Texas Comptroller Takes a Serious Look at Sourcing Regulation After SiriusXM Loss

The Texas Comptroller of Public Accounts has proposed significant amendments to its service receipts sourcing regulation in the wake of the Texas Supreme Court’s decision in Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (Tex. 2022).  The proposed amendments would dispense with the Comptroller’s long-standing “receipts-producing, end-product act” test and align the underlying regulation with the SiriusXM decision.

For Texas franchise tax apportionment purposes, Texas law provides that receipts from services performed in Texas are included in the taxpayer’s gross receipts factor numerator.  The Comptroller’s regulation, 34 Tex. Admin. Code § 3.591, provides that a service is performed at the location of the receipts-producing, end-product act.  In SiriusXM, for example, the Comptroller maintained that Sirius XM’s subscription fees from Texas customers were receipts from a service performed in Texas because the receipts-producing, end-product act—the enabling of customers’ radios to receive the satellite signal, according to the Comptroller—occurred in Texas.  The Texas Supreme Court rejected that argument and held that a service is performed “where the taxpayer’s personnel or equipment is physically doing useful work for the customer.”  In so holding, the court characterized the receipts-producing, end-product act test as “extraneous,” “atextual,” and “unhelpful,” and even observed that the Comptroller had misapplied his own test.

On January 5, 2023, the Comptroller filed proposed amendments to 34 Tex. Admin. Code § 3.591 with the Texas Secretary of State.  The proposed amendments would strike the provisions relating to the receipts-producing, end-product act test, as well as the corresponding examples, from the regulation.  The proposed amendments would incorporate the holding in SiriusXM that a service is performed at the location where the taxpayer’s personnel or equipment is physically doing useful work for the customer, except that it would use “property” in place of “equipment.”  The phrase “useful work for the customer” would be defined as “work that the customer hired the taxable entity to perform,” excluding “activities that enable the taxable entity to do business in general or are not directly used in the provision of a service to the customer.”  In instances where a service is performed inside and outside Texas and the costs of performance are considered for purposes of determining the fair value of the service that is performed in Texas, the proposed amendments would permit consideration only of the direct costs of doing the work that the customer hired the taxpayer to perform.

The proposed amendments were published in the Texas Register on January 20, 2023 and can be accessed at  Interested parties wishing to submit comments must do so within 30 days from the date of publication.