### TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03
- 18
- 00573
- CV

Appellants, Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas// Cross
- Appellant, Sirius XM Radio, Inc.

v. Ap pellee, Siriu s XM Radio, Inc.// Cross
- Appellees, Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas

FROM THE 261ST DISTR ICT COURT OF TRAVIS COUNTY NO. D
- 1
- GN
- 1 6
- 000739, THE HONORA B LE SCOTT H. JENKINS, JU DGE PRESIDING

O P I N I O N

This appeal arises from a suit fi led by Sir ius XM Radio, Inc. to recover franchise taxes paid under p rotest to Glenn Hegar, Comptroller of Public Accounts of t h e State of Texas

. S ee Tex. Tax Code § 112. 0 5 2

. Following a bench tria l, the trial court signed a judgment in favor
of Sirius X M ordering the Com ptr oller to issue a refund . On appeal, the Comptroller challenges the methodology emp loyed by Si rius XM an d a dop ted by t he trial c ourt to calculate th at portion
of Sirius XM ’ s revenue attributa ble to its business in Te xas in tax years 2010 and 2011

. Se e id. § 171. 106(a). S pecifically , th e Comp trol ler cha lleng es certain findings of fact and conclusion s of law m ade by the trial co urt co nce rni ng where Siri u s XM ’ s s ervices were performed and how
the fair value of thos e services in Texas should be calculated

. Sirius XM , by cross
- appeal, asserts
that the trial court erred in not allowing it to include cer tain expe ns es i n its cost

- of

- goods

- s old2

de duction

. See id. § 171 .1012. For the re asons that follow, w e w ill reverse th e trial court ’ s judgment and render judgment in fa vor the Comptroller.

B ACKGROUND
Franchi se Tax Texas imposes a franchis e tax on each taxable en tity that does bus iness i n this

sta t e o r tha t is chartere d or or ganized in t hi s s ta te. See Tex. Tax. Code § 171 .00 1(a). Codified in
Ch apter 171 of the Tax Code , see id. §§ 171. 0 0 0 1

- . 908 , the f ranc hise tax represents a ta x on the value and privilege of d o ing business in T exas. C ombs v. N ew pa r k Res ., Inc. , 422 S.W. 3d 46, 47 (Tex. App.

— Austin 2013, no pet.). G enerally, a taxable entity ’ s fra nchise

- tax l iability is
calculated by firs t determining the entity ’ s “ margin, ” whic h is the lesser of 70% of the t a xa ble

en tity ’ s t ota l reve nu e , or the e nt ity ’ s total revenue minus certain expe nditures as allowed by Chapter 171

. S ee Tex. Tax Code § § 171 .101(a)( 1) ( determi nation of taxable entity ’ s “ margi n ” ) ,

. 101 1 (c) (calculat ion of t ot al revenue ). Pertinent to this ap peal , Chapte r 171 allows a tax able entity to su btract from its total revenue t he cost of g oods sold , sometimes referred to as the

“ COG S d eduction

. ” 1 See id. § § 171.101 ( a ) ( 1) (B ) (ii)(a) (1) (allowing taxable entity to su btract

cost of goods sold ) , .1012 (d et ermi nation of cost o f g oods s ol d)

.

Next, t he entity ’ s “ taxable margin ” is determi ned by apportion ing the entit y ’ s

“ margi n ” to its busines s in Texas

. In re Nestl e U SA , 387 S.W .3d 610 , 615 (T ex. 2012) (orig.

1 Under a third o p tion, not at issue here, a ta xabl e en t it y may elect to ca lcu l ate its m argin by subtracting cer tai n compensation expe nd itures from its total reven ue. See Tex. Tax Code § § 171 .101(a)(1) (B) (ii) (a)(2) ( allowing tax able entity to alt e rnative l y subtr act compe nsat ion ) , .1013 ( dete rmination of c ompen sa t io n ). Under a four th op tion, added by the Legislatur e i n 2013 and not appl icable here , a taxable entity m ay ele ct to sub tract $1 mi llion from its ent ire business. See i d. § 171.101(a)(1)(A) (ii) ; Act of Ma y 27, 2 013, 83d Leg., R.S., ch. 1232, § 6, 2013 T ex. Gen. Laws 3104, 3 106.3

proceeding) ; see Tex . Tax. Code . § 171.101(a) (2 )

. Apportionment is accomplish ed by “ mu lt ip lyin g

a busin ess ’ s tot al margin by an apportionment fac tor

. ” See H a llmark Mktg. Co

. v. Hegar , 488 S.W.3d 795 , 796 (Tex. 2016 )

. I n its simp le st terms , an apportionment factor rep re sents the percentage or f

ract io na l proportion of an entity ’ s g ros s rece ipts from its b usi ness in Texas

r elative to its gross rec eipts f rom its business everywhere , i ncluding in Tex as
. See Tex. Tax
Code § 1 71 .106(a) (describ i ng apportionment ); Hallmark Mktg. , 4 88 S.W.3d at 796 (exp lai n i ng
t hat apportionmen t

- factor nu mer ator “ cons ists of rec ei pt s from business done in Tex as and t he
de nomin at or consists of rec eipts from all busin ess ” )

. Under this form ula , “ doing more busine ss
in Texas generally results in h igher franchise taxes

. ” OGCI Tr a i ni n g, Inc. v. He gar, No. 03

- 16

- 0 070 4

- CV , 2 017 Tex. App. L EXIS 10096 , at * 3

- 4 ( Tex. App.

— Austin Oct. 2 7, 2017, no pet.) (mem. op .) (citing South western Bell Tel. Co. v. Combs , 2 70 S.W.3 d 249, 258 (Tex

. App.

— Amarillo 2008 , pet. denied ) )

. Fina lly, the entity ’ s f ranc hi se
- tax obligation is determ ined by
mult ipl ying the “ taxa b le margin ” by the applicable tax rate. See Tex. Tax Code § 171.002 ( “ Rates ; C omputat ion of Tax ” ).

