Texas Court Concludes That Sirius XM’s Subscriber Revenue is Sourced to Subscriber Location

June 29, 2020

By: Jeff Glickman, SALT Partner

The sourcing of service revenue for apportionment purposes continues to be a highly contested area.  Whether a state uses the “services performed” or “marketplace” standard, there is much disagreement over how to apply those rules.  This issue was the subject of a recent Texas Court of Appeals decision holding that Sirius XM’s (“Sirius”) satellite radio subscription receipts should be sourced to Texas – based on the state’s “services performed” rule – according to the location of the subscriber.[1]

Sirius is a subscription-based satellite radio service with over 150 channels.[2]  Sirius is located outside Texas, and approximately 70% of its content is original programming.  That programming is produced in studios located in a number of cities outside of Texas. Sirius’ production in Texas was limited to a channel named “Willie’s Place,” transmitted five days a week for no more than five hours a day, from a location in Hillsboro, Texas, which Sirius did not own or lease.

Sirius’ main source of revenue was from subscription fees for its satellite radio service, most of which came from owners/lessees of cars equipped with a satellite-enabled radio that contained chips that allowed the radio to receive the encrypted signal.  Sirius did not manufacture the radios, although it did subsidize some of the costs of manufacturing them.  Also, it provided incentives to car manufacturers to install them into the cars.

For purposes of computing the Texas Franchise Tax, a taxpayer that does business inside and outside of Texas must compute an apportionment percentage based on a single gross receipts factor (i.e., gross receipts from business done in Texas divided by gross receipts from business done everywhere).[3]   Service revenue is soured to Texas based on “the location where the service is performed. If services are performed both inside and outside Texas, then such receipts are Texas receipts on the basis of the fair value of the services that are rendered in Texas.”[4]

Based on that standard, Sirius looked to where it produces its radio content, which is outside Texas.  However, the state disagreed and contended that the service provided by Sirius in Texas was the “service of unscrambling the radio signal” which occurred “at the radio receiver” (i.e., where the subscriber is located).  Thus, while the parties agreed that the state uses a “services performed” rule, they disagreed over what the actual service is.

The Court agreed with the state and explained that although there is no specific definition of “services performed,” the standard applied is the “receipt-producing, end-product act.”  Under this standard, Sirius’ production and distribution of content were viewed as “non-receipt-producing, albeit essential, support activities.”  The Court then stated:

The evidence establishes that the service for which Sirius XM’s customers contracted, and that resulted in the subscription revenue at issue, was the receipt of Sirius XM programming. Per the terms of that contract, each subscription was “tied to one receiver.” . . . The receipt-producing, end-product 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. This act occurred where the satellite-enabled radio was located, which can reasonably be presumed to be where the Sirius XM customer resided, as the Comptroller presumed here. . . .  In addition, although Sirius XM’s programming included original content produced by Sirius XM and available exclusively to its subscribers, nothing in the record suggests that Sirius XM contracted with individual subscribers or groups of subscribers to develop or produce specific programming.

When applying an “income-producing activity” or “services performed” standard for sourcing service revenues, an important first question must be: What exactly is the income-producing activity or service being performed?  It’s natural to take a broad view of that as Sirius did when it determined that its service was providing satellite radio services, and therefore, all of the costs associated with the content to provide that service was included to determine how much should be sourced to Texas. 

However, it is not uncommon for states to take a narrower view in order to find that one income-producing act that occurs in the state to argue that all of the revenue should be sourced to that state.[5]  Aprio’s SALT team has experience analyzing state apportionment and sourcing rules.  We can assist businesses to make sure that they are applying the appropriate standard in order to minimize state income tax liability or to ensure that the business does not incur unexpected state tax liabilities and penalties.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

[1] Hegar v. Sirius XM Radio, Inc., No. 03-18-00573-CV (Tex. App, 3rd Dist. – Austin, May 1, 2020).

[2] The facts provided here are based on the tax years 2010 and 2011.

[3] Texas Admin. Code § 3.591(c).

[4] Texas Admin. Code § 3.591(e)(26).

[5] An article in our March 2020 SALT Newsletter also illustrates this narrower approach to “income-producing activity” taken by the state of Florida.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

Recent Articles

About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.

(770) 353-4791