{"id":10647,"date":"2022-07-26T20:00:21","date_gmt":"2022-07-26T20:00:21","guid":{"rendered":"https:\/\/taxops.com\/?p=10647"},"modified":"2022-07-26T20:00:22","modified_gmt":"2022-07-26T20:00:22","slug":"texas-sirius-xm-ruling-another-look-at-sourcing-service-receipts","status":"publish","type":"post","link":"https:\/\/taxops.com\/texas-sirius-xm-ruling-another-look-at-sourcing-service-receipts\/","title":{"rendered":"Texas Sirius XM Ruling: Another Look at Sourcing Service Receipts"},"content":{"rendered":"\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped wp-block-gallery-1 is-layout-flex wp-block-gallery-is-layout-flex\">\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"10648\" src=\"data:image\/gif;base64,R0lGODlhAQABAIAAAAAAAP\/\/\/yH5BAEAAAAALAAAAAABAAEAAAIBRAA7\" data-src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-1024x536.png\" alt=\"\" class=\"wp-image-10648 lazyload\" data-srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><noscript><img decoding=\"async\" width=\"1024\" height=\"536\" data-id=\"10648\" src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-1024x536.png\" alt=\"\" class=\"wp-image-10648 lazyload\" srcset=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-1024x536.png 1024w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-980x513.png 980w, https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling-480x251.png 480w\" sizes=\"(min-width: 0px) and (max-width: 480px) 480px, (min-width: 481px) and (max-width: 980px) 980px, (min-width: 981px) 1024px, 100vw\" \/><\/noscript><\/figure>\n<\/figure>\n\n\n\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><em><em><em><em>In this installment of Spreading SALTovation for Tax Notes, Tram Le examines the Texas Supreme Court\u2019s Sirius XM ruling in relation to the challenges of sourcing service receipts in multiple states.<\/em>\u00a0<\/em><\/em><\/em><\/p><\/blockquote>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><\/p><\/blockquote>\n\n\n\n<p class=\"wp-block-paragraph\">By <a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\">Tram Le<\/a>. <em>Reprinted from Tax Notes State, June 6, 2022, p.977<\/em>\u00a0<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">The Texas Supreme Court\u2019s ruling in Sirius XM rejected the Texas comptroller\u2019s \u201creceipts producing, end-product act\u201d test for sourcing receipts to determine where a service is performed. The court noted that this test was not consistent with the plain language of the law and was unhelpful. Taxpayers doing business in Texas and relying on the 2021 revised rules and guidance adopted by the comptroller should reevaluate how they are sourcing receipts from services in the state.\u00a0\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">While the Sirius XM case focuses on the statutory interpretation of sourcing rules in Texas, sourcing service receipts is a challenge for taxpayers doing business in multiple states. The technology-driven electronic commerce environment has significantly increased demand and taxation of services such as IT consulting, software as a service, and cloud computing. Service businesses operating and serving customers in multiple states are challenged with determining the nature of services provided and where to source their service revenue.&nbsp;&nbsp;<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Sourcing Texas Receipts for Services<\/strong><\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">The rules adopted by the comptroller created confusion and complexity for service providers and affected the franchise tax apportioning formula. The substantive changes significantly affect sourcing rules in Texas.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In January 2021 the comptroller adopted new rules and provisions affecting sourcing rules for franchise tax apportionment purposes. These rules included the receipts-producing, end-product act test. The term \u201cact\u201d in this case is the action that produced receipts or the last action resulting in the end-product of the service performed. In many instances, the application of this test requires taxpayers to look to where the service is received. If there is a receipts-producing, end-product act, then the location of performance is at the receipts-producing, end-product act, and all other actions will not be considered regardless of whether they are essential to the performance of the receipts-producing act. If there is not a receipts-producing, end-product act, then the locations of all essential acts may be considered.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For example, receipts from a show or performance are sourced to where the customers observe the performance \u2014 such as at a movie theater where customers pay admission fees and the company produced receipts. The service would not be considered performed where the show or performance was produced, rehearsed, or recorded \u2014 that is, where the work was performed.\u00a0\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The comptroller also revised rules and definitions for advertising, internet hosting, and other services related to computer hardware and software. In most instances, these rules applied retroactively and purported to reflect current guidance for sourcing receipts for specific services.\u00a0\u00a0<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Advertising Services<\/h3>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">For reports due January 1, 2021, receipts from advertising services are sourced to the advertising audience\u2019s location. The location may be determined by using information such as physical location of the advertising or be based on the service provider\u2019s books and records and methods \u2014 such as census-based apportionment \u2014 that are reasonably available. Before the revised rules, the sourcing of advertising services was dependent on the type of media used to transmit the advertisement.<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Internet Hosting Services<\/h3>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">For internet hosting services, receipts are sourced to the customer location and the rules retroactively apply to reports due on or after January 1, 2014. The comptroller adopted the sales tax definition for internet hosting service and broadly defined this as:&nbsp;&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>a service to an unrelated user;&nbsp;&nbsp;<\/li><li>access over the internet to computer services using property owned or leased by the provider; and&nbsp;<\/li><li>storing or processing data or software owned or leased by the user or provider.