In this c ase, the Comptroll er ’ s appeal ce nte rs on the apportionment step in t he
calculat i o n o f Siri u s XM ’ s fran chis e
- tax l iabi l it y for the t ax years 20 1 0 and 2011 ; Sirius XM ’ s

cross
- appeal concerns th e COG S deduction for the same tax years.

Siri us XM ’ s B usiness Ac tivities

Sirius XM is a f

oreign c orporation that provide s a subscription

- based sat el li te

r a dio serv ic e , co nsisting of more than 150 channels o f mu sic, sports, news, talk, ent ertainment,4

traffic, and weather cha n nels to subs cribers throug h out th e United S tates

. 2 During th e rel evant tax year s , Sirius XM ’ s headqua rters, transmissio n equ ip me nt, a nd productio n stud ios wer e lo cat ed
almost exclusively outside of Texa s
. A pproximately 70 percent of Sirius XM ’ s programming

co nsi sted of ori ginal conte nt produce d by Sirius XM specifically for its sub s cribers and could be

o btained only by su bscri bi ng to S ir ius XM ’ s se rvices

. T his or igina l conte nt was produced fr om multiple studios owned and op er ated by Sirius XM, primarily in New York Ci ty and Washington
D .C. and in smaller remote studios in C lev el and, Los Angeles, Me mphis, Nas hville , and Orl ando.
S ir i us X M ’ s product ion from T exas wa s li mited to a channel named “ Willie ’ s Place, ” t ransmi tted
fi ve days a week f

o r no more than five hours a day, from a location in Hillsboro , Texas, which
Sir ius XM did no t o wn or lease. “ Willie ’ s Place ” i ncluded progr a mm ing f r o m a host na med

“ Billie Mack, ” who trans m itted from his home in Fort Worth.

Sirius XM ’ s prim ary source of reven u e was subscription f ees for its satellite

- radio
servi ces, with most of its customers sub s cribing on an an nual, semi

- annu al , quar terly , o r m on t h ly
basis. Sirius XM sub scri bers receiv e d Sirius XM ’ s pro gramming using sa tellite

- e nable d radios , and mo st of Siri us XM ’ s new subscription growth cam e from purchasers and le ssees of new
and used automo biles e quipped with s a tellite

- enabled ra dios

. T he in t e grated ci r c uits, or “ chip

se ts, ” for the se satellit e
- enabled radios included the enc ry ption, conditional access, and sec urity

te chnology ne cessary to exclusively access Sir ius XM satellite ra dio

.

Sirius XM did not manuf acturer or p rovide t he r ad ios to i ts subsc ri bers

. Instead,
sub s cribers ty pica lly purchase d or lea sed veh icl es with the radios already insta lled by the

2 T he underlying facts in t his ca se are largely undisputed. The following fact s concerning Sirius XM ’ s business activit ies are taken from the trial court ’ s unchall enged fin dings of fact and conclusions of law and from the und is puted evidence pres en ted at tri al , inclu ding a list of 72 stipulations su bmitted by the parties as a joint exh ibit.5

manufacturer or dealer. Sirius XM d id, ho wever, subsidize a port ion of the rad io manu facturin g costs to reduce the hardware pri ce to co n s umers. In addition , S irius X M had agreements with major automakers to incentivize them to install the satellite

- enabled radios as factory or dealer

i nstalled equipment in their v eh icles. Sirius X M refers to the payments it made pu rsuant to thes e
agr e e m e n ts as “ rev enue shares and har dware subsidie s, ” with “ revenue sha res ” computed o n a
per centage of subscription revenue and “ hardware sub sidies ” c omputed as a flat fee per vehicle

.

Sirius X M ’ s Fra n chise

- Tax Dispute
Sirius XM timely filed Te xa s f r anc hise

- tax r eturn s for tax years 201 0 and 2011 , in
whic h it cal culat ed it s margin pr imar ily f rom the total re venue gener at ed by its s ubscri ptions.
For tax ye ar 2010 , Sirius XM calculated its taxable margin by sub tracting its cost of goods sold
from i ts total re v e nue
. See Tex. Ta x Code § 171 .101 (a) (1)(B). For tax year 201 1 , Sirius XM
determined that the total cost of goods sold was less than 30% of Sirius XM ’ s total revenue and, the refore, calculated its margin b y deducting 30% of Sirius XM ’ s total r e v enue
. Se e id. § 171.101 (a) ( 1) (A). Siri us XM then apportioned its reported subscrip tion r eceipts for each year
ba sed on th e l ocations wh ere it produced its programmin g for br oad cas t and on th e relative c osts
of those activi ti es in Texa s and outside Texa s
. See id. § 171. 103

.

The C om pt rol ler subseq uently audited S ir ius XM ’ s 2010 and 20 11 ret urn s and
concl uded tha t Sirius XM h ad in corr ectly co mpute d i ts tax liability. Sp ecifically, the
C om ptroller ’s audi t or de termined that Sir iu s XM ’ s apportionment of i ts subscrip t ion rec eipts
was i nco rrect be cause, i n the Compt roller ’ s view, the service provided by Sirius XM in Texas

w as the “ service of unscramb l ing the r ad io signa l , ” not the productio n of satell ite progr amming , and this s ervice occurred “ at the radio r ec eiver. ” D uring t he au dit, S iri us XM in formed the6

Compt roller that it had undercalculated its C OG S dedu ction. In part, Sirius XM requested an adjus tment to its CO GS d eduction to includ e the revenue share and hardwar e subsidies that it
had paid to automo bi le manuf a c tu rers to in stall s at ellit e
- e nable d radio s
. At the conclusion of the au di t , the C omptroller adjusted Sirius XM ’ s apportionment factor to reflect the per cen ta ge of S irius XM subscri bers in Texa s , wh ich w as
approx imately 8 per cent o f total subs cr ibers to S i rius X M

. I n addi tio n, while the Comptroller
allowed Sirius XM t o include certain requ ested costs in calculating its COG S deduct ion , it did

not allow Sirius XM to include the revenue shar e a nd hardware subsidies

. In sum , the au dit
resulted in a n add iti o n al tax asses sment of $738,89 8 for tax year 2010 and an additional tax

assessment of $1,458,682 for tax ye ar 2011

. Sir ius X M paid t he additional tax and int e rest und e r prote st and the n filed suit in district co urt to obtain a re fu nd

. S ee id. § 1 12. 05 2.

