Texas Supreme Court Rejects the “Receipt-Producing, End-Product Act” Sourcing Test

April 28, 2022

At a glance

  • The main takeaway: Some taxpayers may be eligible for a refund after the Texas Supreme Court rejected a “receipt-producing, end-product act” sourcing test for service revenue and instead applied “the location where the taxpayer’s personnel or equipment is physically doing useful work for the customer.”
  • Assess the impact: Taxpayers that applied the “receipt-producing, end-product act” test to source service revenue, may be impacted differently by this decision. Depending on where your services are performed, in or out of the state, you may have underpaid your Texas Franchise Tax or be entitled to a refund.
  • Take the next step: Aprio’s State and Local Tax (SALT) Team can help you analyze state apportionment and sourcing rules to ensure your business does not incur unexpected state tax liabilities and penalties.

Schedule a free consultation today to learn more!

The full story:

In our June 2020 SALT newsletter, we wrote an article summarizing a Texas Court of Appeals decision that applied a “receipt-producing, end-product act” test to the state’s “services performed” sourcing rule to conclude that Sirius’s receipts from subscriptions to its satellite radio programming should be sourced to the location of the customer. [1]On March 25, 2022, the Texas Supreme Court reversing that decision and rejecting that test as applied. [2]reversing that decision and rejecting that test as applied.[3]

A Brief Recap

For purposes of calculating the Texas Franchise Tax, a taxpayer that does business inside and outside of Texas must calculate 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).[4] 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 based on the fair value of the services that are rendered in Texas.”[5]

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 of appeals 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, the state viewed Sirius’s production and distribution of content as “non-receipt-producing, albeit essential, support activities.”

The Reversal

The Texas Supreme Court opinion began its analysis by noting that the statute sources service receipts to Texas if the “service is performed in the state.” In reviewing the meaning of those terms, the Court notes prior cases that have defined the term “service” as the “performance of labor for the benefit of another” and the term “performed in this state” as “whether the act done is located in Texas.” Putting those definitions together, the Court states that, “A ‘service’ is ‘performed in this state’ if the labor for the benefit of another is done in Texas.”

The Court then explains that prior administrative decisions applied the “receipt-producing, end-product act” test:

only to distinguish between the “support services” that enable the entity to do business and the “receipt-producing” services for which a customer actually pays. As originally employed, the test aimed to tell the Comptroller what qualifies as the “service performed.” It did not tell the Comptroller where a service is performed. Here, however, the Comptroller would use the “receipt-producing, end-product act” test to determine the location of the service. If pressed into this role, the test is not consistent with the statute.

Based on this analysis, the Court rejected that test for sourcing purposes, concluding that “the most natural reading of ‘service performed in this state’ supports locating the performance of the service at the place where the taxpayer’s personnel or equipment is physically doing useful work for the customer.”

Finally, the Court disagreed with the state’s characterization of Sirius’s service in Texas as “unscrambling the radio signal,” and sent the case back to the lower courts for a determination of the appropriate Texas sourcing based on the principles summarized above.

The bottom line

Between these two decisions, Texas amended its apportionment regulation to adopt the “receipt-producing, end-product act” test for sourcing certain services, and this case likely means that this portion of the rule would be invalidated (the regulation as it existed for the periods at issue in this case did not include this language).[6]

The impact of this case will be different for each taxpayer. If your business applied the “receipt-producing, end-product act” test to source services outside of Texas where some or all those services were performed in the state, then you may have underpaid your Texas Franchise Tax. However, if your business applied the “receipt-producing, end-product act” test to source services to Texas where some or all the services were performed outside the state, then you may be entitled to a refund.

Aprio’s SALT team has experience analyzing state apportionment and sourcing rules. We can assist your business to make sure that it is applying the appropriate standard to minimize state income tax liability and to ensure that it 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.

This article was featured in the April 2022 SALT Newsletter.

For more information contact Jeff Glickman at [email protected] or call 770-353-4791.

[1] Please refer to that article for more detailed information regarding the facts of the case.

[3] Sirius XM Radio, Inc. v. Texas Comptroller, No. 20-0426, Texas Supreme Court (March 25, 2022)

[4] Texas Admin. Code § 3.591(c).

[5] Texas Admin. Code § 3.591(e)(26).

[6] We discussed this amendment (and others) in an article from our March 2021 SALT Newsletter.


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.

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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