&nbsp;&nbsp;<\/li><\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Internet hosting services include internet access to computer services, data storage and retrieval, video gaming, data processing, and entertainment streaming services. Telecommunications, cable television, internet advertising, and other services are excluded.<\/p>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">Computer Hardware and Digital Property<\/h3>\n\n\n\n<div style=\"height:8px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">New rules were adopted for computer hardware and digital property. Receipts from the sale of computer hardware with installed software and receipts from the sale of digital property transferred by fixed physical media are sourced as the sale of tangible personal property \u2014 that is, to the location of the property. Receipts from the sale of digital property transferred by means other than fixed physical media are sourced as the sale of intangible personal property \u2014 that is, to the location of the payer. Receipts from the sale of digital property as part of internet hosting services are sourced to the audience\u2019s location.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The guidance also distinguishes between internet hosting services and computer hardware and digital property, which may be sourced as the sale of tangible personal property or intangible property. Factors that are considered in determining whether the transaction involves the sale of a tangible personal property or an intangible property include whether the customer is in physical possession of or has significant economic interest in the property and controls the property. Other factors are whether the provider bears any risk of loss, has the right to determine specific property used and replace the property with comparable property, and concurrently uses the property to provide significant services to entities unrelated to the customer.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The revised definitions and sourcing rules for these services create more complexities and materially change how taxpayers source receipts. For example, taxpayers providing data processing services must evaluate their business operations, contractual agreements, and manner of providing services to customers to determine whether their services are characterized as sales of digital property or considered internet hosting, based on these new definitions and rules, to appropriately determine how to source the receipts.&nbsp;<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Sirius XM Texas Receipts\u00a0<\/strong><\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">Narrowing in on the test, the key to sourcing receipts of services in Texas is identifying what service is provided to customers and understanding where it is performed. Under the Texas tax code, receipts are sourced to Texas if the service is performed in the state.<sup>viii<\/sup> In the Sirius XM case, Texas courts looked at defining what service is being performed for customers and determining where it is performed. Sirius XM produces and offers radio programming and audio content to customers for a monthly subscription fee. Most of the equipment used and employees who produce the programming and content are located outside Texas.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The programming and content are transferred to customers via satellite-enabled radios and must be decrypted and enabled before customers can access the programs and content. Based on the receipts-producing, end-product act test, the comptroller argued, the service being performed is the decryption enabling the customer to access the programming, while the location is where customers access the radio signal via car radio receiver.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Using the economic realities test, the state supreme court concluded that customers pay Sirius XM a monthly subscription fee for radio programming and content services. The court rejected the receipts-producing, end-product act test as applied by the comptroller because it contradicted the plain language of the statute. Under relevant case law, a service is the useful labor and is the \u201cperformance of labor for the benefit of another.\u201d The decryption of the customer\u2019s radio signal is an obstacle to accessing the radio programs and content. Decryption services are not performed for the customer\u2019s benefit because the customer is not paying a subscription fee for those services. Instead, the useful labor and economic realities of the underlying transaction are the production and transmission of radio programming and content. Since most radio programming and content is produced outside Texas, the receipts from the performance of service are sourced to where Sirius XM\u2019s employees and the equipment are doing useful work for the customer.\u00a0\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Given that the comptroller\u2019s sourcing rules using the receipts-producing, end-product act test are not consistent with the plain language of the statute, case law now redirects taxpayers doing business in Texas to consider the economic realities underlying the transactions in determining the nature and location of the service performed. Therefore, taxpayers doing business in Texas should evaluate whether their sourcing methods consider the economic realities of what the customer is buying rather than the last thing a service provider delivers to a customer. Further, taxpayers must fully understand where their employees are performing the service and where the equipment facilitating the transaction is located.