At a Glance…

Earlier this year, in Sirius XM, the Texas Supreme Court rejected the Comptroller’s attempt to source receipts from services to the location of the receipts-producing, end-product act (a sourcing method that produced results similar to market sourcing) in favor of a sourcing method based on the location where the services were rendered. However, the battle is far from over. Now the courts must decide how a service provider, like Sirius, that performs its service in multiple states, including Texas, must allocate service receipts to Texas.


Earlier this year, the Texas Supreme Court decided that, when it comes to sourcing receipts from services, Texas is a performance state. That means a Texas taxpayer should source service receipts based on the location(s) from which the taxpayer’s people or equipment render the service. The Court rejected the Comptroller’s argument that receipts should be sourced to the location of the taxpayer’s receipts-producing, end-product act, which many (including Sirius) argued was akin to market sourcing.

However, the Texas Supreme Court did not decide how to make an allocation of Texas receipts if a taxpayer performs its service from both inside and outside of Texas. In that situation, the Comptroller’s rule provides that: “If services are performed both inside and outside Texas for a single charge, then receipts from the services are Texas gross receipts on the basis of the fair value of the services that are performed in Texas.”1 The Texas Supreme Court remanded the Sirius dispute over fair value allocation to the intermediate appellate court.

On June 22, 2022, the Comptroller filed supplemental briefing with the intermediate appellate court, asking for two rulings.2 First, the Comptroller seeks a ruling that “cost-based sourcing [does] not, as a matter of law, reflect fair value.” In other words, Texas might be a performance state, but it is not a cost of performance state. Second, the Comptroller argues that Sirius’ allocation methodology (using costs) was flawed because Sirius excluded key costs from its calculation and improperly included other costs that do not fall within the definition of a service (i.e., provide a benefit to the customer or constitute useful work). For example, the Comptroller complained that Sirius “assigned no value to its most valuable asset (its essential FCC licenses), disregarded millions of dollars in performance royalties it paid for content it did not produce or own and excluded hundreds of millions of dollars it spent to subsidize the installation of the equipment necessary to hear Sirius XM’s programming in Texas.”3 The Comptroller also complained that Sirius erroneously included research and development costs in its calculation because while “[r]esearch and development might potentially benefit future customers, [] it is not done for the benefit of the customers who were paying subscription revenues for that period.”4

The Comptroller believes that a take nothing judgment is appropriate due to Sirius’ presentation of insufficient evidence regarding fair value allocation. But, if the intermediate appellate court disagrees, the Comptroller wants the case remanded to the trial court to allow the Comptroller the opportunity to present fair value evidence based on the Texas Supreme Court’s guidance regarding the nature of Sirius’ service. The Comptroller presumably seeks remand to the trial court because he offered no evidence to counter that originally offered by Sirius. The Comptroller’s post-remand brief does not set forth a non-cost-based allocation that he deems appropriate. However, the 2021 apportionment rule amendment provides a bit of insight. For example, the rule favors units of service, such as hours worked, rather than costs incurred in Texas versus out of state.5 In fact, the rule expressly states that costs of performing a service do not necessarily represent its value.6 The rule then provides that, if costs are considered, the costs taken into account should be limited to those directly related to the service and should not include overhead costs.7

Despite Sirius’ opposition to any additional briefing, it appears that Sirius Phase II is now underway. Next, we await guidance from the intermediate appellate court about whether a briefing schedule or trial court remand is warranted.