The Texas Supreme Court has ruled in favor of apportioning service receipts to the location of personnel or equipment, a position providing clarity to taxpayers on whether to source receipts from services performed versus where customers are at. 

By Tram Le

On March 25, 2022, the Texas Supreme Court held in favor of the taxpayer that services revenue is apportioned to the location where services are performed, consistent with Texas law.1 The Court found that the performance of service is located where the taxpayer’s personnel or equipment is physically doing useful work for the customer. 

The case involves Sirius XM (Sirius XM Radio, Inc. v. Hegar, Tx. Sup. Ct. No. 20-0462 (3/25/22)), whose headquarters, transmission equipment and production studios used in providing a subscription-based satellite radio service are largely located outside of Texas. In the 2010 and 2011 tax years, Sirius XM apportioned tax based on costs of activities in Texas and outside of Texas. Under Texas rules, service revenue is apportioned to Texas based on the “fair value of the services” rendered in Texas where services are performed in more than one state.2 

For those tax years, the Texas Comptroller adjusted on audit to base the tax on the percentage of Sirius XM’s Texas subscribers. The Comptroller argued that service revenue is sourced to Texas if the “receipt-producing, end-product act” takes place in Texas. In this case, such an act was considered the decryption of the satellite network and enabling of each subscriber’s radio to receive Sirius XM’s signal. However, Sirius XM argued that its services – the production and broadcasting of radio content – was mainly performed outside of Texas. 

The Texas Supreme Court ultimately agreed that Sirius XM was providing satellite radio content and those services are performed in Texas if the labor employed in that service is doing the work in Texas. This constitues a natural reading of the law, which requires taxes due “where service [is] performed in this state.” This rejects the Comptroller premise of service taking place at the customer location. The Court also rejected the use of the “receipt-producing, end-product” test to determine where a service is being performed. 

Although the Court ruled in favor of the taxpayer, the case was remanded to the Appellate court for further review of Sirius XM’s cost of performing services and evidence to support its “fair value of services” performed in Texas.  

The Texas Supreme Court opinion provides clarification in apportioning service revenue in Texas and determining whether services are performed in the state. Taxpayers doing business in Texas should carefully review business operations, nature of services, i.e., properly characterizing the services provided to customers and location of equipment, facilities, and personnel to properly apportion revenue.   

In addition, if services are being performed in Texas and outside of Texas, taxpayers must properly evaluate methods of determining the fair value of services and maintain sufficient evidence to support what revenue is apportioned to Texas. Contact a TaxOps advisor is you need assistance assessing nexus and taxability in the state of Texas and everywhere you do business. 

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 and the Spreading SALTovation column for Tax Notes. Reach out to Tram at  

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