\u00a0\u00a0<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>General Sourcing Rules for Multistate Service Providers<\/strong><\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">States generally follow two methods to source service revenue for income tax purposes \u2014 cost of performance (COP) or market-based sourcing. Under the Uniform Division of Income for Tax Purposes Act, sales of services are sourced using the COP approach. In recent years, there has been a shift from using a COP method to market-based sourcing in many states. However, state laws, regulations, and application of related methods can vary widely from state to state, which can be problematic since sourcing methods affect the apportionment of state income. Following this trend, the Multistate Tax Commission adopted market-based sourcing regulations to replace the COP rules on sourcing receipts from services.\u00a0\u00a0<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Source Based on Services Performed vs. Customer Location<\/strong>\u00a0<\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">The two methods differ in how and where service receipts are sourced. Under the COP method, states generally source service revenue based on where the services are physically performed. If services are performed in more than one state, states may use an all-or-nothing approach to source the revenue. Based on the COP method, for example, if the income producing activity that gave rise to the service receipts is performed in and outside the state, the receipts are sourced to Florida \u2014 where the greater proportion (more than 50 percent) of the income producing activity is performed in Florida.<sup>xi<\/sup>&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Where businesses have multiple service revenue streams, the cost of performance \u2014 that is, the direct cost of providing the services \u2014 must be applied to each separate income-producing activity and not to all of the business\u2019 activities. An income-producing activity is not specifically defined in many states, but there is a requirement that an income-producing activity apply to each separate item of income. These activities typically include income derived from performing services for the ultimate purpose of obtaining gains or profits.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Other states use the proportionate method to source service revenue when services are performed in one or more states. In South Carolina, receipts are sourced to the state to the extent the services are performed there.<sup>xii<\/sup>&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Most states use a market-based approach that sources receipts to where the customers are located, services are delivered, services are received, or where the customers received the benefit of the services. In Wisconsin, the benefit of a service is deemed to be received in the state if the service is provided to a customer physically located in the state or is related to real or tangible personal property in the state. Customer location could depend on the type of customer. In California for example, if the customer is a business entity, then the service is deemed to be received in the state if the contract or customer records indicate that the benefit of the service is in the state. Alternatively, for individual customers, the benefit of the service is presumed to be received in California based on the customer\u2019s billing address.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">States with a market-based approach generally require businesses to use single-salesfactor apportionment to source sales, because the intent of the market-based sourcing method is to impose tax on the taxpayer\u2019s access to a state\u2019s marketplace.\u00a0<\/p>\n\n\n\n<div style=\"height:35px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Conclusion<\/strong><\/h2>\n\n\n\n<div style=\"height:15px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p class=\"wp-block-paragraph\">State tax laws and sourcing rules have undergone significant changes. Many states generally lack formal guidance and have varying rules on sourcing service revenue. Although many states have replaced the COP-based sourcing approach with a market-based one, Texas laws have not.&nbsp;&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The Texas comptroller will likely revise rules or issue new guidance that more closely reflects sourcing receipts from services based on where the service is being performed \u2014 not where it is received. Given the complexities in how companies provide services and the sourcing rules that apply, taxpayers doing business in Texas should review their current sourcing methods to ensure that there is proper characterization of the service being performed \u2014 that is, what useful labor is being performed \u2014 and understand where the services are being provided. Failure to properly characterize the nature of the transaction may lead to improper sourcing of receipts and ultimately affect a company\u2019s state corporate income or franchise tax liability.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For more guidance, reach out to the tax professionals at <a href=\"https:\/\/taxops.com\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"TaxOps.com\">taxops.com<\/a>.<\/p>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Tram Le<\/em><\/a><em> (tle@taxops.com) 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. Copyright 2022 Tram Le. All rights reserved.\u00a0\u00a0<\/em>\u00a0<\/p><\/blockquote>\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let&#8217;s Talk Tax<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\">More Tax News<\/h3>\n\n\n<ul class=\"wp-block-latest-posts__list wp-block-latest-posts\"><li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/auditor-independence-in-the-age-of-private-equity\/\">Auditor Independence in the Age of Private Equity: What CFOs Need to Know<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/r-d-credits-for-software-companies\/\">R&amp;D Credits for Software Companies: Scrum Teams, Qualifiers, and Section 174 After OBBBA<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/section-174-decoupling-what-tax-pros-need-to-know-state-by-state\/\">Section 174 Decoupling: What Tax Pros Need To Know State By State<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/sean-espy-new-partner\/\">TaxOps Welcomes Sean Espy as Partner, Tax Minimization<\/a><\/li>\n<li><a class=\"wp-block-latest-posts__post-title\" href=\"https:\/\/taxops.com\/state-nexus-demystified-navigating-tax-compliance-after-wayfair-episode-1-2\/\">Your Tax Footprint Is Probably Bigger Than You Think: What Finance Leaders Need to Know About State Nexus<\/a><\/li>\n<\/ul>\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<\/div>\n\n\n\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n","protected":false},"excerpt":{"rendered":"<p>In this installment of Spreading SALTovation for Tax Notes, Tram Le examines the Texas Supreme Court\u2019s Sirius XM ruling in relation to the challenges of sourcing service receipts in multiple states.