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A Sirius Tax Matter in Texas

Posted on Sep. 20, 2021
Roxanne Bland
Roxanne Bland

Roxanne Bland is Tax Notes State’s contributing editor. Before joining Tax Analysts, Bland spent 17 years with the Multistate Tax Commission, where she worked with state revenue agency representatives to draft model legislation pertaining to sales and use taxation and corporate income, analyzed and reported on proposed federal legislative initiatives affecting state taxation, worked with legislative consultants and representatives from other state organizations on international issues affecting states, and assisted member state representatives in federal lobbying efforts. Before that, she was an attorney with the Federation of Tax Administrators for over seven years.

In this installment of The SALT Box, Bland examines Sirius XM Radio Inc. v. Hegar, a case accepted by the Texas Supreme Court. She writes that the Texas Court of Appeals, Third District’s illogical ruling that Sirius’s receipts should be attributed to Texas has flipped the state’s standard for attributing receipts on its head, and that hopefully the state supreme court will set it aright.

On September 3 the Texas Supreme Court agreed to hear Sirius XM Radio,1 concerning whether the state properly apportioned the taxpayer’s activities within the jurisdiction for purposes of calculating its franchise tax liability. While there are several issues in play, the critical one is whether the state’s interpretation of the relevant statutes in this case is contrary to the statutory language, and indeed, whether it is contrary to the state’s interpretation of these statutes in prior cases.

Sirius Business

Sirius XM Radio Inc. is a Delaware corporation that provides radio service of varying types2 to paid subscribers via satellite. Seventy percent of Sirius’s programming consists of original content produced in its studios and transmitted from facilities spread nationwide. Sirius’s activity in Texas is limited to a single channel transmitted from a facility it neither owns nor leases. A small portion of the channel’s content is produced by a single Texas resident who transmits from his home in Fort Worth. The bulk of Sirius’s revenues derive from subscription fees, and most new subscriptions come from buyers and lessees of new or used cars equipped with satellite-enabled radios containing integrated circuit technology to ensure that programming access is limited to subscribers. The satellite radios made available to subscribers were not manufactured or provided by Sirius; rather, the equipment was installed by the cars’ manufacturer or dealer. Sirius subsidized a portion of the equipment’s manufacturing costs to reduce the price to consumers, and it entered into agreements with major car manufacturers to have them install satellite radios in their vehicles. Sirius categorized these expenses as “revenue shares and hardware subsidies,” with revenue shares calculated as a percentage of subscription revenue, and hardware subsidies calculated by a flat fee per vehicle.

For the tax years at issue — 2010 and 2011 — Sirius calculated the margin to determine its franchise tax liability by taking the gross subscription revenue and apportioning it for both years based on the location where its programming was produced and the relative costs of those activities within and without Texas. On audit, the state tax agency determined that Sirius’s apportionment of its tax receipts was incorrect, as it asserted that the service Sirius provided in Texas was its unscrambling of the radio signals that occurred at the radio receiver and not the production of satellite programming. During the audit, Sirius told the tax agency that it incorrectly calculated its cost of goods sold deduction and requested to include the hardware subsidies and revenue shares it paid to car manufacturers. At the audit’s conclusion, the tax agency recalculated Sirius’s apportionment factor based on the percentage of Texas subscribers, which it calculated at 8 percent, and disallowed the costs of the hardware subsidies and revenue shares. The trial court determined that the tax agency erred in adjusting Sirius’s apportionment factor; thus, Sirius was due a refund on that portion of its tax liability. However, the court upheld the tax agency’s disallowance of the hardware subsidies and revenue shares. Both Sirius and the tax agency appealed.

On appeal, the tax agency challenged the trial court’s holding in favor of Sirius on the apportionment issue. Both parties agreed that for apportionment purposes, the legal standard in Texas is geographical in nature — that is, based on the location where the act was done, rather than, for example, the location where money changed hands. Thus, the parties agree that Sirius’s Texas gross receipts consist of payments by Texas subscribers. The dispute, however, was over whether such receipts are attributable to a service performed in Texas. The tax agency argued that while Sirius’s out-of-state production and distribution activities were necessary to support its radio service, the receipt-producing, end-product act was Sirius’s decryption of the signal received by the satellite radio, which was done by remotely activating (or, in some cases, deactivating) the chip set in customers’ equipment. Such actions were taken based on where a customer’s satellite radio was located; presumably, the customers in this case resided in Texas.

Sirius, however, argued that the state’s franchise tax is origin-based and not market-based. Thus, for its services, which are transmitted remotely, the relevant question for determining where its acts are done is not the location of its audience, but where Sirius, as a service provider, performs its service-related activities. Under the origin-based standard, those activities take place in the locations where Sirius produces or transmits its content. For support, Sirius points to Westcott,3 a case it says has similar facts. In Westcott, the taxpayer produced training materials for various professions such as law enforcement, education, and health on a subscription basis and transmitted by satellite nationwide. Just as Westcott Communications Inc. was paid to provide training content to its subscribers, Sirius argues that its subscribers pay it to provide entertainment content, also transmitted by satellite. Applying the origin-based standard, Sirius asserts that the provider’s “act is done” in the location where it performs its service-related activities. The difference between Westcott and the current case, Sirius argues, is that Westcott created and transmitted the training materials from its Texas production facilities to its nationwide network of subscribers, which triggered Westcott’s franchise tax liability, whereas Sirius produces and transmits almost all its content to Texas subscribers from out of state. Thus, Sirius contends that under the origin-based standard, calculating its revenue attributed to Texas was properly based on its activities done in the state — that is, content produced by the Texas resident, and not content produced in its facilities elsewhere.

