Texas Comptroller Proposes Rule Changes for Sourcing Service Receipts in Light of Sirius XM | Reed Smith

The Texas Comptroller has proposed further changes to the agency’s recently amended Texas franchise tax rule for raising revenue from the provision of services. The proposed changes reflect the Texas Supreme Court’s ruling in Sirius XM. The proposed changes were published in the January 20, 2023 issue of the Texas Register and the comment period closes on February 19, 2023.


In March 2022, the Texas Supreme Court ruled that for Texas franchise tax purposes, revenue from the supply of a service is obtained at the place of supply, i.e., the taxpayer’s location of the personnel or equipment performing the service, which the customer pays for.1 However, as discussed in our March 2022 Client Alert, the Texas Supreme Court has not provided an answer on how to make a fair value attribution of service revenue when the taxpayer is providing the service both inside and outside of Texas. Instead, the High Court referred the case back to the Third Court of Appeals for further consideration of this issue.

In November 2022, the Third Circuit Court of Appeals ruled that obtaining service receipts using performance costs is an appropriate method for fair value attribution, although perhaps not the exclusive method.2 As discussed in our November 2022 Client Alert, the court concluded that “nothing in the plain language of the rule prescribes any particular method of calculating fair value or precludes benefit costs as a reasonable means of determining fair value for apportionment purposes.” Following the Third Circuit Court’s opinion, the Comptroller decided not to petition the Texas Supreme Court for review.

2023 Proposed Changes

The Comptroller’s proposed amendments modify the definition of “place of performance” in Section 3.591(e)(26)(A), removing the standard “invoicing, finished product action” and related examples, and providing that “a service is at the place or be carried out at the locations where the taxpayer’s staff or property performs the work that the customer has asked the taxpayer to perform.”3 The proposed rule further provides that activities not directly related to the provision of the service are not relevant for determining the place where the service was provided.

The provisions for the procurement of services performed both inside and outside of Texas under Section 3.591(e)(26)(B) would also be amended to clarify that when considering costs in determining fair value of the service, only the direct costs of carrying out the work are taken into account.4 The costs would not include those not directly used to provide a service to the customer.

Comments until February 19, 2023

Comments on the proposed rule must be received by the Comptroller by February 19, 2023. The earliest date that the proposed changes can take effect is February 19, 2023.

  1. Sirius XM Radio, Inc. vs. Hegar643 SW3d 402 (Tex. 2022).
  2. Hegar vs. Sirius SM Radio, Inc.#03-18-00572-CV (Tex. App. – Austin 2022, no pet.).
  3. Suggested 34 Tex. Admin. Code ยง 3.591 (Texas Register, published January 20, 2023).
  4. ID.

Customer Alert 2023-023


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