In this installment of Spreading SALTovation for Tax Notes, Tram Le examines the Texas Supreme Court’s Sirius XM ruling in relation to the challenges of sourcing service receipts in multiple states. 

By Tram Le. Reprinted from Tax Notes State, June 6, 2022, p.977 

The Texas Supreme Court’s ruling in Sirius XM rejected the Texas comptroller’s “receipts producing, end-product act” test for sourcing receipts to determine where a service is performed. The court noted that this test was not consistent with the plain language of the law and was unhelpful. Taxpayers doing business in Texas and relying on the 2021 revised rules and guidance adopted by the comptroller should reevaluate how they are sourcing receipts from services in the state.  

While the Sirius XM case focuses on the statutory interpretation of sourcing rules in Texas, sourcing service receipts is a challenge for taxpayers doing business in multiple states. The technology-driven electronic commerce environment has significantly increased demand and taxation of services such as IT consulting, software as a service, and cloud computing. Service businesses operating and serving customers in multiple states are challenged with determining the nature of services provided and where to source their service revenue.  

Sourcing Texas Receipts for Services

The rules adopted by the comptroller created confusion and complexity for service providers and affected the franchise tax apportioning formula. The substantive changes significantly affect sourcing rules in Texas.  

In January 2021 the comptroller adopted new rules and provisions affecting sourcing rules for franchise tax apportionment purposes. These rules included the receipts-producing, end-product act test. The term “act” in this case is the action that produced receipts or the last action resulting in the end-product of the service performed. In many instances, the application of this test requires taxpayers to look to where the service is received. If there is a receipts-producing, end-product act, then the location of performance is at the receipts-producing, end-product act, and all other actions will not be considered regardless of whether they are essential to the performance of the receipts-producing act. If there is not a receipts-producing, end-product act, then the locations of all essential acts may be considered.

For example, receipts from a show or performance are sourced to where the customers observe the performance — such as at a movie theater where customers pay admission fees and the company produced receipts. The service would not be considered performed where the show or performance was produced, rehearsed, or recorded — that is, where the work was performed.  

The comptroller also revised rules and definitions for advertising, internet hosting, and other services related to computer hardware and software. In most instances, these rules applied retroactively and purported to reflect current guidance for sourcing receipts for specific services.  

Advertising Services

For reports due January 1, 2021, receipts from advertising services are sourced to the advertising audience’s location. The location may be determined by using information such as physical location of the advertising or be based on the service provider’s books and records and methods — such as census-based apportionment — that are reasonably available. Before the revised rules, the sourcing of advertising services was dependent on the type of media used to transmit the advertisement.

Internet Hosting Services

For internet hosting services, receipts are sourced to the customer location and the rules retroactively apply to reports due on or after January 1, 2014. The comptroller adopted the sales tax definition for internet hosting service and broadly defined this as:  

  • a service to an unrelated user;  
  • access over the internet to computer services using property owned or leased by the provider; and 
  • storing or processing data or software owned or leased by the user or provider.  

Internet hosting services include internet access to computer services, data storage and retrieval, video gaming, data processing, and entertainment streaming services. Telecommunications, cable television, internet advertising, and other services are excluded.

Computer Hardware and Digital Property

New rules were adopted for computer hardware and digital property. Receipts from the sale of computer hardware with installed software and receipts from the sale of digital property transferred by fixed physical media are sourced as the sale of tangible personal property — that is, to the location of the property. Receipts from the sale of digital property transferred by means other than fixed physical media are sourced as the sale of intangible personal property — that is, to the location of the payer. Receipts from the sale of digital property as part of internet hosting services are sourced to the audience’s location.

The guidance also distinguishes between internet hosting services and computer hardware and digital property, which may be sourced as the sale of tangible personal property or intangible property. Factors that are considered in determining whether the transaction involves the sale of a tangible personal property or an intangible property include whether the customer is in physical possession of or has significant economic interest in the property and controls the property. Other factors are whether the provider bears any risk of loss, has the right to determine specific property used and replace the property with comparable property, and concurrently uses the property to provide significant services to entities unrelated to the customer.

The revised definitions and sourcing rules for these services create more complexities and materially change how taxpayers source receipts. For example, taxpayers providing data processing services must evaluate their business operations, contractual agreements, and manner of providing services to customers to determine whether their services are characterized as sales of digital property or considered internet hosting, based on these new definitions and rules, to appropriately determine how to source the receipts. 

Sirius XM Texas Receipts 

Narrowing in on the test, the key to sourcing receipts of services in Texas is identifying what service is provided to customers and understanding where it is performed. Under the Texas tax code, receipts are sourced to Texas if the service is performed in the state.viii In the Sirius XM case, Texas courts looked at defining what service is being performed for customers and determining where it is performed. Sirius XM produces and offers radio programming and audio content to customers for a monthly subscription fee. Most of the equipment used and employees who produce the programming and content are located outside Texas.  