F ol lowi ng a bench trial , the trial court rendered a judgment in favor of Sirius XM and issued findings of fact and conclusion s of law. In part, the t rial court conclud ed that the
Com ptroller ’ s adju stm ent to Sirius XM ’ s apport ionme nt fa ctor was inc orrect a nd t hat Sir ius XM

was entitle d to a ref

und. However, t he trial court upheld the C omptroller ’ s decision to deny
Sirius XM ’ s request to include rev enue sha re a nd hardware su bsidies in its revised COGS
deduction. Th e se c ross appeals followed.

STAND AR D OF R EVI E W
The p ar ties ch allenge several of the trial court ’ s findings of fact a nd conclusion s of law. We review a trial court ’ s findings of fact following a bench trial for legal and factual
suff iciency under the same standards we appl y to jur y verd i c ts

. O rtiz v. Jon es , 917 S.W .2d 770 , 772 (Tex. 1996). W hen findings of fact are filed and unchallenged, “ they are binding on an7

appellate co urt unless the c on trary is established as a matter of law, or if there is no evidence to support t he f

indin g
. ” M

cG a llia r d v. Kuh lma nn , 722 S.W .2d 694 , 696 (Tex. 1986 ). We review a
trial court ’ s c onclusions of law under a de novo standard of review. B M C Soft w are Bel gium , N.V. v. Marcha nd , 83 S.W.3d 789, 794 ( Tex. 2002).

To the extent the partie s ’ i ssue s o n appe a l concer n the prop er cons truc tion of t h e
f ranchise

- tax statute , th e se also are questions of law that we review de n ovo. Se e First Am. Title
Ins . Co. v. Com bs , 25 8 S.W.3d 627, 631 (Tex. 2008). Where th e statutory te x t is clear, it is
determi nati ve o f leg is lat ive i ntent , un less en forc ing the p lain meaning of the statute ’ s words
would lead to absurd results. Entergy Gul f States, Inc. v. Summers , 2 82 S .W.3d 433, 437 (Tex.
20 09 ). On the other ha nd, if a statute is amb ig uous, we defer to the interp ret a tion of th e sta t ute
made by the ad m inistrativ e agency char ged with its enforcement, so long as th e interpre tation is
reasonable and does not contra dict the statute ’ s plain language. Texas Ass ’ n of Acupuncture &
O riental Med. v
. Texas B d. of Chir opract i c E xam ’ r s , 524 S.W

. 3d 734 , 739 (Tex. A pp.

— Austin 2017, no pet.) ( quoting Railroad Comm ’ n v. Te xas Citizens for a Sa fe Future & Clean Water , 336 S. W.3d 619, 628

- 30 (Tex. 2011)) ; see Feiss v. State Farm Lloyds , 202 S.W.3d 744, 747 (Tex. 2006).

ANALYSIS
A ppor t i on me nt
In tw o i ssues on appeal, th e Com ptro ller chall en ges those finding s of fact and
conclusion s of law underlying the trial court ’ s det ermination that “ [ t]he apportionment factors Sirius XM reported on its returns for Rep ort Years 2010 and 2011 were c o nsis te nt with t h e fair
value of S i rius XM ’ s s ervice performed in Texas ” and that “ S ir ius XM is entitled to a refun d fo r8

the additional tax resulting from the amount by which the Comptroller ’ s apportionment factors
exceeded Si rius XM ’ s apportionment facto r s
. ”

A s previou s l y d isc ussed, f or those taxab le entit ies that conduct busin ess in multiple states, a pp ortionment is designed t o limit the e ntity ’ s franchi se
- tax liab ilit y to that

revenue at trib utable to b usine ss conducted in Tex as
. See H a llmark Mktg. Co

. , 48 8 S .W.3d

at 7 96

. Cr itical to t he apportio nme nt step in calc ulating a ta xable entity ’ s franchise

- tax liabi lity
is the de term ination of the entity ’s gross receipts f rom “ its business done in this state. ” See Tex. Tax Code § 17 1.103(a)

. S ectio n 171.10 3 (a) s ta tes that w hen cal culating to tal gross r ec eip ts from

“ business done in this sta te , ” a taxable ent ity mu st in cl ude receipt s from “e ach s erv ice performe d
in this s tate. ” Id. § 171.103(a)(2). S imilarly, t he Comptroller’s rul es prov ide th at r eceipt s f r om

sa le s of a se r vices a re apportio ned to the “ loca tio n where the service is performed

. ” 34 Tex.
Admin. Code § 3.59 1( e)(26 ) (2 017) ( Tex . C om ptroller of Pub . Accounts, Margin: Appor t ionment)

. If se rvices are perform ed both in sid e and outside of Texas, th e rece ip ts are
app ortione d based on th e fa ir val ue o f t he services that are rendered in Te xas. Id.

In thi s case, there is n o disput e that Sirius XM conducts busi ness both in a nd

ou t side of Texas and that, a s a result, Sirius XM must appor tion its marg i n bas ed on the

p erc entag e of gr oss recei pts from its b usiness done in Texas

. See i d. § 171.10 6(a). In addit ion, both parties acknowledge t hat t he gross recei p t s at issue are receipts re c eived by Sirius XM
f rom subscri bers in Te xas and that thes e subscri p tion re ceipts must be ap portioned b ased o n the
fa ir value of the ser vices performed by Sirius XM

. 3 See 34 Te x. Admin. Code § 3 .591( e)(26)

. Consequently , t he parties ’ disp ute center s on whether a Texas subs c ription re cei p t is a re ceipt

3 Although not all of Siriu s XM ’ s reven ue was f rom sub scri ptio ns, because it r epr esen ts the bu lk o f Sirius XM ’ s revenue , the parties h ave ag reed for p urpose s of this litig ation t hat all of Siri us XM ’ s revenue i s subscription revenu e
.9

from a “ s erv ice pe r forme d in this stat e , ” a s that phr a se is used in S ectio n 171.103 (a)(2 )

. See Tex. Tax Code § 171.103(a )(2) ( emphasis added).

