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Dallas, TX 75202

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Proposed Revisions to Texas Comptroller Rule 3.591 (Apportionment) Seek to Incorporate the Texas Supreme Court's Holding in Sirius XM Radio, Inc.

By David E. Colmenero on January 27, 2022
In the Friday, January 20, 2023 edition of the Texas Register, the Texas Comptroller published yet an another set of proposed revisions to Texas Comptroller Rule 3.591, Franchise Tax Apportionment. See 48 Tex. Reg. 200 (Jan. 20, 2023) available at https://www.sos.state.tx.us/texreg/index.shtml. These proposed revisions are significant as they are intended to reflect the Texas Supreme Court’s decision in Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402 (Tex. 2022), which rejected the Texas Comptroller’s “receipt-producing, end-product act” test for sourcing receipts from the provision of services for Texas franchise tax purposes. Under the statute, revenues from the provision of services are sourced to Texas if the “service [is] performed in this state.” Tex. Tax Code sec. 171.103(a)(2). The Supreme Court in Sirius XM held that this statutory language “supports locating the performance of the service at the place where the taxpayer’s personnel or equipment is physically doing the useful work for a customer.” See Sirius XM Radio, Inc. 643 S.W.3d. at 408.

According to the preamble to the proposed revisions, the Texas Comptroller interprets the Supreme Court’s phrase “ ‘useful work for the customer’ to mean ‘work that the customer hired the taxable entity to perform,’ [but] does not include ‘activities that enable the taxable entity to do business in general or are not directly used in the provision of a service to the customer.’ ” See Preamble, 34 Tex. Admin. Code sec. 3.591 (proposed rev. published Jan 20, 2023). The proposed revisions also replace the word “equipment” with the word “property” in recognition of the fact that certain property may be used to perform services and the property may not be equipment. The proposed revisions to Rule 3.591 include changes throughout the Rule that incorporate the Texas Comptroller’s application of these general concepts. Taxpayers may submit comments on the proposed rules for a period of 30 days from the date of publication (i.e., until February 20, 2023 as the 30th day falls on a Sunday).

The question that taxpayers and the Texas Comptroller will no doubt be debating and possibly litigating will likely be whether these revisions go far enough.

If you have questions regarding the information disclosed above or any other State Tax related matter, please contact David Colmenero at dcolmenero@meadowscollier.com, Alex Pilawski at apilawski@meadowscollier.com or Jason Hendrix at jhendrix@meadowscollier.com. To contact them by phone, please call 214.744.3700.