The Texas Supreme Court has ruled in favor of the taxpayer in a dispute with the Comptroller over the taxpayer’s apportionment of gross receipts from services performed in Texas. Sirius XM Radio, Inc. v. Hegar (No. 20-0462) posed the question of whether the monthly subscription fees paid by its Texas users constitute Texas receipts under § 171.103(a), Tax Code. In an opinion by Justice Blacklock, the Court rejected the Comptroller’s position that a taxpayer must allocate services to Texas if the “receipt-producing, end-product act” occurred in the state. The Comptroller argued that the “service” Sirius provides is the enabling of each subscriber’s radio to receive Sirius’s signals and thus is “performed” every time a subscriber signs up for the service. Sirius, on the other hand, contended that its services involve the production of radio shows and the transmission of radio signals, most of which occurs outside of Texas.

The decision overturns the Austin Court of Appeals, which accepted the Comptroller’s position and reversed a trial court order directing the Comptroller to refund $2 million in taxes paid under protest. The Court’s analysis turned on the construction of the phrase “services performed in this state.” Reviewing prior administrative decisions and the Court’s own precedent, Justice Blacklock determined that the “receipt-producing, end-product act” test relied on by the Comptroller contradicts the plain language of § 171.103. That test, according to the opinion, cannot be used to determine the location of the service, that is, where the service is received. The statute, rather, uses the word “performed,” and if the Legislature had meant “received,” it would have said so. Similar cases involving broadcasting have focused on the location of the broadcaster’s equipment and personnel. For Sirius, those assets are not located in Texas.

The opinion then turns to identifying the “service” Sirius actually performs. Contrary to the court of appeals, which held that the act “that allowed each Sirius XM customer to receive Sirius XM programming occurred when Sirius XM decrypted the program by activating or deactivating the customer’s chip set in their satellite-enabled radio, which Sirius XM could do remotely.” Justice Blacklock opined that this interpretation disregards the underlying economic reality of the transaction: Sirius XM is not a remote encryption company but “a radio production and broadcasting company operating dozens of satellite radio channels from locations outside of Texas.” Moreover, Sirius’s customers own their radios, not Sirius, and Sirius’s encryption-decryption model is for its own benefit. As Justice Blacklock put it, Sirius’s “customers want to listen to radio content. They do not want encryption. They would prefer to have the content without decryption, which make the content free. Sirius, of course, would not make money that way.” Justice Blacklock compared the Comptroller’s position in this case to characterizing an online newspaper as a “paywall-removing service.” Decryption allows Sirius to capture a share of the value of its radio content, but “is obviously not the useful labor that Sirius performs.” Even if it was, the opinion concludes, there is still no evidence that decryption is performed using equipment or personnel in Texas.

SCOTX remanded the case to the court of appeals to consider the Comptroller’s argument that a study submitted by Sirius to the district court is insufficient evidence to establish the fair market value of its services performed in Texas. Sirius offered the study to support its “cost-based analysis of fair value, including its treatment of its FCC license, its handling of its subsidies, [and] its apportionment of consulting fees.” Whether the Comptroller will litigate the issue remains to be seen.

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