(a) Source of law — Arkansas Code § 26-51-701. Arkansas has adopted the:

1. (1) Uniform Division of Income for Tax Purposes Act, Arkansas Code § 26-51-701 et seq.; and
2. (2) Multistate Tax Compact, Arkansas Code § 26-5-101 et seq.

(b) Business versus nonbusiness income — Arkansas Code § 26-51-701.

1. (1)

   1. (A) "Business income" means income arising from transactions and activities in the regular course of a taxpayer's trade or business.
   2. (B) Business income also includes income from tangible and intangible property if the acquisition, management, and disposition (sale, exchange, etc.) of such property is an integral part of the taxpayer's regular trade or business operations.
2. (2) "Nonbusiness income" means all income other than business income.

3. (3)

   1. (A) The classification of income by labels, such as manufacturing income, compensation for services, sales income, interest, dividends, rents, royalties, gains, operating income, nonoperating income, etc., should not be the sole factor used in determining whether income is business or nonbusiness income.
   2. (B) Income of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business.
   3. (C) Accordingly, the critical element in determining whether income is "business income" or "nonbusiness income" is the identification of the transactions and activity that are the elements of a particular trade or business.
   4. (D) In general, all transactions and activities of the taxpayer that are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business.

4. (4) Rental income from real and tangible property is business income if the property generating the rental income is:

   1. (A) Used in the taxpayer's trade or business; and
   2. (B) Includable in the property factor.

5. (5)

   1. (A) Gain or loss from the sale, exchange, or other disposition of real property or of tangible or intangible personal property constitutes business income if the property, while owned by the taxpayer, was used in the taxpayer's trade or business.
   2. (B) However, if the property was utilized for the production of nonbusiness income before its sale, exchange, or other disposition, the gain or loss will constitute nonbusiness income.
6. (6) Interest income is business income where the intangible receiving the interest arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.
7. (7) Dividends are business income where the stock earning such dividends arises out of or was acquired in the regular course of the taxpayer's trade or business operations or where the purpose of acquiring and holding the stock is related to or incidental to such trade or business operations.
8. (8) Patent and copyright royalties are business income where the patent or copyright receiving the royalties arises out of or was created in the regular course of the taxpayer's trade or business operations or where the purpose for acquiring and holding the patent or copyright is related to or incidental to such trade or business operations.
9. (9) For intangible income from related parties, see Apportionment of Business Income Arising from Intragroup Intangible Licensing Transactions, 26 CAR pt. 131.

(c) Unitary business principle — Arkansas Code § 26-51-701.

1. (1)

   1. (A) The determination of whether income constitutes business income depends upon whether a unitary relationship exists between the income in question and a taxpayer’s business activities in Arkansas.
   2. (B) A unitary relationship exists when an activity conducted in one (1) state benefits or is benefited by an activity in another state.
   3. (C)

(i) Certain factors of profitability such as functional integration, centralization of management, and economies of scale may be used to indicate the contribution made to the overall business enterprise.

1. (ii) These factors help determine the existence of a unitary relationship for classifying income as business income.

   1. (D) However, Arkansas will not accept returns filed on a unitary combined basis.

2. (2)

   1. (A) The determination of whether the activities of the taxpayer constitute a single trade or business or more than one (1) trade or business will turn on the facts in each case.
   2. (B) In general, the activities of the taxpayer will be considered a single business if there is evidence to indicate that the segments under consideration are integrated with, dependent upon, or contribute to each other and the operations of the taxpayer as a whole.

3. (3) The following factors are considered to be reliable indicators of a single trade or business, and the presence of any of these factors creates a strong presumption that the activities of the taxpayer constitute a single trade or business:

   1. (A) Same type of business.

      1. (i) A taxpayer is generally engaged in a single trade or business when all of its activities are in the same general line.
      2. (ii) For example, a taxpayer that operates a chain of retail grocery stores will almost always be engaged in a single trade or business;

   2. (B) Steps in a vertical process.

      1. (i) A taxpayer is almost always engaged in a single trade or business when its various divisions or segments are engaged in different steps in a large, vertically structured enterprise.
      2. (ii) For example, a taxpayer that explores for and mines copper ores, concentrates, smelts, and refines the copper ores, and fabricates the refined copper into consumer products is engaged in a single trade or business, regardless of the fact that the various steps in the process are operated substantially independently of each other with only general supervision from the taxpayer's executive offices; and

   3. (C) Strong centralized management.

      1. (i) A taxpayer that might otherwise be considered as engaged in more than one (1) trade or business is properly considered as engaged in one (1) trade or business when there is a strong central management, coupled with the existence of centralized departments for such functions as financing, advertising, research, or purchasing.
      2. (ii) Thus, some conglomerates may properly be considered as engaged in only one (1) trade or business when:

(b) (b) There are centralized offices that perform for the divisions the normal matters that a truly independent business would perform for itself, such as:

1. (1) (1) Accounting;
2. (2) (2) Personnel;
3. (3) (3) Insurance;
4. (4) (4) Legal;
5. (5) (5) Purchasing;
6. (6) (6) Advertising; or
7. (7) (7) Financing.