April 6, 2022

Texas Supreme Court Rules for Sirius XM Over Service Receipt Sourcing

Holland & Knight Alert
John Wertz | Mary A. McNulty

The Texas Supreme Court ruled in favor of Sirius XM Radio (Sirius) in a recent decision that could have wide-ranging impact on the methodology for sourcing receipts from the performance of services for purposes of the Texas Margins Tax.

At issue in the case was proper methodology for sourcing Sirius' subscription services receipts from Texas subscribers to its satellite radio service. Under Section 171.103(a)(2) of the Texas Tax Code, receipts from "each service performed in this state" are treated as Texas receipts. Sirius argued that the service it performed for Texas subscribers was the production of radio shows and transmission of a radio signal. Each service is determined to be performed in Texas if the people or equipment performing the service are located in Texas. The state Comptroller argued that the service provided by Sirius to its customers in Texas is the provision of access to its encrypted radio signal, which takes place in Texas. The Comptroller's position is that "performed in the state" means that the "receipt-producing, end-product act" takes place in the state.

The Court rejected the Comptroller's "receipt-producing, end-product act" test for determining the location of a service and concluded that the most "natural" reading of the words "service performed in the state" supports locating the performance of the service at the place where the taxpayer's personnel or equipment is physically doing the work for the customer.

Importance of the Case

The case reaffirms that Texas is an "origin-based" jurisdiction, as opposed to a "destination-based" jurisdiction, with regard to sourcing receipts from the performance of services. Texas looks to where the service is performed rather than where it is received. Clients with receipts from the performance of services should be sourcing these receipts based on where the services were performed.

Refund Opportunities

For clients in the services industry, particularly advertising and broadcasting, origin-based sourcing is in conflict with the sourcing rules promulgated by the Comptroller. Any clients following these sourcing rules should be evaluating whether to file refund claims.

For Texas-based service companies, the Comptroller may look to apply the Sirius decision on audit in situations where the taxpayer has used a customer-based sourcing methodology.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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