To create a poisoned arrow, use the poison skill on a poison potion, then on a single piece of cloth. That cloth will turn into a poison soaked rag. You must have this rag in your top pack.
When firing a poisoned arrow, you have a percent chance to fire an arrow with the level of the poison applied. That percent is equal to your poisoning skill. Therefore, if you fire an arrow with a greater poisoned rag, and you have 75 poisoning, you have a 75% chance to greater poison, and a 25% chance to normal poison.
In the event of a lesser poisoned rag that loses a level of poison, you will not poison at all.
Shooting a poisoned arrow will damage your bow, and bows can not be repaired. However, carpenters can seal bows in wax which will delay corrosion.