The Court’s approach in NuStar is consistent with the textual, plain-meaning methodology the Texas Supreme Court applied in Sirius XM Radio, Inc. v. Hegar, a franchise-tax apportionment case involving receipts from services.8 In Sirius XM, the Comptroller asserted sales of services should be sourced based on a “receipt-producing, end-product act” methodology which would have tended to source the receipts to where the service is received. However, Tex. Tax Code Sec. 171.103(a)(2) sources services to Texas when the “service [is] performed in” Texas.
The Court rejected the Comptroller’s methodology as it was inconsistent with the statutory language (‘performed’ not ‘received’) and held the most natural reading looks to where the taxpayer’s personnel or equipment is located.
Notably, Sirius XM also relied on a close reading of Tex. Tax Code Sec. 171.103 to show different legislative language is used when a destination/customer-location rule is intended. The Court pointed to Sec. 171.103(a)(1) (tangible personal property) as an example of statutory language that expressly looks to delivery or shipment “to a buyer in this state.”
In NuStar, the Court similarly compared subsection (a)(1) to subsection (a)(4)’s explicit ‘use … in this state’ phrasing for certain intangibles to underscore that subsection (a)(1) does not incorporate ‘use’ or ‘consumption’ concepts. Together, the cases reinforce that Texas franchise tax sourcing turns on the specific language the legislature selected in each subsection, and the Court is reluctant to read additional language into a statute.
The NuStar decision also highlights a clear divergence among states in interpreting nearly identical statutory language governing the sourcing of tangible personal property sales. For background, the language of Tex. Tax. Code Sec. 171.103(a)(1) is based upon the Multistate Tax Commission’s Uniform Division of Income for Tax Purposes Act (“UDITPA”).9
In California, a state that historically has followed UDITPA, the California Court of Appeal held that its statute required a destination‑based sourcing approach, excluding sales delivered in-state but destined for out‑of‑state use.10 In its analysis, the Court of Appeal noted other jurisdictions interpreted their UDITPA-based statutes to require destination-based sourcing and placed great weight upon promoting “uniformity” amongst the states. This decision contrasts with the NuStar approach.
By contrast, the Utah Supreme Court analyzed Utah’s own UDITPA-based statute and held that the location of delivery controlled and rejected an ultimate-destination sourcing argument.11 Similar to the Texas Supreme Court, the Utah Supreme Court determined ultimate destination sourcing cannot be read into the statute due to a lack of statutory reference or language such as “consume.”
Notably, the Texas Supreme Court declined to give weight to decisions from other jurisdictions, emphasizing the lack of nationwide uniformity and concluding that the plain language of the Texas statute must control.
From a practical perspective, the NuStar decision clearly indicates that taxpayers should apply a place-of-delivery or place-of-transfer analysis for sourcing sales of tangible personal property for Texas franchise tax purposes. As indicated by the Court, when sourcing sales of tangible personal property for franchise tax purposes, the customer’s location when the seller surrenders the goods is paramount, and the Court specified that the facts surrounding each transaction may produce different sourcing results.
However, and as alluded to by the Court, the method of delivery and the location of the customer may not always be as simple as presented in NuStar.
The Texas Supreme Court earlier addressed a complex delivery scenario in Lockheed Martin Corp v. Hegar.12 In that case, the Court addressed sourcing considerations related to a company’s manufactured F-16 fighter jets that were ultimately destined for foreign countries.
There, the Court held the sale of each F-16 should be sourced outside of Texas. The Court reasoned that the F-16 in question was ultimately delivered to the foreign-government buyer, and that the U.S. government’s involvement in each transaction (wherein the U.S. Government received the F-16 in Texas before subsequent transfer to the foreign-government buyer) was a “condition of the sale” that had no bearing on the sourcing considerations.13
In NuStar, the Court attempted to distinguish the holding of Lockheed Martin Corp., interpreting the phrase “to a buyer” in Tex. Tax Code Sec. 171.103(a) to mean “the intended recipient of the goods” rather than “a mere intermediary who takes possession only to facilitate further transport to the buyer.”
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