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On March 25, 2022, the Texas Supreme Court issued its opinion in Sirius XM Radio, Inc. v. Hegar, a Texas franchise tax case concerning apportionment of service receipts.1 The Court agreed with the taxpayer’s construction of the governing statute, but remanded the case to the intermediate appellate court to review the sufficiency of the taxpayer’s evidence supporting its apportionment calculation.

Sirius XM Radio, Inc. v. Hegar concerns the sourcing of receipts from satellite radio subscriptions for Texas franchise tax apportionment purposes. Sirius broadcasts more than 150 satellite-radio channels, over 70% of which run original content produced by Sirius. Sirius conducts the vast majority of its operations outside of Texas. The company’s headquarters, transmission equipment, and production studios are almost exclusively outside of Texas, and its satellites are located in outer space.  Sirius produces content for one channel, Willie’s Place, from Texas.

For purposes of Texas franchise tax apportionment, Texas receipts include the receipts from “each service performed in this state.” Tex. Tax Code § 171.103(a)(2). “If services are performed both inside and outside Texas, then such receipts are Texas receipts on the basis of the fair value of the services that are rendered in Texas.” 34 Tex. Admin. Code § 3.591(e)(26)(B).

Sirius sourced its subscription receipts based on the locations from which it produced programming, using the relative costs of those activities in Texas and elsewhere. The Comptroller audited Sirius and determined that the taxpayer should have sourced its subscription receipts using the location of its subscribers. The Comptroller contended that, to determine whether a service is “performed in this state,” the taxpayer must look to the location of its “receipt-producing, end-product act.” According to the Comptroller, Sirius’s relevant act was decrypting the satellite radio signal for paying customers, which happened at the customer’s location. Thus, in the Comptroller’s view, Sirius should have sourced its subscription receipts to Texas based on the locations of its subscribers.

However, the Texas Supreme Court sided with Sirius on the law. The Court began its analysis with a reminder that Texas courts have not adopted the agency-deference doctrines employed by federal courts. Rather, Texas courts endeavor to decide for themselves what the statutory text means so that they may determine whether an agency’s construction is consistent with the statute’s plain language and, therefore, entitled to be upheld. The Texas Supreme Court’s opinion does just that.

Looking to “straightforward understandings of the everyday words the statute uses,” the Court held that a service is performed in Texas if the labor for the benefit of another is done in the state. Given the statute’s focus on the location where the service is performed (not received), the “most natural reading of ‘service performed in this state’ supports locating the performance of the service at the place where the taxpayer’s personnel or equipment is physically doing useful work for the customer.”

The Court rejected the Comptroller’s receipt-producing, end-product act test as “atextual and unhelpful,” and noted that prior court opinions (e.g., Westcott Communications) and the Comptroller’s own authority was inconsistent with his position advanced in Sirius XM. Notably, the Court never adopted the “cost of performance” language heavily referenced in Sirius’s and amici briefing. Instead, the Court recognized Texas “uses an origin-based system” that has “long looked to where the service is performed rather than where it is received.”

Having assigned meaning to the statutory text, the Court then turned to the proper characterization of the nature and location of the services performed by Sirius. The Court rejected the Comptroller’s argument because characterizing Sirius’s service “as ‘decryption’ elevates the technicalities of the transaction over the economic reality of the service performed.” No one would pay for Sirius’s decryption without the radio content it produces. Moreover, “the decryption service—even if it mattered—is performed outside of Texas, at the point of transmission.” The Court ultimately concluded that “Sirius has little personnel or equipment in Texas that performs the radio production and transmission services for which its customers pay monthly subscription fees.” Thus, the Court held “the court of appeals’ decision apportioning to Texas all of Sirius’s receipts from Texas subscribers must be reversed” and the case remanded to that court to consider the appropriateness of Sirius’s apportionment calculation.