Texas Court Decisions – Lockheed Martin Prevails, Sirius XM Refund Overturned on Appeal

Texas Supreme Court Rules for Lockheed Martin in Refund Case

The Texas Supreme Court ruled that Lockheed Martin’s sale of fighter jets to the U.S. government for resale to foreign governments could not be apportioned to Texas according to Texas tax law prior to 2008. Lockheed argued that the receipts from the sales that occurred in 2005, 2006, and 2007, should be sourced to the respective foreign nations of the aircraft’s ultimate users. 

The federal Arms Export Control Act restricts the sale of aircraft through the federal Foreign Military Sales (FMS) program. Under the program, there is no contract between the foreign government and the defense contractor. Rather, there exists a contract between the U.S. government and the foreign government, and another contract between the U.S. government and the defense contractor. Under prior Texas tax law, tax was based on earned surplus and the tax base was apportioned as the taxpayer’s gross receipts from business done in Texas divided by the gross receipts from its entire business. The numerator included each sale of tangible personal property if the property was delivered or shipped to a buyer in Texas regardless of the FOB point or another condition of the sale.

In the Lockheed case, the court found that the defense contractor’s sale of each aircraft was to a foreign-government buyer for whom the aircraft was manufactured and to whom it was ultimately delivered. The Supreme Court found that the U.S. government’s involvement in each transaction was a condition of the sale that had no bearing on whether to apportion the receipts from that sale to Texas. The aircraft were not delivered to the foreign governments in Texas. Rather, as the ultimate buyers, the foreign governments received the aircraft in their countries.

Texas Court of Appeals Overrules Trial Court Denying Sirius XM Refund Claim

The Texas Court of Appeals ruled that Sirius XM must apportion subscription receipts based on the proportion of subscribers in Texas to subscribers nationwide and that Sirius XM was not entitled to a Cost of Goods Sold (COGS) deduction for subsidizing 3rd party manufactured ratios.

For apportionment purposes, the court found that the service being provided was not the production of satellite programming, but rather the receipt of the provider’s programming. The court posited that each subscription is tied to one satellite-enabled radio in which a radio receiver unscrambles and decodes an encrypted satellite signal, which occurs where the radio is located; presumably, where the customer resides.

Sirius XM argued that because the radios are necessary for customers to receive the programming, the costs related to the radios were deductible under COGS. The court found that the radio programs are included in the definition of “tangible personal property,” but the customers receive only a right to access and listen to the program content, which do not qualify as sales of tangible personal property and, therefore, are not “goods” for purposes of calculating COGS.

What we all can learn from Lockheed Martin and Sirius XM rulings is that state income/franchise tax compliance can be complicated. Weaver’s professional team of state income tax professionals is here to help you navigate the U.S. 46 jurisdictions currently imposing varying income/franchise taxes. Contact us to discuss your current situation and find out how we can help.

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