Publish Date

Apr 07, 2022

Texas Supreme Court Rejects Comptroller’s Market-Based Sourcing Apportionment Methodology in Favor of Statutory Cost of Performance Approach

A&M Tax Advisor Weekly

On March 25, 2022, the Texas Supreme Court unanimously ruled in favor of Sirius XM Radio, Inc. (“Sirius”) and against the Texas Comptroller of Public Accounts’ (the “Comptroller”) assessment in Sirius v. Hegar, No. 20-0462 (Texas 2021). The court held that for the purposes of Texas’ franchise tax, receipts from Sirius’ production of radio shows and the transmission of radio signals should be sourced to the location where the services were performed. This decision contrasted with the Comptroller’s assertion that such receipts were for a signal decryption service that should be taxed based on the receiving customer’s location.

The court highlighted that the key enabling statute said that the Texas franchise tax applies to receipts from a “service performed in this state.” The court then observed that Sirius produced content from New York City and Washington D.C., launched satellites from abroad, broadcast content from New Jersey, D.C., and Georgia, maintained ten satellites orbiting 22,000 miles above earth that broadcast content to subscribers (the main source of revenue) or through terrestrial repeaters before reaching subscribers, and controlled the satellites from Georgia and abroad. The court also noted that despite these general facts, some of Sirius’ content was produced in Texas and twenty-two of its seven hundred terrestrial repeaters were in Texas.

With these facts in mind, the court examined the Comptroller’s argument that Sirius’ service was the unscrambling of the radio signal in Texas and that such service must be apportioned where the “receipt-producing, end-product act” takes place. However, the court determined such decryption was for Sirius’ benefit and was not the service purchased by its customers. It then analyzed Sirius’ contention that its production and transmission of radio waves were performed where the personnel or equipment performing the services were physically located. The court accepted this perspective and stated that the apportionment analysis should focus on the Legislature’s statutory verbiage; not the Comptroller’s expansion or narrowing of it. As such, the economic reality of Sirius’ business was that it delivered its production and broadcast services through a myriad of locations, few of which are in Texas. As such, the court held for Sirius and remanded the case to the Court of Appeals to determine the proper Texas apportionment of Sirius’ receipts under the place of performance apportionment methodology.

For companies that provide services in Texas, A&M can help determine how this decision may create a refund opportunity and/or a reduction in future Texas tax obligations. If you are interested in learning more, please contact a member of our team.,Texas%20Supreme%20Court%20Rejects%20Comptroller's%20Market-Based%20Sourcing%20Apportionment%20Methodology,Statutory%20Cost%20of%20Performance%20Approach&text=On%20March%2025,%202022,%20the,of%20Sirius%20XM%20Radio,%20Inc.