Th e Texas Su preme Court , construing the phrase “ services performed within
Texas ” in a pr edecessor t o the current ver sion of fr a nchis e
- tax statute , ha s stated that “ the act
done

. . . m ust be locat ed in Texas. It [i s] the loca lization of the transactio n in Texas and not
the place of physic al handing over or receiving of money that [is] signi fic an t. ” Humble Oil & Ref ini ng C o. v. C

alve rt , 414 S.W.2d 172 , 180 (Te x. 1 967). Later, i n 1 9 80 , t he Comptrol le r issued a decision and , citing Humble O i l , deter mined that the place “ where ‘the act is do ne’
determi nes the geogr a phi cal cha racter of the receipts de rived fro m the performan c e of a s e rvi ce .” Tex. Comp . Pu b . Acc ’ ts He aring No. 10,1028 ( 1980) (quoting Hum bl e Oil , 414 S.W.2 d at 180)

. F inally, this Court , relying on both the Humble Oil opinion and the Com p tr oller ’ s 1980 d ecision ,

rec ognized that the phras e “ service performed in this sta t e , ” r easonably construe d, means

“ t he act is done in t his stat e
. ” See Westcott Comm c ’ ns , Inc . v. Strayhorn, 104 S.W.3d 141, 147 (Tex. App.

— Austin 2003, pet

. denied). Al though b oth parties emphasize i n their appel late b riefin g that t he phrase “ service perfo r m ed i n this state ” mea n s “ the act is done in this st at e , ” t he p arties
d i sag ree o n whether the tria l court correct ly applied t his i nterpretation to the undispu ted facts in
this case

. In relevant part, t he trial court made th e following findings of fact a nd

c onclusions of law :

2 2

. [ Sir ius X M ’ s expert] perf orm ed an analys is determinin g the p ercentage o f value

- pr oducing activities in Te xas , as compared to those outside of Tex as based on the cost of those activit ies.

. . . [Sirius XM ’ s expert ’ s] anal y s is i s a cre di ble metho d for d e ter mining fair value.

. . .

. . .10

24. Sirius X M ’s rece ip t

- produci ng , end

- pr od uct act was the p roducti on and distributi on of more than 150 channels of music, sports, news, talk and enter tainment programmi ng. Mo re than 7 0 % o f Si rius XM ’s chann e ls were co m prised of original content pro duced b y Siriu s XM.

On appeal, the Co m pt roller f irst challenges the trial court ’ s finding that Sirius
XM ’ s “ r eceipt

- producing , end

- product act ” was “ the pro duction and di stribution ” of Sir i u s XM programming. In part, t he Com ptroller asserts that th e f inding is in consistent with the where

- the

a ct

- is

- done s tandard as articulate d in the Comptroller ’ s 1980 d ecision

. See Tex. Comp . Pub.
Acc ’ ts Hearing No. 10,1028 (1980 )

. In t hat decision, th e Comptroll er considered how to all ocat e

r ec eipts derived fro m th e bro adcastin g of a d vertisements from a televi si on station in Lubbo ck, Texas, to a tra nsmitter tower in Lubbock (for broadcast to a Texas audience ) and to a trans mitter

tower in Cap r ock, New Mexic o (for b roadcast pr imar ily to a New M ex ico audience )

. Id. After

co ns truing the phr ase “service p erformed in t hi s state ” to mean wh ere “ th e act is d one , ” the Comp troller concluded that “ the amounts paid by [the taxpayer ’ s] cust omers for the act of
broa dcasting th eir comme rcial m e s sag e s on th e frequ ency
. . . fr om Lubbock, Texa s, ‘ should be
d enominated ‘ receipt s from b us iness done in Texas

. ’ ” Id. Conver se ly, r eceipts paid by

customers to the taxpayer for broadcasting their comme r cial message s on the frequ enc y f ro m C a pr ock , New Me x ico , should n ot be characterized a s Texas rec e ipts

. Id.

In re aching this conclusion , t he C omptroller rejected the Franchise Tax Divisi on ’ s suggestion to ca lculate app o rtion ment based on th e taxpa y er ’ s proper ty and payroll in Texas

ve rsus i ts pr operty and pa yroll in New Me xico

. Id. The Fra nchis e Tax D ivisi on had argued th at

“ but for ” its b roadcas t location in Lubbock , the taxpayer would not have had any message to
broadcas t from Cap r ock, New Me xico , and thus , a portion of th e tax p a ye r ’ s re ceipts fro m its11

br oadca stin g from New Mexico sho uld be a t tributed to Texas. In r eject in g this argument , t he Comp tr oller explained :

T o accomplish the goal of giving independent mean ing and significa nce to the receipts fac to r from sales o f s ervic es o f a co rporation , . . . t h e ph rase “ s ervices p erforme d within Tex as ” . . . mus t be construed a s “ units o f service sold, t he performance of whi ch occurs wi thin Texas, ” thereby shifting the focus geographicall y from ever y ac tivity per formed by a co rp oratio n t hat gen erate s serv ic e re ceipt s, t o those specific, e nd

-

product a cts for which a cu stomer cont ra cts and pays to receive

. I f no distinction b e tween rec eipt

- pro ducing ac tivities versus non
- receipt

- producing , albe it es se ntial , support activi ties were made, no ind epe ndent meani ng cou ld be giv en to the “receipts f

rom sales of services ” fa cto r
. . . .

Id. ( e mphasis added).

