.

Arkansas joins almost three dozen other states that have adopted market-based sourcing provisions, including four of the five states that border Arkansas. Adoption of market-based sourcing provisions has slowed considerably in recent years as most states that impose a corporate income tax also use market-based sourcing. Additionally, Arkansas follows several other states that have adopted similar bright-line thresholds for non-sales taxes following the 2018 South Dakota v. Wayfair decision, including more recently Hawaii (effective for tax years beginning in 2020) and New Jersey (effective for tax years ending on and after July 31, 2023), both adopting a $100,000 sales or 200 transaction threshold to be subject to each state’s corporate income tax.