Corporate Close-Up: The Texas Comptroller Ruled that Wireless Voice and Data Services are Performed in Texas when a Customer Accesses Those Services in Texas--Is It Market-Based Sourcing?


Texas is among a number of states that categorize the sale of mobile voice and data services as the sale of internet access services and telecommunication services, not the sale of an intangible asset. As a result, the Texas Comptroller of Public Accounts ruled in Letter No. 201711016L (Nov. 27, 2017) that sales receipts are apportioned to Texas when the receipts are earned from providing access to the internet in Texas or when telecommunications services are performed in Texas.

The taxpayer requesting the ruling was a Delaware limited liability company that had no employees or business locations outside Texas. The company contracted with mobile telecommunications carriers to buy and resell voice and data services using the carriers’ network infrastructure. The company sells the mobile voice and data services it acquires to a mobile virtual network operator domiciled in Pennsylvania, and it also rebrands and resells the services to its own customers.

Looking to the taxpayer’s contracts with network carriers to purchase and distribute services and with the Pennsylvania network operator to sell wireless voice and data services, the Comptroller determined that the taxpayer’s receipts were from the resale of services, analogous to services provided by telephone companies. Accordingly, those receipts must be apportioned to Texas, pursuant to Tex. Admin. Code tit. 34, § 3.591(e)(12) and (30), to the extent those services are performed in Texas.

The regulation provides, as an example, that a telephone company providing access to the telephone company's local exchange network in Texas to a long distance carrier is performing a service in-state. Any fee that the telephone company charges the long distance carrier for access to the local exchange network in Texas is a Texas receipt, regardless of whether the access is related to an interstate call. Although the taxpayer in the ruling is not a telephone company, the Comptroller reasoned that the taxpayer sold the same kind of telecommunication service. Thus, when customers access the taxpayer’s wireless voice and data services in Texas, the taxpayer is performing services in Texas, and receipts from those customers are Texas receipts.

The South Carolina Court of Appeals came to a similar conclusion with respect to the services provided by DIRECTV to its customers. South Carolina does not explicitly adopt market-based or cost-of-performance sourcing for services, but looks to the location of a taxpayer’s income-producing activity, taking an approach that resembles market-based sourcing. If the income-producing activity is performed partly within and partly outside South Carolina, sales are attributable to South Carolina, pursuant to S.C. Code Ann. § 12-6-2295, to the extent the income-producing activity is performed within the state.

According to the decision in DIRECTV, Inc. v. South Carolina Dept. of Rev., 804 S.E.2d 633 (S.C. Ct. App. 2017), DIRECTV’s income-producing activity as a service provider is the delivery to its customers nationwide of high-quality television entertainment. Its customers pay DIRECTV for the service of delivering television programming and for the equipment to process the signal DIRECTV sends to its customers. Thus, all income-producing activity related to South Carolina customers occurs in South Carolina. Accordingly, the court concluded that fees paid by South Carolina subscribers reasonably represent DIRECTV’s business activity in the state and must be included in the numerator of the gross receipts ratio as South Carolina gross receipts.

In July 2017, Oregon enacted legislation adopting market-based sourcing for sales of intangible property and services. The market-based sourcing rules took effect on Jan. 1. A taxpayer’s market for sales of services is in Oregon to the extent the service is delivered to a location in-state. As Bloomberg Tax editor Chris Bailey noted in his Aug. 21 SALT Talk blog, what exactly is meant by delivery to an Oregon location will be determined in Department of Revenue regulations. If, as expected, Oregon follows the Multistate Tax Commission’s model regulations when issuing guidance, a service delivered to an individual customer by electronic transmission would be sourced to Oregon if and to the extent the customer receives the service in the state. As in the case of providing internet access to customers in Texas or television signals to customers in South Carolina, the likely result is that receipts from providing these services to customers in Oregon will be included in the numerator of the Oregon gross receipts factor.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is market-based sourcing the wave of the future for apportioning receipts from the sale of internet access, television entertainment, and other electronic services?

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