Detailed Texas Development
As the tax filing season gets underway, it is important to keep in mind all the legislative and regulatory changes that have occurred since last year’s returns were filed. Earlier this year, Texas Comptroller Rule § 3.591, which sets forth the apportionment rules for the Texas Franchise Tax, was significantly revised. One of the more significant changes related to the sourcing of service receipts. Under Texas law, receipts from providing a service are apportioned to the location where the service is performed. If services are performed both inside and outside Texas, then the receipts are attributed to Texas in proportion to the fair value of the services that are rendered in Texas. The revised rule added guidance on interpreting the location where a service is considered performed. Under the rule, a service will be performed at the location of the receipts-producing, end-product act or acts. The new language aligns with a test adopted by the Third Court of Appeals in Hegar v. Sirius XM Radio, Inc. in which the court held that the receipts-producing end product act associated with the provision of satellite radio service was the taxpayer activating a customer’s chip set in their satellite-enabled radio. The court held that this activity occurred where the customer’s radio was located, which was likely the customer’s residence where his/her car was located.
While the adoption of the rule confirms the Comptroller’s intent to apply the receipts-producing, end-product act test both retroactively and prospectively, the Sirius XM litigation is not yet over. The taxpayer’s petition for review before the Texas Supreme Court, filed in July 2020, is still pending. At least four amicus briefs have been filed urging the court to hear the case, most recently by the Motion Picture Association. Collectively, the briefs point out that the Sirius XM decision conflicts with the 2003 Westcott decision from the same appellate court, which addressed similar facts. The briefs also note that the holding in the case coupled with the rule change that, per the Comptroller, is “a straightforward reading of the Tax Code as embodied in existing precedent,” creates significant uncertainty for taxpayers for both for past and future tax years. It’s unclear when the court will decide whether to hear the Sirius XM appeal; however, both parties have filed their briefs on the merits, and Sirius XM filed its reply brief on the merits on June 14, 2021. Please stay tuned to TWIST for future updates on this litigation.
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