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Margin Tax

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The Texas Court of Appeals recently issued a decision that applied market-based sourcing for services, despite the state’s statute that requires the sourcing of receipts to the location where the service is performed.  In Hegar v. Sirius XM Radio Inc., No. 03-18-00573-CV (Tex. App. Austin, 2020), the court narrowly defined the scope of “performance” as the final act that gets the service to the customer, thereby ignoring all of the costs that went into the performance and production of the service up to that point.  Such an application produces a result that equates to market-based sourcing.

Pop quiz: when it comes to business earnings, the State of Texas imposes: (a) an income tax; (b) a business activity tax that is not an income tax; or (c) no tax at all. Good news (or bad news)—no matter which answer you chose, you may be right (or wrong).  Right now, the answer appears to be (b), but in a few months we may find out that the answer is actually (a), and barring a change of course by the State Legislature, the answer may be (c) in the near future.  One thing is clear; the Texas Franchise Tax (or “margin tax,” as it is colloquially known), is in a state of flux.