Here, r elying on this language from the 1 9 80 d ecision , t he Comp troller argue s that although th e trial court ’ s findings an d conclusions c orrectly re c o gnize that t he recei pt

pr oducing, e n d

- produc t

- act test is t he s tandard for de termining where an “ act is done ” (and thus , where th e service is “ p erformed ” for purposes of apportionmen t ) , the trial cou rt misa p plie d th is
standar d when it conclude d t hat ( 1) the location o f Sirius XM ’ s “ receipt

- p roducing , end product

a ct ” was the l ocati on of its “ production and distri butio n ” activities and , (2) a s a re sult, the fair
value of Siriu s X M ’ s services could be dete rmined from the co st s of those a c tivities

. The
C omp t roller asser t s that, based on the cou rt ’ s un c h allenged factu al findings and th e evidenc e presented , “ p r oduction and distribut ion ” are only “ non
- receipt

- pro ducing, albei t essential, support

ac tivi ties , ” a nd “ the only activ ity tha t could even pla us ibly be d escribed as t h e ‘ rece i p t

- pr oducing,

en d

- pro du c t ’ act is the a ctual performance of a udible radio service f or the customer

. ” In other

wor ds, in the Comptroller ’ s view, the evidence is insufficient to suppo rt the trial court ’ s find ing
because Siri us XM ’ s ser vice was the p ro viding of r adio progra mming th r ough s a te llite

- enabled12

r a dio s , a nd therefore , every subscription re ceipt from a Texas customer is proper ly characterized

as a receipt from a “ service perform ed in this state. ” See T ex. Tax Code § 1 71 .103(a )(2 )

.

We agree t ha t the Compt roller ’ s in ter pret a t ion of where t he “ service [ is ]
p erfo rmed ” t o m ean where the “ ‘ receipt

- producing, end

- product ’ act is done , ” as first a rticulated
in the C om ptroller ’ s 1980 decision and by the trial court in this cas e , is a re asonable cons truct ion
of the franchise

- ta x sta t ute. Section 171 .1 03 (a)(2) does not define “ service performed in this

state ” or oth erwise provide guidance on how to determine where a service is performed

. See Hegar v. Autohaus LP , 514 S.W.3d 897 , 903 (Tex. App.

— Austin 2017 , pe t. den ied) (explaining

t h at when statu te contains undefined term, the t erm is typically given its ordina ry meaning unless

“ a different , more limited, or precise definition is app arent from the term ’ s use in the context of
th e sta tute ” ( quoting Sou thwest Ro yaltie s v. Hegar , 500 S. W .3d 400, 404

- 05 (Tex. 2016) ) )

. In
addition , Sirius XM has not offere d a n alternative construction of the p hrase “ service perf ormed
in this state , ” and the Com ptroller ’ s construction does not conflic t with the plain lang ua ge of the

statut e
. 4 See id. ; see also T ex as Dep ’ t of Ins. v
. Am erican Nat ’ l Ins. , 41 0 S.W.3d 843, 85 5 (Tex.
2 012) ( adopting agency ’ s interpret at ion, notin g tha t it “ is reasonable, was formally p romulgated,
and is not expressly contr ad icted by the [ stat ute ] ” ). In fact, this Court has pre v iously considered the phrase “ service performed in this state , ” an d al tho ugh we did not reference the end

- pro duct

- act

sta nd ard expre s sly, we concluded that the C omptroller ’ s inter pretation of th at p h ra se as express ed
in th e 1 980 de cision was a reas ona bl e i nterpre tat io n and then applied th at interpretatio n to the

4 In its app ellees ’ brief, Sirius XM does not assert that th e Com pt r oller ’ s interpretation of whe re “ a ser vice [ is] per formed ” is unreas onable or that anot her re asonable interpretati on exists

. S ee Tex. Tax Code § 171 .1 0 3 (a)(2)

. In fact, Sirius XM seems to acknow ledg e that a “ service [is] perfo r med ” in Texas if th e “ act d one ” to pro duce the in come o c cu r s in T exas. Conseq uently , the parties ’ d ispute centers on wh ether the trial court misapplied the standard “ by lookin g t o the lo cations of Sirius XM ’ s production and tr ansmission ac ti vities. ”13

facts in that ca se
. See Wes t co t t , 104 S.W.3d at 146

- 47

. As a r esu lt , the trial court was correct to
the extent it concluded that the “ receip t

- p roducing, en d

- produ ct act ” is t he proper standard fo r de termining where a “ service [is ] pe rfo rmed ” when apportioning services u nder Section 171.103
of the Ta x Cod e
.

Applyi ng th is sta ndard here, we also agree with the Com ptroller ’ s conten tion that
th e eviden ce is i nsufficie nt to su pport the trial court ’ s f i n ding regarding Siri us XM ’ s “ receipt

pro ducing, e nd

- product act. ” The evide nce establishes that t he se rvice for which S irius X M ’ s
customers c ontracted , and that resul t ed in the subscripti on revenue a t issue , was the recei pt of
Si rius X M programming . Per the t erms of that contract , each subscription was “ tied to one
receiver

. ” In ad d itio n, a cces s to the S irius XM p rogramm ing was l im ited to sate llite

- e na bled
radios and, more specifically, to those s at elli te

- enab le d radios in which the r adio r eceiver ha d

u n s cram bled and de coded the encrypted Sirius XM satellite sig nal. T he receipt

- pro duci ng , end

produc t act that allo w ed eac h Siriu s XM customer to receive Sirius XM prog ramming occur r ed
when Sir i us XM de cr y pt ed the p rogram by activat ing o r deac tivating the c u stom er ’ s chip set in
their satellite

- enable d radio , which Sirius XM could do re motely. This act occu r r ed where t he

sate lli te

- e n abl e d r adio was located, which can reasonably be presumed to be whe re th e Sirius XM

c ustomer r eside d , as th e Comp troller presum e d he re
. 5

In its appell ee ’s brief, Sirius XM asserts t h e trial court ’ s findi ng as to where Sir ius
X M pe rformed servic es is c o rre ct and emp h asizes that fra nchise taxes in Texas are “ o ri gin
based ” an d n ot “ market based. ” S ir ius XM re asons that when servic e s are tra nsmitted remotel y,

