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Arkansas has enacted a rewrite of the state version of the Uniform Division of Income for Tax Purposes Act (UDITPA). The rewrite adopts several changes included by the Multistate Tax Commission in its most recent update to the Compact.

Notable changes made by the bill include:

• Replacing the concept of apportionable “business incomeâ€� with a broader definition of “apportionable incomeâ€� that includes all income apportionable under the U.S. Constitution (except where specifically allocated).
• Computing the sales factor using only receipts from transactions and activity in the regular course of the taxpayer’s trade or business.
• Sourcing receipts from sales other than sales of tangible personal property on a market basis, rather than location of the income-producing activity. Taxpayers principally engaged in various specified communications services may elect to continue using income-producing activity sourcing through tax years beginning before December 31, 2035.
• Authorizing the Department of Finance and Administration to adopt uniform alternative allocation and apportionment methods for specific industries.

With respect to market-based sourcing, receipts from sales of other than tangible personal property are considered in the state if the taxpayer’s market for the sales in the state. The market for sales is in the state for: (a) the sale, rental, lease, or license of real property if the property is in the state; (b) the rental, lease, or license of tangible personal property, if and to the extent, the property is in the state; and (c) the sale of a service, if the service is delivered to a location in the state. For intangible property that is rented, leased or licensed, the receipts are in the state, if and to the extent, the property is used in the state, provided that for intangible property used to market a good or service, the intangible property is used in the state if the good or service is purchased by a consumer in the state.

If the state or states to which receipts should be assigned cannot be determined, the state of assignment may be reasonably approximated. If the taxpayer is not taxable in the state to which a receipt is assigned, or the state of assignment cannot be determined or reasonably approximated, the receipt is to be excluded from denominator of the receipts factor.

Of note, the Act also appears to limit the effects of the recent Arkansas Supreme Court decision in Hudson v. Murphy Oil. Recall, in that case, an Arkansas taxpayer was permitted to allocate the entirety of an expense that was outside the regular course of its trade or business entirely to Arkansas, its commercial domicile. Such a method would likely be disallowed under the new definition of apportionable income. The Act will be effective for tax years beginning on or after January 1, 2026. Contact Asad Markatia with questions on .

In addition, Act 1008 of the 2025 Legislature repeals the remaining 0.125 percent state sales and use tax on “food and food ingredients� effective January 1, 2026. Local taxes on such items remain in effect. Contact Sadie Cuevas for questions on .

The California Court of Appeal, First Appellate District recently affirmed that a taxpayer’s cardiac monitoring devices do not qualify for exemption as "medicine" under California sales and use tax law. The taxpayer manufactures cardiac monitors designed to be implanted subcutaneously in the body to record electrocardiograms necessary for physicians to diagnose and manage cardiac conditions. After remitting sales tax on these devices, the taxpayer sought a refund, asserting that the devices should be exempt as "medicine" under state law. Following unsuccessful administrative appeals, the taxpayer pursued legal action, which resulted in a trial court granting summary judgment in favor of the California Department of Tax and Fee Administration. The taxpayer subsequently appealed.

Under California law, sales of "medicine" are exempt from the state sales and use tax. The statutory definition of "medicine" (Rev. & Tax Code sec. 6369) encompasses substances or preparations intended for internal or external application to the human body for diagnostic or therapeutic purposes. The statute explicitly excludes from the exemption items such as "splints, bandages, � instruments, apparatus, contrivances, appliances, [and] devices," but then contains a proviso to exempt specifically “bone screws, bone pins, pacemakers, and other articles �  permanently implanted in the human body to assist the functioning of any natural organ, �.�

The taxpayer contended its cardiac monitors, being permanently implanted, should be classified as "medicine" because they facilitate the diagnosis of cardiac conditions, thereby assisting the functioning of the heart. The appellate court, however, rejected this argument. After an exhaustive review and construction of the statute and accompanying regulation, the court reasoned that the monitors primarily serve an informational role, rather than assisting the functioning of the heart. In contrast, devices like pacemakers intrinsically assist the organ function. Thus, the court concluded that the taxpayer's devices do not meet the statutory criteria for exemption. The court closed, “[Taxpayer] is in the unenviable position of having a product whose function touches several of the concerns [of the law and regulation]. Unfortunately, those touches are too tenuous to establish the firm basis needed for an exemption.â€� For more information on  , contact  Jim Kuhl.Ìý

The New York Court of Appeals recently affirmed a Tax Appeals Tribunal decision holding that a taxpayer’s service which helped clients measure the effectiveness of their digital advertising campaigns was a taxable information service under New York law. The measurement service involved surveying persons that had been exposed to the advertisement, compiling and analyzing the survey responses, benchmarking the results against a database of similar campaigns maintained by the taxpayer, and providing the customer with a report presenting the results and providing recommendations. The Department of Taxation and Finance determined on audit that the entire service was taxable. After unsuccessful administrative appeals, the taxpayer appealed to the Tax Appeals Tribunal.Ìý

New York law (N.Y. Tax Law § 1105(c)(1)) imposes sales and use tax on the furnishing of information by various means, including collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to persons by any means. It excludes, however, “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons�.� Before the Tribunal, the taxpayer made two arguments: (a) its service was not an information service as it primarily involved the provision of recommendations to clients; and (b) the information gathered was not “substantially incorporated� in reports to others. The Tribunal found that any recommendations provided by the taxpayer were “ancillary to the data collection and analysis� performed by the taxpayer. Further, the subsequent inclusion of the data that was collected for each customer in the benchmarking database used to prepare reports for future clients disqualified the service from the exclusion.

In its opinion, the state high court agreed with the Tribunal that the primary function of the taxpayer’s service “fit comfortablyâ€� within the definition of information services as its primary function was the collection and analysis of information, and other features of the report were ancillary to the core purpose of data analysis. The second issue addressed in the court's determination was interpretation of the phrase "substantially incorporated". The court reviewed several definitions based on other authorities such as a U.S. Supreme Court holding that "substantially justified" does not mean "justified to a high degree" but rather "justified in substance." Black’s Law Dictionary defined “substantialâ€� as “of real worthâ€� or “worth whileâ€� (sic) as distinguished from something “without value or merely nominal.â€� Consequently, the court agreed with the Tribunal that inclusion of the data gathered in a database used to benchmark other customers is sufficient to be considered "substantially incorporated in reports furnished to other persons" and precludes the taxpayer from qualifying for the exclusion. For question on ,  please reach out to Judy Cheng and Jenn White.Ìý