Texas Supreme Court sources service receipts to location of personnel or equipment, not where services are received

March 2022

In brief

The Texas Supreme Court on March 25 held that amounts received for Sirius XM’s radio satellite services are sourced to where services are performed rather than to where services are received. Texas law provides that service revenue is sourced to where services are “performed.” The Comptroller argued that such performance is located where the “end-product act” occurs, which is at the location of the customer where the radio signal is decrypted. The Court disagreed and found that the performance of the service is located where the taxpayer’s personnel or equipment is physically doing useful work for the customer.

The takeaway. The Court looked to the “economic realities” of Sirius XM’s business. Taxpayers should review their customer contracts to evaluate the economic realities when determining the services that customers are paying to be performed. 

Although the decision is taxpayer-favorable, the proceedings may not be over. The Court’s opinion left open the Comptroller’s ability to challenge on remand Sirius XM’s assessment of the fair value of the services actually performed in Texas. Taxpayers should monitor the progress of the case at the appellate court as to how or if the Comptroller decides to challenge the location and value of services provided by Sirius XM.

[Sirius XM Radio, Inc. v. Hegar, Tx. Sup. Ct. No. 20-0462 (3/25/22)] 

In detail 


Sirius XM Radio, Inc. provides a subscription-based satellite radio service to customers throughout the United States. Its headquarters, transmission equipment, and production studios are located almost exclusively outside of Texas.

On its 2010 and 2011 Texas franchise tax returns, Sirius XM apportioned its “taxable margin” based on the locations where it produced its programming for broadcast and the relative costs of those activities in Texas and outside Texas. The Comptroller objected to this apportionment method on audit and adjusted Sirius XM’s apportionment factor to reflect the percentage of its Texas subscribers. 

Sirius XM paid the additional tax and interest under protest and filed suit for a refund. The trial court held in favor of Sirius XM, finding that “[t]he apportionment factors Sirius XM reported on its returns for Report Years 2010 and 2011 were consistent with the fair value of Sirius XM’s service performed in Texas.” The appellate court found in favor of the Comptroller, holding that the “receipt-producing, end-product act that allowed each Sirius XM customer to receive Sirius XM programming occurred when Sirius XM decrypted the program by activating or deactivating the customer’s chip set in their satellite-enabled radio . . . This act occurred where the satellite enabled radio was located, which can reasonably be presumed to be where the Sirius XM customer resided.” Click here to read our Insight on the appellate court decision. 

Sirius XM appealed to the Texas Supreme Court (Court).

Sourcing service revenue where services are performed

Service revenue is sourced to Texas based on “each service performed in this state.” Texas rules provide that receipts from services are apportioned to the location “where the service is performed,” and if services are performed in more than one state, then the value sourced to Texas is the “fair value of the services that are rendered in Texas.” 

The Comptroller argued that service revenue is sourced to Texas if the “receipt-producing, end-product act” takes place in Texas. In this case, such an act is the enabling of each subscriber’s radio to receive Sirius XM’s signal.

Sirius XM asserted that the service it performs for Texas subscribers is the production of radio shows and transmission of a radio signal, nearly all of which takes place outside Texas.

Services are performed at location of personnel or equipment

The Court agreed with Sirius XM and found that a “service” is “performed” in Texas if the “labor for the benefit of another is done in Texas . . . . [which is] where the employees do their work.” When technology performs the useful act “we look to the location of that equipment.” 

The Court concluded that “the most natural reading of ‘service performed in this state’ supports locating the performance of the service at a place where the taxpayer’s personnel or equipment is physically doing useful work for the customer.” The Court stated that such an interpretation is consistent with the state’s case law history that has “long looked to where the service is performed rather than where it is received.” 

Court rejects customer location

The Court recognized that if the legislature intended to source services to customer location, it could have easily designated customer location in the statute. In fact, the legislature did so when sourcing sales of tangible property. For services, the legislature chose the words “performed in this state” rather than language focused on where the customer “receives” services.

According to the Court, to use a “receipt-producing, end-product act” test to determine the location of the service performed, as advocated by the Comptroller, “parts ways with the statute” and should not “play any role in our decision.” Instead, the Court commented that the “receipt-producing, end-product” act test may be useful in distinguishing between “support services” and the “receipt producing services” that a customer pays for (i.e., determining the service being performed), but the test is not well-established in prior case law and should not be used to determine where a service is being performed. 

Sirius XM’s services 

In order to apply its location-of-services-performed test, the Court first identified the service Sirius XM performed. The Court rejected the Comptroller’s view that Sirius XM performed only decryption services at the location of its customers. The Court provided that “customers want to listen to radio content. They do not want decryption.” 

Instead, the Court recognized that the economic reality is that Sirius XM is a radio production and broadcasting company operating dozens of satellite radio channels from locations outside of Texas. The Court also commented that it would be incorrect for the Comptroller to focus on the location of radio equipment in customers’ cars as evidence that services are performed in Texas since the receipts in dispute are from monthly subscriptions for access to radio content, not from the sale or lease of radio sets (which are installed in cars whether or not owners subscribe to SiriusXM’s services).

The Court found that, generally, Sirius XM had little personnel or equipment in Texas performing radio production and transmission services. However, the Court acknowledged that no court had considered the Comptroller’s argument that the cost-based analysis of fair value, proffered by Sirius XM, lacked legally sufficient evidence to establish the fair value of services performed in Texas.

Remanded to the appellate court 

Although the Court rejected the Comptroller’s method of sourcing services to the location of decryption, the Court recognized that some receipts should be sourced to Texas based on a measure of the fair value of Sirius XM’s services performed in Texas. As discussed above, the Court stated that determining the location of performance of a service requires looking to the location of the taxpayer’s personnel or equipment that performs the service.

When services are performed inside and outside Texas, by rule receipts are apportioned to Texas based on the “fair value of the services that are rendered in Texas.” To establish the fair value of its services, Sirius XM submitted a study showing the cost of performing its services. The Comptroller challenged the study as providing insufficient evidence, specifically contesting the treatment of Sirius XM’s FCC license, its handling of subsidies, its apportionment of consulting fees, etc. 

The Court acknowledged that no court had considered the Comptroller’s argument that Sirius XM’s study was insufficient, and the Court chose not to address the appropriateness of cost based methods in determining the fair value of services. The Court remanded the case back to the appellate court for further proceedings consistent with its opinion. The Court noted that the Comptroller may raise on remand with the appellate court the position that Sirius XM’s study is insufficient. 

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Peter Michalowski

SALT Services Leader, PwC US

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