5 According t o the p arties ’ stipulation s, adm i tted into evide nc e at tri al, Sir ius XM did not trac k subscr ipti on revenu e on a state

- by

- s tate basi s and could not identify the percent age of its liste ning audience that was in Texas

. A cc ordingly, the Comp troller used the s ubscri bers ’ addresses to geog rap h ically cat e gori ze S irius XM ’ s re ceipts.14

the relevant activ ities for purpo ses o f de termini ng where “ the act is do ne ” is not where t he
audi e nce is located b ut , instead, where “ the service provider performs its se rv ice

- relat e d a ctivities

. ”
Accor d ing to Sirius XM , the tr i al court co rrectly applied this ori gin

- b ased stand a rd “ by lo okin g to the lo cations of Sirius XM ’ s production a n d tran smi ssio n ac tivities

. ”

In support of its argument, Sir ius XM relies on this C ourt ’ s decis i on in Wes t cott
Communi c ations , 104 S.W.3d at 14 1

- 147

. That case c on cer ned the franchise

- tax liab ility of a

company , Wes t cott Comm unica ti ons, that “ produced e d ucatio nal, in form ational, and training

pro grammin g ” i n Texas and subsequ ently delive re d that prog ra mming to sub s cribers through out
the nation vi a s a tellite broad cas t and videotape

. Id. at 144. Westcott ’ s customers included schools , law enforcement person n el, nu rses, a nd o ther professionals. The issue be f or e th is Co urt was
wh ether the ta xp ay er ’ s r ec e ip ts from tra ining pr ograms delivered by sate l l ite to its subscr ibers

were properly characterized as receipts f or “ service s performed in th is state. ” Id. To answer this

q uest ion, the Court began b y ex amining th e phrase “ service p er formed in th is state ” i n t he
franchi se
- tax s tatute a nd , based on the C om p t roller ’ s 1980 opin ion, concluded the phrase mea ns
t he “act i s done ” in Te xas
. Id. at 14 6 ( noting that “ c o n structi on of s tatu te by a n administrative

agency c harged with its enforc emen t is enti tl e d to seri o us c onsiderat ion , so long as the
construction i s r easonable and con s istent with the statute ” and will be accepted by the court

“ even if other reasonable int e r preta ti on s e xi st ” )

. The n, applyi ng th is interpret ation to the fact s
pre sented, the C ou r t conclud e d , “ [i ]t is c lear tha t where the ‘ act is done ’ in this cas e is in Te xa s, rather than in the state s of the subs cri bing cl ients. ” Id. at 147

. Consequently, th e Court held, it

w as re asonable for the trial co u rt to conclude that Wes t c ot t ’ s traini ng services w er e perfo rme d in
Tex as and that receipts from these s ervices “ w ere co vered un der the franchise tax statute as gross receipts from business done in th e state

. ” Id.15 In thi s ap peal, Sirius XM argues that it p rovi ded a service virt ually identic al to

t hat p rov ided by the taxpaye r in Wes t cott and t hat ba s ed on th is pre cedent , this Court should hold
that the trial court reasonably co ncluded that Sirius XM ’ s services were p erforme d at the location
of production and distribution

. 6 Althou gh Wes t cott is fa ctu ally s imil ar to thi s case i n s ome

res pect s, w e disag r ee tha t it is cont ro llin g as to w he re Sirius XM ’ s “ services [were] performed

. ”
See Tex. Tax Code § 171.103(a )(2)

.

Lik e the t axp a yer in Westcott , Sirius XM was not paid by its sub scribers in 2010

a nd 2011 to b roa dc as t or produce television or radio pr ogr a mming. See 10 4 S.W.3d at 147. In
other words , u nli ke the taxp ayer in the Com ptroller ’ s 1980 decision , wh ich rece ived i ts reven ue from adverti sers for the act of t ra n s mitting adver ti seme nts to an a ud ience , both Westcott a nd
Sir iu s XM rec eived their r ev en u e from con ten t subscribers, i.e., its audience

. In addition , like
the taxpayer in Westcott , which the Court noted w as pa i d “ to p r ovi de train ing to its customers , ”
Sirius XM w as paid to provide en tert ai nment to its subscri b ing cus tomers. S ee id.

The Co u rt in Westcott emp has ized , however, that the servi ce s provided by Westcott
via satellite were “ unli k e a cable t elevis ion p r ovider ” bec aus e Westcott w ent “ well beyond providing a broadcast signal to its cu stome rs. ” Id

. In stead , W estcott ’ s services incl ud e d “live
broadcast ses sions, interactive quest ion

- an d

- answer sessions, te sting , a nd other educational and

6 A lthough n ot ent irel y clear, S i rius XM seems to s uggest t hat Wes t co tt stands for the ge nera l p roposition tha t under an origin

- based standar d, w he n program ming is produced and tr ansm itted to an other state, where th e “ act is d one ” is w here t he “ ser vice pro vider [] pe r fo r med i t s s ervice

- re la ted activit ies ” a nd not w here the r eceiving customer is loc ate d

. Th i s propo sition , however, i gnores the fa ct t hat , in som e case s, the lo cation of th e serv ic e pro vi der ’ s performa nce ( depe nding on w he re it pe rfo r ms it s end

- product act ) a nd th e lo cation of t he aud ience may be the sa me
. We do not read Wes t cott as br oad ly as Sirius XM suggests

. The Co urt ’ s conclus ion in W es t cott that the “ act was done ” in Texa s

— th e place where Wes t cott pr oduced and broad ca s t its p rogr amm in g fro m

— was ba sed on and l imit ed to th e f acts present ed in th at case
.16

tr aining serv i ces. ” Id. In ot her words , in Westcott , the record est ablished that the tax paye r de v el oped training pr og ram s f o r their custo mers and th a t its custome rs contract ed to re ceive

program s t o meet their spe cific needs

. See id. at 147, 150. For example , the fo rm at and substan ce of the training that Westcott w ould have produced and transmit ted to i ts law enfo rc e men t c li ents

wo uld not necessaril y have been t he same as what it would have pro duced and transmitted to other clients, such as educat ors a nd healthca re pr ov iders

. While sat e llite transmission of the

p rograms may have provided a convenience t o Westcott ’s c u stom er s , it was pri mar ily the

su b stance of the p rogra m s that its customer s were paying for , and t h ose programs were de velo ped and produc ed exclusively in Te xas
. See id.