\u00a0 By Tram Le. Reprinted from Tax Notes State, June 6, 2022, p.977\u00a0 The Texas Supreme Court\u2019s ruling in Sirius XM rejected the Texas comptroller\u2019s [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":10648,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"off","_et_pb_old_content":"<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:gallery {\"linkTo\":\"none\"} -->\n<figure class=\"wp-block-gallery has-nested-images columns-default is-cropped\"><!-- wp:image {\"id\":10182,\"sizeSlug\":\"large\",\"linkDestination\":\"none\"} -->\n<figure class=\"wp-block-image size-large\"><img src=\"https:\/\/taxops.com\/wp-content\/uploads\/2022\/04\/Texas-High-Court-Clarifies-Service-Receipt-Apportionment-1-1024x536.png\" alt=\"\" class=\"wp-image-10182\"\/><\/figure>\n<!-- \/wp:image --><\/figure>\n<!-- \/wp:gallery -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><em><em>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.<\/em>&nbsp;<\/em><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:quote -->\n<blockquote class=\"wp-block-quote\"><p><\/p><\/blockquote>\n<!-- \/wp:quote -->\n\n<!-- wp:paragraph -->\n<p>By <a href=\"https:\/\/taxops.com\/tram-le\/\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">Tram Le<\/a> <\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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.<sup>1<\/sup> The Court found that the performance of service is located where the taxpayer\u2019s personnel or equipment is physically doing useful work for the customer.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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 \u201cfair value of the services\u201d rendered in Texas where services are performed in more than one state.<sup>2<\/sup>&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>For those tax years, the Texas Comptroller adjusted on audit to base the tax on the percentage of Sirius XM\u2019s Texas subscribers. The Comptroller argued that service revenue is sourced to Texas if the \u201creceipt-producing, end-product act\u201d takes place in Texas. In this case, such an act was considered the decryption of the satellite network and enabling of each subscriber\u2019s radio to receive Sirius XM\u2019s signal. However, Sirius XM argued that its services \u2013 the production and broadcasting of radio content \u2013 was mainly performed outside of Texas.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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 \u201cwhere service [is] performed in this state.\u201d This rejects the Comptroller premise of service taking place at the customer location. The Court also rejected the use of the \u201creceipt-producing, end-product\u201d test to determine where a service is being performed.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>Although the Court ruled in favor of the taxpayer, the case was remanded to the Appellate court for further review of Sirius XM\u2019s cost of performing services and evidence to support its \u201cfair value of services\u201d performed in Texas.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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.&nbsp;&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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.&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:paragraph -->\n<p>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.&nbsp;Reach out to Tram at <a href=\"mailto:tle@taxops.com\" target=\"_blank\" rel=\"noreferrer noopener\" title=\"Tram Le\">tle@taxops.com<\/a>.&nbsp;&nbsp;<\/p>\n<!-- \/wp:paragraph -->\n\n<!-- wp:spacer {\"height\":\"53px\"} -->\n<div style=\"height:53px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/\" target=\"_blank\" rel=\"noreferrer noopener\">Let's Talk Tax<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:heading {\"level\":3} -->\n<h3>More Tax News<\/h3>\n<!-- \/wp:heading -->\n\n<!-- wp:latest-posts \/-->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->\n\n<!-- wp:buttons -->\n<div class=\"wp-block-buttons\"><!-- wp:button -->\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link\" href=\"https:\/\/taxops.com\/contact\/#subscribe\" target=\"_blank\" rel=\"noreferrer noopener\">Subscribe to Tax News<\/a><\/div>\n<!-- \/wp:button --><\/div>\n<!-- \/wp:buttons -->\n\n<!-- wp:spacer {\"height\":\"47px\"} -->\n<div style=\"height:47px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n<!-- \/wp:spacer -->","_et_gb_content_width":"","spt_transcript":"","footnotes":""},"categories":[229,226],"tags":[252,284,126,265,913,997,996,949,30,101,80],"class_list":["post-10647","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-state-and-local","category-tax-news","tag-accountant","tag-cfo","tag-cpa","tag-finance-professional","tag-new-tax","tag-online-services","tag-service-reciepts","tag-sirius-xm","tag-state-and-local-tax","tag-state-tax","tag-tax-provider"],"aioseo_notices":[],"jetpack_featured_media_url":"https:\/\/taxops.com\/wp-content\/uploads\/2022\/07\/Texas-Sirius-XM-Ruling.png","_links":{"self":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10647","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/comments?post=10647"}],"version-history":[{"count":3,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10647\/revisions"}],"predecessor-version":[{"id":10652,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/posts\/10647\/revisions\/10652"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media\/10648"}],"wp:attachment":[{"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/media?parent=10647"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/categories?post=10647"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxops.com\/wp-json\/wp\/v2\/tags?post=10647"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}