The Texas Supreme Court recently ruled on apportionment under the Texas franchise tax, also known as the Texas margin tax. Apportionment is the method by which a taxpayer determines how much of its income (or, in Texas, taxable margin) is taxable to a particular state as opposed to other states. In this case, the Texas Supreme Court ruled that Sirius XM’s receipts from providing its satellite radio services were taxable to the states from which the satellite radio programs were broadcast, not the states in which subscribers received the programs. While this decision is specific to satellite radio, it may have implications for other providers of remote services. We discuss this opinion and its broader impact on Texas taxpayers below.
Texas tax law provides that a taxpayer must apportion services to the location where the services are performed. Here, the parties disagreed about what service Sirius XM performed and, therefore, where Sirius XM performed the service. Sirius XM argued that the service it provided was creating satellite radio content, which it largely did at studios outside Texas. However, the Texas Comptroller’s position was that the service Sirius XM provided was that of unscrambling the radio signal, which occurred at the radio receiver, and that its satellite radio receipts should therefore be apportioned to the locations of its subscribers. The Texas Supreme Court agreed with Sirius XM and reversed the Third Court of Appeals, which had sided with the Texas Comptroller.
The Texas Supreme Court grounded its ruling in the plain language of the statute. It noted that the Texas Comptroller’s interpretation of the statute may not contradict the plain statutory language. In determining the meaning of the statutory language, the Texas Supreme Court looked to its prior decisions and determined that a service is performed in Texas “if the labor for the benefit of another is done in Texas.” It then stated that where that labor is done is “generally” “where the employees do their work, since businesses act only through their agents.” In recognition of the changing technological nature of the economy, the Texas Supreme Court went on to say that when “technology rather than personnel performs the useful act, we look to the location of that equipment.” In this analysis, the Texas Supreme Court specifically rejected an approach that would “ignore the location of the service performer and focus only on the location where the performance is received or its effects felt.”
Interestingly, the Texas Supreme Court’s plain reading of the statute contradicts rules adopted by the Texas Comptroller while this case was ongoing. Those rules stated that Texas Comptroller’s interpretation of the statute — that services should be apportioned to the location of the “receipts-producing, end product act.” In short, this rule seeks to apportion a service to the location where its benefit is received, which contradicts the Texas Supreme Court’s reading of the plain language of the statute in this case. While administrative rules that contradict plain statutory language are legally invalid, the Texas Supreme Court did not directly address these rules at all. Thus, the Texas Supreme Court’s opinion casts doubt on the Texas Comptroller’s rules in this area, and raises the likelihood that those rules may be declared invalid in later litigation on this issue.
Note that this decision is not yet final, as the Texas Comptroller may still seek rehearing. However, it likely will become final, and if so, its reasoning will likely impact both broadcasting and other types of remote services. Therefore, taxpayers in these industries should examine this opinion carefully and, if necessary, consult a Texas tax professional, such as a Texas tax attorney, to be certain of their Texas tax obligations.
