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Texas court applies customer-based apportionment to satellite radio margin tax

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June 2020


The Texas Court of Appeals has held that a subscription-based satellite radio service’s franchise tax base should be apportioned based on the locations of its subscribers, rather than on the locations where it produced its broadcast programming. The taxpayer is petitioning the Texas Supreme Court for review of the decision.

[Hegar v. Sirius XM Radio, Inc., Tex. App, 3rd Dist. - Austin, No. 03-18-00573-CV, 5/1/20]

The takeaway

The appellate court’s decision appears consistent with a number of recent Comptroller hearings and letter rulings that focus narrowly on the ‘act done’ or ‘end-product act’ for which the customer contracts and pays to receive. This approach generally has resulted in sourcing certain service receipts to the location of the customer (i.e., market sourcing) and represents a shift from prior Comptroller hearings and letter rulings that generally focused on the ‘fair value’ or ‘cost of performance’ of the services performed in Texas. The court’s discussion of Westcott Communications highlights the challenge taxpayers may have in evaluating the ‘act done’ or ‘end-product act’ that its customers are paying to receive.

Texas service providers, especially those with Texas-based technology or communication platforms with out-of-state customers, should consider whether they should source service revenue consistent with the rationale provided in Sirius XM and whether the filing of refund claims may be applicable.

Out-of-state taxpayers that provide services through technology and communications platforms should review their current and historical sourcing of receipts to Texas to determine whether FIN 48 reserves may be applicable as a result of this decision.

Note: The taxpayer is petitioning the Texas Supreme Court for review of the appellate court’s decision.

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Peter Michalowski

State and Local Tax Leader, PwC US

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