The programming and content are transferred to customers via satellite-enabled radios and must be decrypted and enabled before customers can access the programs and content. Based on the receipts-producing, end-product act test, the comptroller argued, the service being performed is the decryption enabling the customer to access the programming, while the location is where customers access the radio signal via car radio receiver.  

Using the economic realities test, the state supreme court concluded that customers pay Sirius XM a monthly subscription fee for radio programming and content services. The court rejected the receipts-producing, end-product act test as applied by the comptroller because it contradicted the plain language of the statute. Under relevant case law, a service is the useful labor and is the “performance of labor for the benefit of another.” The decryption of the customer’s radio signal is an obstacle to accessing the radio programs and content. Decryption services are not performed for the customer’s benefit because the customer is not paying a subscription fee for those services. Instead, the useful labor and economic realities of the underlying transaction are the production and transmission of radio programming and content. Since most radio programming and content is produced outside Texas, the receipts from the performance of service are sourced to where Sirius XM’s employees and the equipment are doing useful work for the customer.  

Given that the comptroller’s sourcing rules using the receipts-producing, end-product act test are not consistent with the plain language of the statute, case law now redirects taxpayers doing business in Texas to consider the economic realities underlying the transactions in determining the nature and location of the service performed. Therefore, taxpayers doing business in Texas should evaluate whether their sourcing methods consider the economic realities of what the customer is buying rather than the last thing a service provider delivers to a customer. Further, taxpayers must fully understand where their employees are performing the service and where the equipment facilitating the transaction is located.  

General Sourcing Rules for Multistate Service Providers

States generally follow two methods to source service revenue for income tax purposes — cost of performance (COP) or market-based sourcing. Under the Uniform Division of Income for Tax Purposes Act, sales of services are sourced using the COP approach. In recent years, there has been a shift from using a COP method to market-based sourcing in many states. However, state laws, regulations, and application of related methods can vary widely from state to state, which can be problematic since sourcing methods affect the apportionment of state income. Following this trend, the Multistate Tax Commission adopted market-based sourcing regulations to replace the COP rules on sourcing receipts from services.  

Source Based on Services Performed vs. Customer Location 

The two methods differ in how and where service receipts are sourced. Under the COP method, states generally source service revenue based on where the services are physically performed. If services are performed in more than one state, states may use an all-or-nothing approach to source the revenue. Based on the COP method, for example, if the income producing activity that gave rise to the service receipts is performed in and outside the state, the receipts are sourced to Florida — where the greater proportion (more than 50 percent) of the income producing activity is performed in Florida.xi 

Where businesses have multiple service revenue streams, the cost of performance — that is, the direct cost of providing the services — must be applied to each separate income-producing activity and not to all of the business’ activities. An income-producing activity is not specifically defined in many states, but there is a requirement that an income-producing activity apply to each separate item of income. These activities typically include income derived from performing services for the ultimate purpose of obtaining gains or profits.  

Other states use the proportionate method to source service revenue when services are performed in one or more states. In South Carolina, receipts are sourced to the state to the extent the services are performed there.xii 

Most states use a market-based approach that sources receipts to where the customers are located, services are delivered, services are received, or where the customers received the benefit of the services. In Wisconsin, the benefit of a service is deemed to be received in the state if the service is provided to a customer physically located in the state or is related to real or tangible personal property in the state. Customer location could depend on the type of customer. In California for example, if the customer is a business entity, then the service is deemed to be received in the state if the contract or customer records indicate that the benefit of the service is in the state. Alternatively, for individual customers, the benefit of the service is presumed to be received in California based on the customer’s billing address.

States with a market-based approach generally require businesses to use single-salesfactor apportionment to source sales, because the intent of the market-based sourcing method is to impose tax on the taxpayer’s access to a state’s marketplace. 


State tax laws and sourcing rules have undergone significant changes. Many states generally lack formal guidance and have varying rules on sourcing service revenue. Although many states have replaced the COP-based sourcing approach with a market-based one, Texas laws have not.  

The Texas comptroller will likely revise rules or issue new guidance that more closely reflects sourcing receipts from services based on where the service is being performed — not where it is received. Given the complexities in how companies provide services and the sourcing rules that apply, taxpayers doing business in Texas should review their current sourcing methods to ensure that there is proper characterization of the service being performed — that is, what useful labor is being performed — and understand where the services are being provided. Failure to properly characterize the nature of the transaction may lead to improper sourcing of receipts and ultimately affect a company’s state corporate income or franchise tax liability. 

For more guidance, reach out to the tax professionals at

Tram Le ( is a member of the SALTovation team at TaxOps and an adjunct professor at the University of Texas at Arlington. She writes about hot topics in state and local tax affecting business operations and growth strategies. Copyright 2022 Tram Le. All rights reserved.   

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