The appellate court rejected Sirius’s Westcott argument. In that case, the appellate court said, the Westcott court took note that the taxpayer’s services were tailored to the needs of its subscribers. For example, educational and training programs for law enforcement subscribers differed substantially from programs provided to healthcare subscribers. In Westcott, satellite transmission was a convenience for subscribers, but what they contracted and paid for was the substance of the programs. In contrast, the appellate court said, the service Sirius provided was available to any person with a satellite radio who contracted with Sirius for content. For Sirius subscribers, the purpose of the contract was only to receive programming via their satellite radio. The appellate court acknowledged that Sirius developed original content in facilities outside Texas but pointed out that the content was indiscriminately available to all subscribers, rather than developed and produced for individual subscribers or groups of subscribers. Thus, the appellate court concluded, Sirius’s receipt-producing, end-product act was not the production and distribution of programming, which took place outside of Texas, but the decryption of the signals received by a subscriber with a satellite radio, which took place where the radio was located — that is, Texas. Thus, using the comparative costs of Sirius’s activities within and without Texas was improper to apportion its gross revenue for franchise tax purposes.

As for Sirius’s COGS argument, the appellate court upheld the lower court’s finding in favor of the tax agency to exclude the hardware subsidies and revenue shares from Sirius’s calculations because the relevant definitory statutes do not support Sirius’s position that it sold goods — i.e., tangible personal property — to its subscribers to allow the hardware subsidies and revenue shares to be deducted as COGS. Sirius did not pursue this holding in its appeal to the state supreme court and it will not be discussed further.

The Appellate Court’s Opinion: Siriusly?

The appellate court’s opinion is puzzling. For one, it placed significant emphasis on the difference between the programming Westcott developed for its subscribers and that developed by Sirius for its subscribers. Westcott’s programming was tailored to the specific needs of its subscribers, and Sirius’s programming is not. Yet the appellate court never explained why and how this difference should affect the tax consequences for Sirius.

Second, and more important, Westcott stands for the proposition that satellite training programs should be taxed where they are created rather than where they are received. In that case, Westcott argued that the programs, which were created in Texas, should be taxed where they are received by its out-of-state subscribers, while the tax agency argued that the programs should be taxed in Texas. The Westcott court accepted the tax agency’s argument and held for the state. As in Westcott, the Sirius appellate court accepted the tax agency’s argument. However, the tax agency’s argument in this case is the opposite of what it argued in Westcott, resulting in the appellate court’s holding that satellite programming should be taxed where it is received, and not where it is created. The appellate court pointed out that from a subscriber’s standpoint, what the subscriber contracts for is Sirius’s program content, which is received in Texas. By that logic, from the standpoint of Westcott’s subscribers, they contracted for Westcott’s program content, which was received wherever they may have been located. If this is so, plainly Westcott was wrongly decided.

The appellate court does not explain why Sirius’s ability to remotely activate or deactivate a customer’s chip set has any bearing on the tax consequences of a subscriber’s receipt of programming in Texas. The tax agency argued that the receipt-producing, end-product act was to activate or deactivate a Texas subscriber’s satellite radio by which the service is provided. But how does Sirius’s ability to remotely “flip a switch” translate into a service performed in Texas? Sirius’s service to its subscribers is the provision of programming transmitted by satellite. The satellite radio is simply the means by which the service is received. That Sirius receives revenue from a subscriber when the radio’s chip set is decrypted and loses revenue when the radio’s chip set is encrypted is not the issue; the ability to enable or disable a subscriber’s chip set is incidental to the service it provides, not the service itself.

On appeal to the state supreme court, the heart of Sirius’s argument is that in considering cases such as this, Texas courts have always looked to where services are performed rather than where they are received. Here, the appellate court created a new rule that flies in the face of that long-standing practice. In doing so, the appellate court simply deferred the tax agency’s interpretation of a rule that merited greater scrutiny, especially given that the tax agency interpreted the rule in the opposite manner from its interpretation in this case. This is a question that demands resolution, one way or another.


To put it bluntly, the appellate court’s decision that Sirius’s receipts should be attributed to Texas is illogical. If the state’s standard for attributing receipts is origin-based — that is, based on where the services are performed — it is hard to see how Sirius’s service, created and developed out of state and received by Texas subscribers, can be deemed to have been performed in Texas. Sirius’s ability to encrypt and decrypt programming remotely, whether in Texas or anywhere else, is only the means by which Sirius provides its service to subscribers, and not the service itself. The appellate court’s opinion flips the law on its head. Now that the state supreme court has decided to hear the case, one hopes that the course will be set aright.


1 Sirius XM Radio Inc. v. Hegar, No. 20-0462 (Tex. filed Jul. 14, 2020).

2 Sirius’s programming includes music, sports, news, talk, entertainment, traffic, and weather channels.

3 Westcott Communications Inc. v. Strayhorn, 104 S.W.3d 141 (Tex. App. 2003).


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