In contrast, t he undisp uted findings and evidence here s how that Si rius X M ’ s
p ro gra mming wa s available to any perso n wi th a satellite

- enabled radio that c ontracted wi th
Sirius XM to receive programming and that th e purpose of the contrac t , fr o m the st and point of
the sub s criber , was the ability to rec eive the p rogramming t hrough his or he r satell ite

- enable d

r adio

. In a d d it ion, although Sir ius XM ’ s programming include d or igina l content produc ed by
Sirius XM and av aila ble exclus ively to it s subsc r ibers , not hing in the record suggests that Sir ius
XM contracted wit h in dividu al subsc ribe rs or group s o f subscribers to develop o r produce specific programming

.

We conclude that the trial court ’ s finding that the receipt

- producin g, end

- product

act was “ the prod uct ion and distribution ” of Sir ius XM p rog ramming is not supported by th e trial court ’ s unchall en ged underlyi ng f actual f ind ings and the evidence presented at t rial

. Consequently , we must also conclude the trial court ’ s findin g t hat the comp a rativ e cos t o f t hese
activities in and outs ide Texas is a “ cre dible method for d ete rm ining fair va lu e ” of Sir ius XM ’ s

serv ices is no t s up porte d by the record. As a result, the trial court erred in concluding that “ [ t]he17

apportionment factors Sirius XM reported on its returns for Rep ort Years 2010 and 2011 were

c o nsistent with the fair v al ue of S i rius XM ’ s servic e performed in Texas

. ” W e sustain the Comptroller ’ s issues on appeal.

Cost

- of

- Goods

- S old Deduction As previously d is cussed, fr an chi se taxes are asse ssed against a “ ta xable mar gi n. ”
See Tex. Tax Code § 171.002(a). B efore ap po rt ionm ent, Se cti on 17 1.101 permits an entity to
subt r act its “ cost of good s sold ” from its total reven ue when calcu lat ing its mar gin. See id. § 171. 101( a )( 1) (B) (prov idi ng that taxable e n tity may elect to subtract ei ther cost of good s sold or compensa ti o n ). D ur ing the audi t p r oces s, Si rius XM requ ested pe r mission to revise its
COGS deduction to include the re venue share and h ard ware su bsidy payments that it made t o

a utomo bile manufac tu rers in ex change fo r the man ufactu rers ’ installation of satellite

- enabl e d
radio in their v ehicles. The Comptroller rejecte d this request. Si mila rly, t he tri al c ourt ’ s f indings
and conclusion s i ncluded the foll owing:

5. Sirius XM ’s Revenue Share and Hardware Subsid i es e xpenses are not includ able in Sir ius XM ’s cost

- of

- good s
- s old deduc tion

.

In its conditional cross

- appeal , Siri us XM ch alle nges th i s concl usion

.

Section 171.1012 addresses how a tax able entity ’ s cost of goods sold is ca lculated

. See id. § 171.1012 (determination of cost of goods sold). Under the COG S d ed uction , a taxable

en tity ma y subtract , among other th i ngs, “ all direct costs of ac quir ing or producing t he goods [sold ] , ” including labor, c ertain materials, handling, sto rage, depreciation, rent, r epa irs and maintenance, from its total re venue
. Id. § 1 71 .101 2( c ). “ Producti on ” is b roadly defined to mean

“ c o nstruction, ma nu fact ure, de ve l opment, min ing, ext raction, improvement, creati on , raising, or18

growth. ” Id. § 171.1012 (a) (2) (emphasis added)

. For pur p oses of calcu l ati ng cost of goods sold ,

“ g oods ” i s defined as “ real or tang ibl e personal prop erty sold i n the ordinary course of busine ss

o f a taxable entity

. ” Id

. § 171.1012 (a) (1). “ T angi ble personal p r operty ” is de fine d as “ personal property that can b e seen, weigh e d, measured, felt, o r touched or th at is p erceptible to t he s ens es in any other manner. ” I

d. § 171.1012(a)( 3) (A)(i)

. In subs ection (ii), “ [t] angi b le p erson al property ”
is fu rth er defined t o include “ film s , sound record ings, vi deotapes, live and pre recorded tele vision

a nd radio progr am s , bo ok s, and othe r simila r pro per ty embodying words, ideas , concepts, images,
or sound. ” Id. § 171.1012 (a) ( 3)(A )(ii) ( emph asis added)

. “ Tan gible personal p roperty ” does not
include “ service s. ” Id . § 171.1012 (a) (3)(B).

Sirius XM con tends tha t when t hese s tatutory de finitions a re appli ed to the undisputed fact s in this case, it is clear that the trial cour t was incorrect in concluding that

revenue share and hardware subsidies are not costs of goods sold

. 7 A ccording to Sirius XM, the
record est ablishes t ha t d uring the relevant tax y e ar s, it sold “ goods ”

— namely , “ tangible p e rsonal property ” in the f

orm of “ li ve and prerecorded . . . ra dio programs ”

— an d that these goods were

“ produced ” within the meaning of Section 1 71. 101 2(a )(2)

— that is, “ i mpro ved or cre at ed ”

— w hen
th e pr ogram s we re actua lly h eard by subscrib ers i n their aut om obiles

. Sirius XM reas ons that
bec ause t he satellite

- enable d radios were nece ssary f or subscribers to rec eive Si rius XM ’ s

7 The trial cou rt ’ s findi ngs and conclusions describe Sirius XM ’ s sat e l lit e
- ra dio subscri ption as a
“ service ” for p ur

p oses of appo rtio nment . Th e Comptroller p oints out that Si rius XM has not chall enged t hos e portions of t h e trial co urt ’ s finding s or otherw ise argued that it does not provide a “ service

