Smith, 46, was arrested without incident at his residence about 11 a.m., according to Tippah County Sheriff Karl Gaillard. He said the investigation into Wallace's death continues.
Smith will be held in the Tippah County Jail until he can be arraigned before a Circuit Court judge early next week, the sheriff said. No bond has been set.
Efforts to reach Mayor Kerry W. Hill for comment weren't successful Friday.
Tippah authorities moved quickly to arrest Smith after receiving test results on evidence sent off to the State Crime Lab soon after Wallace's death.
Shortly after Wallace died, Smith lost both hands in an electrical accident while working as a lineman for the Tippah Electric Power Association. He is now severely handicapped.
He worked for the Tippah Electric Power Association for 15 years prior to his accident. Serving his first term on the board, Smith defeated six-term alderman Gilroy Bails in May 2009.
Tippah authorities and the Mississippi Bureau of Investigation are investigating the Wallace case, which was the county's first homicide of 2010.
The investigation began after the body of Wallace, 41, was found April 19 in a remote area of the county-owned North Industrial Park, near County Road 565. Wallace apparently had been shot several times.
Authorities were sent to what they originally were told was a traffic wreck after a Chevrolet car registered to Wallace was spotted in grass and shrubs a few feet from the road. Wallace's body was found off the road, not far from the car.
Investigators said they believe Wallace was killed where he was found.
No drugs, weapons or cash were found on Wallace or in the vehicle, investigators said.
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