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Texas Court of Appeals Affirms Amount of Sirius XM’s Franchise Tax Receipts

Tax Development Nov 15, 2022

Texas Court of Appeals Affirms Amount of Sirius XM’s Franchise Tax Receipts

On November 10, 2022, the Texas Court of Appeals affirmed the trial court’s determination of the amount of Sirius XM’s Texas receipts, which had been remanded by the Texas Supreme Court. 



On March 25, 2022, the Texas Supreme Court delivered its Opinion in the franchise tax case of Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (Tex. 2022). At issue was the application of Texas’s sourcing of receipts from services. Sirius XM produces radio programming, which it transmits using satellites, and its subscribers pay monthly fees to access said programming. Under Texas Tax Code § 171.103(a)(2), receipts from “each service performed in this state” are included in Texas gross receipts for franchise tax apportionment purposes. The supreme court reversed the court of appeals’ decision apportioning to Texas the subscriber receipts based on the location of the customer’s automobile radio where the encrypted signal from the satellite radio service was decoded by a chip enabling the radio signal to be heard. The supreme court held that the sourcing of the services should instead be based on the location of Sirius XM’s personnel or equipment that perform the service because the relevant service was Sirius XM’s production and broadcasting.

Sirius XM produced and transmitted the majority of its subscription-based programming from multiple studios it owned and operated, primarily in New York City and Washington, D.C., and in smaller remote studios. Because the wrong test had been applied for apportioning the receipts, the court of appeals never addressed whether the taxpayer had provided sufficient evidence of the fair value of the services that were rendered in Texas. Thus, the supreme court remanded the case to the extent the parties still disagreed on whether Sirius XM’s cost of performance study provided sufficient evidence of the fair value of the services performed in the state.

Court of Appeals Analysis

Under former Comptroller Rule 3.591(e)(26), if services occur in multiple states, they are apportioned to Texas based on the “fair value of the services that are rendered in Texas.” The court of appeals was tasked with addressing the Comptroller’s arguments: “(1) as a matter of law, a taxable entity cannot rely on cost-of-performance data to apportion the fair value of its services, and (2) in the alternative, Sirius XM failed to ‘meet its burden of proving the costs that represent the fair value of services performed in Texas.’” In addressing the first issue, the court of appeals determined the phrase “fair value” means “the monetary worth of the services at issue, based on an objectively reasonable assessment” and that using cost of performance is not plainly erroneous or inconsistent with the language requiring a reasonable means of assessing fair value. In addressing the alternative issue, the court of appeals concluded legally sufficient evidence had been provided. The court explained that the Comptroller did not preserve its complaint that the expert’s testimony on the fair value was legally insufficient by making a timely objection with the trial court. The Comptroller essentially was arguing that Sirius XM provided no evidence of fair value because the expert’s opinion was unreliable by excluding significant costs or fair value, which without a prior objection at trial does not provide a fair opportunity for the opposing party to cure any deficiency upon appeal. As a result, the court of appeals agreed with the amount of Sirius XM’s Texas receipts that had been determined at the trial court.

Ryan’s Texas Franchise Tax team has extensive experience assisting clients in gathering the facts necessary to establish the relevant services performed, identify the requisite personnel and equipment performing those services, and support the fair value of the service performed in Texas for proper apportionment purposes. Contact one of the Ryan experts listed below to identify the fair value of your services. 


Eric L. Stein

Sandi Farquharson

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