. ” In additi on, t he Comptro ller argues that Sirius XM has j udicially admitted that it was performing a “ service

. ” Se e H o ly C ro ss Chur ch of God in Christ v. Wol f , 44 S.W .3d 5 62 , 568 (Tex. 2001) ( “ A j udicial ad mission that is clear an d u n equiv o ca l has conclusive effect and bars the a dmitting party from later disputing the admitted fact. ” ). For purposes of anal yzing S iriu s XM ’ s c ro ss
- appe al, we will assume that Sirius XM has no t waived and is no t other wise precl uded from asserting th at it provide d “ goods ” to its su bs cribers.19

s atellite

- radio prog ramming in their automobiles , its paymen t s t o a utomobile manufac tu rers rel ated
to those radios are d e ductible as a co st of producing the “ live and p rerecorded . . . radio pr ograms
. ”

The T exas Supreme Court recently addressed a simil ar argument in Hegar v
. American M

ulti

- Cinema, Inc. , No. 17

- 0 46 4,

__ S.W.3d __ , 2020 Tex

. LEXIS 269 ( T ex. Apr. 3,
20 20 ). In that case, the Texas Supreme Court considered whether a movie theat er sells tangible personal pr op ert y, within the me aning of Section 171.1012 , when it exh ibi ts films to its ticket

purc hasing p atrons. Id. at * 2

. The t ax payer , a m ov ie theater chai n, s o u ght to calculate its cost
of goods sold to include “ c osts it inc urred in exhibiting films, such as film acquisition costs
and costs associated with the theat er auditoriums themselves. ” Id. at * 4 . The mov ie theat er chain a sserte d that under the defi niti o n of “ tangible personal property ” in subsection (ii) , a

“ film ” was t angible personal property and that it sold fi lms in the ordinary course of its
business by exhibiting the fil ms to its viewin g a udience

. S ee id. at * 9 ; s ee al so Tex. Tax Code § 171.1012 ( a ) (1), ( 3)(A )(ii)

. I n rejecting this argument , the Texas S upreme C ourt exp lained that

“ [a] lthough [ subsection ( ii )] does not contemplate a particular mediu m, it doe s require that
th e ‘ medium in wh ich the prop erty is embodi e d ’ is in tended or reasonably lik e ly to be m ass
dis tri buted. ” American M ulti

- Cinema , 2020 Tex. LE XIS 269 , at *22. Consequently, t he court
held that with r esp ect to “ goods ” under Section 171. 1012 , “ pr operty with a ph ysical or
demon st ra ble

— that is , tangibl e

— pre senc e must be transferred

. T ransferring a film ’ s creative
content alone will not suffic e. ” Id. at *16

.

Simi larly, in this case, “ radio programs ” are expressly included in the defin ition
of “ tangib le personal property ” un der subse ct i on (ii) , which if sold , would co nstitute “ good s
. ”
S ee Tex . Tax Code § 171. 1012 (a) (1) , . 1012 (a) ( 3)(A )(ii)

. In add it ion , there can be no dispute that
Sirius XM tra n s mitted , and Sirius XM ’ s subscribers paid to rece i ve tra nsmission s of , “ radio20

p rograms. ” H owever , the evidence show s that li ke the mo vie

- vie wing audi en ce in American
M ulti

- Cinema , Sirius XM subscribe rs received only a right to access and listen to t he program s ’
creative content

. I n addition , a lthou gh S i rius XM may have r emotely transmitted i ts radio

programs to its su bscribers in a digital fo rmat , not hing in the record suggests that the digital
informa tion was transmi tted in a manner that would allow a subscriber to access that in for mation again at a la ter tim e
. C ompare American M ulti

- Cinema , 2020 Tex. LE XIS 269 , at * 22 n .13 ( noting that “som e medi um is transferred to the consumer ” when creative content is transferred
in some digital forms of media ). Consequently, the r ecord fails to esta blish that “ proper ty with a phy sical or demonstra ble

— that is , tangible

— presence” was trans ferred by Sirius XM to it s subscribers. See id. at *1 6

. In s tead , the transfer to the subscriber was solely that of the creative
content of the radio program , which unde r the Texas Supreme Court ’ s hol ding i n American
M ulti

- Cinema , fails to qu alify as a sale of “ t angible pe rsonal p roperty

. ” See Tex. Tax. Code § 171.1012(a)(1).

We c annot co nclude that the evidence estab lish es that during the relevant tax

years, Sirius XM sold “ live and pre recorded . . . radio programs ” co nstituti n g “ tang ible personal property, ” as th at p h rase is used in Sec tion 171. 1 012. Beca use the evidence does no t establish
that Sirius XM sold “goods, ” the trial court did no t err in concluding that its “ Revenue Share
and Hardware Subsid i es e xpenses [wer e] not i nclud abl e in [its ] cost

- of

- good s
- sold de d u c tion

. ”
S irius XM ’ s sole issu e on c ross
- appeal is overruled.

C ONCLUSION
The trial c ourt erred in concluding that the apportionment factor s reported by
Sir ius XM accuratel y re flect the fair value of serv ices pe rformed in Texas during tax years 20 1021

a nd 2011

. In addition, Sirius XM failed to esta blish that i ts repo rted co st of goods sold shou ld
be revised to include the re venue share and h ard ware su bsidy pa yments that it made in tax
years 2010 a nd 2011

. A ccordi ngl y, the trial court erred in awarding Si rius XM “ a refun d fo r the
addi tional tax resu lting from the amou nt by w hich the Comptroller ’ s apportionme nt factors
exceeded Si rius XM ’ s apportionment facto r s , ” and Sirius XM is not entitled to a p artial r efund

. W e r everse the judgment of the trial cour t a nd render a tak e
- nothing judgm ent in fav or o f the
Com ptroller on Siriu s XM ’ s claim s.

_ ___________________ ______________________ Ch a ri L. K elly , Justi ce Before Justic e s Goodwin , Baker, an d Kel ly
Reversed and Rendered
Fil ed : May 1 , 2020