On March 25, 2022, the Texas Supreme Court, in a much anticipated opinion ruled in favor of Sirius XM and rejected the Comptroller’s use of the “receipt-producing, end-product act” test to determine where a service is “performed”. The Texas Supreme Court’s decision in Sirius XM v. Hegar upheld the State’s statutory language that requires receipts from services to be sourced to Texas if the services are performed in Texas, and a service is considered “performed” in Texas when a taxpayer’s employees or equipment is physically doing work in Texas for customers.

Sirius XM Radio, Inc. v. Texas Comptroller Case Background

Texas revenue sourcing rules provide that revenue from performing a service is attributed to the location where the service is performed. When services are performed both within Texas and other states, then the service receipts sourced to Texas is “the fair value of the services that are rendered in Texas.”

Sirius XM, which provides satellite radio programming to subscribers for a fee,  hosts a majority of its staff and equipment outside of Texas. Because of this, Sirius XM held that the services they provide to Texas subscribers are:

  • The production of radio shows and
  • Transmission of a radio signal

As these two activities take place nearly entirely out of Texas, very little of the subscription revenue received from subscribers should be sourced to Texas.

However, under audit the Comptroller argued that the service being provided was the “unscrambling [of] a radio signal” rather than satellite radio programming and that the “receipt-producing, end-product act” took place at the location of the radio receiver (i.e. the customer’s location) and attributed all subscription revenue from Texas based subscribers to Texas.

Multiple Lower Court Decisions

Upon the Comptroller’s decision and paying the assessment, Sirius XM filed a refund suit with the Texas district court. The district court decided in favor of Sirius XM on the basis that the apportionment factors used by Sirius XM on the originally filed returns reflected the fair value of the services that are rendered in Texas.

The Comptroller then appealed to the Texas appellate court (Court of Appeal, Third District). The appeals court upon review of the facts viewed the “receipt-producing, end-product act” to occur when Sirius XM activated or deactivated the customer’s satellite-enabled radio and the act was therefore performed where the radio was located, which could reasonably be presumed to where Sirius XM’s customers resided. This decision resulted in a sourcing method consistent with the Comptroller and overturned the district court’s decision.

Sirius XM then petitioned the Texas Supreme Court for review with key non-profit trade associations filing briefs in favor of Sirius XM and urging the Court to review the case.

Texas Supreme Court’s Decision

The Texas Supreme Court (the Court) rejected the Comptroller’s “receipt-producing, end-product act” test, overturning the court of appeals’ decision. The Court pointed out that no such test exists in the State’s statutes and there was no reason to depart from the “straightforward understandings of the everyday words” that the apportionment statute uses. As such, a “service” is considered “performed” in Texas if the “labor for the benefit of another is done in Texas” (i.e., where employees do their work). Additionally, when technology performs the useful act, the Court noted that it looks to the location of that equipment.

The Court also noted that in this case “customers want to listen to radio content. They do not want decryption”. This is consistent with Sirius XM’s position that the service they provide is radio broadcasting, not signal decryption, and the revenue is generated from subscriptions to access the radio content, not from the sale, lease, or activation of radio sets.

What It Means for Taxpayers

With the Court upholding the existing legislation and their rejection of the Comptroller’s “receipt-producing, end-product act” test, many tax professionals see this as a significant victory for service providers located outside of Texas. The Court’s decision is especially relevant to out of state taxpayers providing services electronically such as Software as a Service (SaaS) providers that often have customers/users all over the U.S. but little to no employees outside the state where headquartered. For now, the focus remains where a service provider’s equipment and personnel are located and not where services are received.

This ruling shows that the courts are sticking to what the state’s tax statutes say and rejecting reinterpretations. Comptrollers and tax departments will not be able to reinterpret the meaning of tax statutes without actually changing the statutes. However, rules can be changed quickly, and state tax departments are getting more and more aggressive. For now, taxpayers doing business in Texas should continue to focus on where they’re performing their services and remain alert for any future changes.

Keeping a Close Eye on SALT

The world of State and Local Tax is ever evolving with more states looking to out-of-state taxpayers to pick up the tax burden. If you have specific questions about your tax situation, or Sirius XM v. Hegar, please get in touch with our State and Local Tax Team. We’ll continue to publish content and updates about the State and Local Tax space, to keep up to date, subscribe to our bi-weekly Insights Newsletter.

About the Author

Kaylyn Kleinhans

With over 10 years of state and local tax experience, State & Local Tax Practice Leader, Kaylyn Kleinhans specializes in multi-state corporate income tax, business activity tax (BAT) nexus analysis, revenue sourcing analysis, local taxes such as San Francisco Gross Receipts Tax (SFGRT) and Los Angeles City Business Tax (LACBT), and unitary and consolidated state income tax compliance. She works extensively with clients in technology and manufacturing.

Kaylyn received a Certificate of Advanced Accounting Proficiency (CAAP) from Santa Clara University’s Leavey School of Business and a bachelor’s degree in economics and business from Westmont College. Outside of work, Kaylyn enjoys spending time with family and traveling around the world (pre-COVID). Now she spends all her time with her very fluffy and crazy cat and her spouse dreaming of the days she can travel again!