A Common-Sense Approach to Sales Factor Sourcing | Blank Rome LLP

For years, departments of revenue have interpreted their states’ sourcing statutes to use a market-state approach. Those attempts have ranged from reasonable interpretations to outlandish ones. Recently, the Texas Supreme Court beat back such an attempt by the Comptroller in Sirius XM Radio, Inc. v. Hegar, No. 20-0462, 2022 WL 879704 (Tex. Mar. 25, 2022).

Facts: At issue in the case was the sourcing of service receipts from Sirius’ satellite radio. For apportionment purposes, Texas sources service receipts based on where the service was “performed.” Id. at 2. In Sirius, the Comptroller argued that the receipts should be sourced to location of the “receipt-producing, end-product act,” which was the location of the customer. Id. at 5. Conversely, Sirius argued that the statutory language looked to where the personnel or equipment performing the service was located. Id.

Ruling: Despite the Comptroller’s convoluted arguments, the Court held that “[t]he focus should be on the statutory words themselves.” Id. at 5. Accordingly, the Court looked to the meaning of the term “performed.” Based on prior caselaw, the Court stated a service is performed where the “act [is] done.” Id. at 4.

Significantly, the Court stated that had the Legislature intended to apply a market-state approach, it would have been easy for them to do so—by sourcing service receipts to “the place of receipt or the location of the customer.” Id. at 4. However, the Legislature opted not to use such language for the sourcing of service receipts, though it did for other categories of receipts.

Based on the plain language of the sourcing statute, the Court determined that services are performed “where the taxpayer’s personnel or equipment is physically doing useful work for the customer.” Id. at 5.

The Texas Supreme Court’s common-sense approach was so compelling that the Pennsylvania Senior Deputy Attorney General Sean Kirkpatrick advised the Pennsylvania Supreme Court of the Sirius decision. Mr. Kirkpatrick stated that the Sirius decision is contrary to the Pennsylvania Department of Revenue’s position in Synthes USA HQ, Inc. v. Commonwealth, No. 11 MAP 2021. In the Synthes case, the Department of Revenue argued that the location of the “income-producing activity” is the location where the benefit is received (i.e., market-based sourcing). The Pennsylvania Supreme Court has not issued its decision in that case yet.

While the trend is to source receipts to the location of a company’s market, this case serves as an important reminder that such sourcing can only be done by legislation—not simply by departmental interpretation.