Radio XM Sirius, Inv. vs. Hegar (Texas Comptroller of Public Accounts), No. 20-0462, __S.W.3D__ (Tex. Mar. 25, 2022)
Publish: Under Texas law, are Texas users’ monthly Sirius XM subscription fees receipts for “service performed in that state”?
Holding: No. Sirius XM “service” is “performed in this state” if the work for another is performed in Texas. Although Sirius XM subscribers reside in Texas, the “services” provided by Sirius XM are provided outside the Texas border. Thus, the Comptroller’s assessment of the state franchise tax on subscription fees paid to Sirius XM by all Texas residents was incorrect.
Summary of facts: Sirius broadcasts more than 150 satellite radio channels. Content is produced in studios primarily located outside of Texas, although Sirius ran a small radio show in Texas for a time. Content is distributed by transmitting it to satellites from facilities in states other than Texas. Satellites are launched from outside the United States. The satellites transmit signals back to Earth, where they reach either radio sets or terrestrial repeaters (twenty-two of which are in Texas) that complete the coverage. The satellites are controlled by Sirius facilities located outside of Texas. Once the signal reaches a customer’s radio, a circuit or “chip” decrypts the radio signal, allowing the listener to hear the programming. Customers can access Sirius content by paying a subscription fee.
For the 2010 and 2011 tax years, Sirius filed what it believed to be an appropriate franchise tax return for its “services performed in“Texas. However, the Texas Comptroller claimed that Sirius underpaid $878,364.39 for the 2010 tax year and $1,674,907.38 for the 2011 tax year.service performed in this conditionby Sirius was the radio signal “decryption” service to Texas-based consumers. The Comptroller believed that services should be allocated based on the state in which the “act of receipting and final product production” takes place.
Sirius argued that it performs little or no service in Texas. Sirius argued that the phrase “service performed in this state” means that the personnel or equipment performing the service must be physically located in Texas. Sirius argues that the service it provides is not the decryption of radio signals but the production and broadcast of radio content, which happens outside of Texas.
Main points of law:
- Texas franchise tax is calculated by multiplying the “taxable margin” of the taxable entity by the tax rate. Tax Code § 171.002. Determining an entity’s “taxable margin” requires three steps: (1) margin calculation, (2) distribution, and (3) deductions. Identifier. § 171.101(a).
- “Marginis generally a percentage of the taxpayer’s total income. § 171.101(a)(1). “Distribution” margin in Texas is provided by section 171.106, resulting in a “distributed margin.” The allocated margin is calculated by multiplying the margin by a fraction whose “numerator. . . is the taxable entity’s gross receipts from activities carried on in that state” and whose “denominator . . . corresponds to the taxable person’s gross receipts from all of his activity. Identifier. § 171.106(a). The allowable deductions are then subtracted from the allocated margin, resulting in the “taxable marginto which the tax rate applies. Identifier. § 171.101(a)(3).
- Determination of distributed margin requires calculating what percentage of the taxpayer entity’s gross revenue is “business done in this state.” § 171.106(a) (emphasis added). Section 171.103 outlines the required calculation, and one of the elements of the calculation is “the taxable entity’s revenue from . . . each service performed in this condition.” Identifier. § 171.103(a)(2) (emphasis added).
- Texas administrative code rules provide that revenue from services “shall be allocated to the place where the service is performed” and if the services are performed in more than one state, the value assigned to Texas is the “fair value of the services which are provided”. returned to Texas. To see 34 admin. Code § 3.591(e)(26).
- “Service”, in this context, means “the performance of work for the benefit of others”. Van Zandt vs. Fort Worth Press, 359 SW2d 893, 895 (Texas 1962). As for “executed in this state”, the SiriusXM Court, note:
We see no reason to deviate from these straightforward interpretations of the everyday words the law uses. A “service” is “performed in this state” if the work for the benefit of another is performed in Texas. As a general rule, to know where the “useful work” of a taxable person is carried out, it suffices to ask where the employees carry out their work, the companies only acting through their agents. When technology rather than personnel performs the useful act, we look to the location of that equipment, as did the Comptroller and the Courts of Appeal. . . . SiriusXM, slippery notice. at 10
- Texas used a single-factor test based on sales receipts. Other states consider revenue and other factors. “But Texas’ single-factor origin-based system only looks at where the service from which revenue is derived is performed.” Identifier. to 13 (emphasis added).
- “Determining the place of performance requires looking at the physical location of the taxpayer’s personnel or equipment performing the service for which the customer is paying. . . . We see no reason for the “act of producing receipt, final product” criterion to play a role in our decision. to 15 (emphasis added).
- In tax cases, courts must take into account (and must not ignore) the economic realities underlying the transactions in question. “The economic reality here is that Sirius is a radio production and broadcast company operating dozens of satellite radio channels from locations outside of Texas. Characterizing the service Sirius performs as “decryption” elevates the technical aspects of the transaction above the economic reality of the service performed at 16-17.
- where the services are performed inside and outside of Texas, the taxpayer must attribute to Texas the “fair value of the services rendered in Texas”. Former 34 TEX. ADMIN. CODE § 3.591(e)(26).1
Knowledge: This SiriusXM The opinion provides sound guidance on how a taxable entity — particularly a technology-focused business out of state — should allocate gross revenue from operations conducted in Texas. Sirius XM was successful in the business primarily because Sirius XM – through its technology-driven business model – performed very little service in Texas. Labor and facilities were located outside the Texas border. Thus, pursuant to the Texas Tax Code and the Texas Administrative Code, Sirius XM was required to allocate to Texas the fair value of the services performed in Texas, but all subscription fees paid by Texas residents were not necessarily subject to taxable apportionment because the fees were not for services performed in Texas. Sirius XM may be an outlier in the realm of tech-focused companies doing business in Texas. Each such taxable entity must assess its business activities, revenue streams, location of its workforce, location of its facilities, and services provided “in Texas” when allocating the applicable taxable margin in under Chapter 171 of the Texas Tax Code.