Will the Sirius MX franchise tax amendment affect your business?

The Texas Comptroller of Public Accounts has proposed amendments to the state’s franchise tax apportionment rule in response to the Sirius XM case. 

These amendments, published in the Texas Register on January 20, come after the Texas Supreme Court unanimously rejected the Comptroller’s “receipt-producing, end-product act” test contrary to the statute. 

Amendment details and its impact on S corporations 

The proposed amendments on Sirius XM Radio, Inc v. Hegar case to Texas’ franchise tax apportionment seek to source service receipts based on where the taxpayer’s personnel or equipment is physically doing helpful work for the customer.  

The amendments could have significant implications for S corporations, which are pass-through entities. Under the new sourcing provisions: 

  • They may face increased franchise tax liabilities if a greater share of their revenue is now attributed to Texas. This change could impact S corporations with heavy customer bases or operational activities within the state. 
  • They may need to consider the potential impact on their overall tax planning and compliance strategies. With a higher proportion of revenue being sourced to Texas, these corporations may need to reassess their tax obligations and explore strategies to help minimize their tax liabilities while remaining compliant with the amended regulations.  
  • They may need to adjust and review their internal accounting and reporting processes. As the sourcing of service receipts becomes more closely tied to the location of personnel or equipment, S corporations may need to confirm they can track these factors accurately. This strategy may help avoid additional costs and administrative burdens. 

By aligning with the Sirius XM decision, the Comptroller aims to provide clarity and consistency in how service receipts are sourced for tax purposes. 

Businesses operating in the Lone Star State should familiarize themselves with these changes and adjust their tax compliance strategies, with the help of legal guidance, to avoid potential penalties or disputes with the Texas Comptroller.