Reed Smith Client Alerts

The Texas Comptroller has proposed further amendments to the agency’s recently-amended Texas franchise tax rule on sourcing receipts from the performance of services. The proposed amendments reflect the Texas Supreme Court’s ruling in Sirius XM. The proposed amendments have been published in the January 20, 2023 issue of the Texas Register and the comment period will close on February 19, 2023.

Authors: Rich Moore


In March 2022, the Texas Supreme Court held that, for purposes of the Texas franchise tax, receipts from the provision of a service are sourced to the location of performance, i.e., the location of the taxpayer’s personnel or equipment that performs the service for which the customer pays.1 As discussed in our March 2022 Client Alert, the Texas Supreme Court did not provide an answer, however, on how to make a fair value allocation of service receipts if the taxpayer performs the service both within and outside of Texas. Instead, the high court remanded the case to the Third Court of Appeals for further consideration of that issue.

In November 2022, the Third Court of Appeals held that sourcing service receipts using cost of performance is an appropriate method for making a fair value allocation, although perhaps not the exclusive method.2 As discussed in our November 2022 Client Alert, the court concluded that “nothing in the plain language of the Rule dictates a specific method for calculating fair value or excludes cost of performance as a reasonable means of assessing fair value for purposes of apportionment.” Following the Third Court of Appeals’ opinion, the Comptroller chose to not petition the Texas Supreme Court for review.