Armanino Blog

Florida, Texas, Abandon Cost-of-Performance Sourcing Without Changing Their Laws

by Alex Thacher, Mark Cummings
October 23, 2020


Texas and Florida, which have traditionally been cost-of-performance states, have begun sourcing receipts by applying a market-sourcing approach and targeting SaaS companies. (“Cost of performance” means income from a service is apportioned to the state where the income-producing activity is performed, based on cost of performance. “Market sourcing” means receipts are sourced to the state where the services are delivered or the benefit of the service is received.)

Texas, based on the recent decision in Hegar v. Sirius XM Radio, Inc., 604 S.W.3d 125 (Tex. App.-Austin 2020), is applying the decision citing the Texas sales and use tax sourcing rulings for data processing services. Florida likewise has issued Technical Assistance Advisement (TAC) 20C1-001, which is in direct conflict with its own statute.

Both states are isolating the final stages of the transaction (i.e., where the service is being delivered), such as where a SaaS vendor’s platform is being accessed or (in the Sirius case) the transmitter turned on, and ignoring the actual location of where all of the direct costs of the service are being performed.

In Detail

In the Sirius case, the Texas Court of Appeals held that the subscription-based service of Sirius XM radio should be apportioned based on the location of its subscribers rather than the locations where the broadcasting is produced. In a contradictory case, Westcott Communications, Inc. v. Strayhorn, 104 S.W.3d 141 (Tex. App.-Austin 2003), the Court of Appeals ruled in favor of the Texas Comptroller and required Westcott Communications, a Texas-based satellite programming company, to source 100% of its receipts to Texas because it produced, filmed, edited and broadcast its services in Texas.

Conversely, in Sirius, the Court of Appeals again ruled in the Comptroller’s favor, requiring Sirius XM, an out-of-state satellite programming company, to source its service receipts based on its customers’ locations rather than the locations where it produced, recorded, edited and transmitted its service.

The ideology of the rulings and decisions is the difference between “act done” or “end-product act” which the customer contracts to receive. This defining and further exploring the statute has resulted in sourcing of certain services, like software, to the location of the customer (i.e., market sourcing). This is problematic because Westcott and Sirius are similar cases with incompatible results.

In Florida, cost of performance means direct costs determined in a manner consistent with generally accepted accounting principles or the original language used in the UDITPA issued by the Multistate Tax Commission. One SaaS company targeted by the state employed its foreign subsidiary to perform the majority of the income-producing activity. (Florida allows independent contractors to be included as part of the cost-of-performance calculation.) The company also had no property in Florida.

The Florida auditor is applying TAC 20C1-001, which relied upon two Arizona cases, one a financial loan and the other an interstate transportation case, that arrived at spurious conclusions. A state that is typically a cost-of-performance state bases its income on the location of services received if it can attempt to justify that location using a definition of services received or contract completion contrary to its own sourcing methodology.

In Pennsylvania, in a recent case, the court sided with the taxpayer, who was deemed entitled to a refund using this benefits-received method/definition. Ohio is also beginning to use similar methodology and definitions with regards to its commercial activity tax.


For SaaS companies, this means if they are filing a Texas sales and use tax return and sourcing data processing services to Texas, the Comptroller will likely try to apply the same sourcing for the Texas margins tax. Similarly, Florida will also likely attempt to apply their new sourcing methodology to companies filing there.

Companies that get audited in either Texas or Florida should consider filing a protest. These issues will be litigated in both states. The cases and rulings are rapidly changing and must be monitored regularly. Companies may also wish to review their current state tax provision for these positions. Also, Texas companies that used the cost-of-performance method in prior years should consider filing protective refund claims. Similarly, a SaaS company that had significant losses and applied the cost of performance in Florida in prior years may want to file protective claims increasing their NOLs applying market sourcing.

The Texas Comptroller and the Florida Department of Revenue have a history of taking positions and losing upon judicial review. It is uncertain whether this will be the case again.

If you have any additional questions, contact our experts.

October 23, 2020

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Alex Thacher - Partner, Tax - San Jose, CA | Armanino
Mark Cummings - Tax, Armanino
Managing Director
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