The Texas Comptroller of Public Accounts has proposed amendments to the Texas Administrative Code’s apportionment rules found in 34 Tex. Admin. Code Section 3.591. The proposed amendments modify the definition of “location of performance” in response to the Sirius XM Radio, Inc. v. Hegar decision.
In Sirius XM, the Texas Supreme Court ruled that gross receipts from the sale of services should be sourced using origin-based sourcing. In other words, the receipts from the sale of services would be sourced to the location where the services were performed.
Prior to the Sirius XM decision, the Comptroller’s position when determining the location of a service was to look to the location of the “receipt-producing, end-product act.”
Now, the Comptroller’s proposed amendments remove the “receipt-producing” and “end-product act” language and examples from §3.591(e)(26)(A). In their place, the proposal adds, “locations where the taxable entity’s personnel or property are doing the work that the customer hired the taxable entity to perform. Activities that are not directly used to provide a service are not relevant when determining the location where a taxable entity performs a service.”
The proposed changes also amend §3.591(e)(26)(B) to clarify that only the direct costs of doing work the entity was hired by the customer to perform would be considered when determining the service’s fair value. Costs not directly related to the service will no longer be considered.
The comment period lasts 30 days from the date of the publication of proposal in the Texas Register; thus, the earliest the proposed changes could take effect is in mid-February. The proposed amendment was filed with the Texas Secretary of State on January 5 and published on January 20; thus, the earliest possible date of adoption is February 19, 2023.
Businesses performing services for Texas customers should review their current apportionment methodologies to comply with Sirius XM and monitor the potential administrative changes.
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