Texas Comptroller finally gets serious; proposes amendments to franchise tax sourcing in light of Sirius XM

The Texas Comptroller of Public Accounts (the Comptroller) published proposed amendments to Texas’ franchise tax apportionment rule in the January 20 issue of the Texas Register¹, discarding the now-repudiated “receipt-producing, end-product act” test. The Comptroller proposed these amendments in response to the Texas Supreme Court’s unanimous decision in Sirius XM Radio, Inc. v. Hegar.² Eversheds Sutherland’s SALT Team represented Sirius XM in this litigation.

Sirius XM offered a subscription-based radio service to subscribers throughout the United States. While Sirius XM produced a small amount of its programing in Texas, the Company’s headquarters, transmission equipment, and most of its production studios were located outside the state. Texas law provides that a taxpayer must source receipts based on where the taxpayer “performed” its services. Thus, Sirius XM sourced most of its receipts outside of Texas.

The Comptroller disagreed, arguing that a service should be deemed performed at the location of the “receipt-producing, end-product act,” which the Comptroller argued in Sirius XM’s case was the place where the radio signal was delivered to customers. The Comptroller’s position produced a result similar to market-based sourcing, rather than the statutory place of performance method. While the case was still pending in Texas’ appellate courts, the Comptroller sought to enshrine the “receipt-producing end-product act” test in regulation by amending his apportionment rule, 34 Tex. Admin. Code § 3.591(e)(26)(A), to adopt the test.

Nevertheless, after the rule was adopted, the Texas Supreme Court unanimously rejected the Comptroller’s “receipt-producing, end-product act” test as contrary to the statute: “We see no reason for the ‘receipt-producing, end-product act’ test to play any role in our decision.”³

The End of the "Receipt-Producing, End-Product" Test

In response to the Texas Supreme Court’s decision, the Comptroller’s proposed regulation abandoned (finally) the “receipt-producing, end-product act” test and all examples applying it.

Amendments to the sourcing provisions in 34 Tex. Admin. Code § 3.591(e)(26)(A) are intended to conform to the Sirius XM decision, sourcing service receipts by “locating the performance of the service at the place where the taxpayer’s personnel or equipment is physically doing useful work for the customer.”⁴

The Comptroller’s proposed rule interprets the phrase “useful work for the customer” as “work that the customer hired the taxable entity to perform,” but excludes activities that enable the taxpayer to do business in general, or are not directly used in the provision of a service to its customer. In addition, the Comptroller’s proposed rule replaces the term used by the Supreme Court—“equipment”—with the more general term “property” in apparent recognition that the location of property that is not equipment may be relevant as well.

Comments to the proposed amendments must be received by the Comptroller by February 19.