On March 13, 2026, the Texas Supreme Court determined that the Texas sourcing statute for sales of tangible personal property “unambiguously” sources receipts from sales of tangible personal property to Texas if the taxpayer yields possession and control of the goods to the buyer at a location in Texas. This sourcing rule applies even if the buyer subsequently transports those goods to another jurisdiction for consumption or use.1
Background and procedure
The taxpayer, NuStar Energy L.P. (“Taxpayer”), sells high-sulfur bunker fuel to foreign registered oceangoing vessels, delivering fuel to customers at Texas ports. For the 2011–2013 tax years at issue, Taxpayer treated these receipts as Texas-sourced receipts for apportionment purposes. Subsequently, Taxpayer initiated a refund claim for these years by removing these receipts from its apportionment factor.
Taxpayer asserted that these receipts should not have been sourced to Texas, as the purchasers of bunker fuel do not and cannot (legally) use, sell or otherwise consume the fuel in Texas or Texas waters. The Comptroller disagreed with Taxpayer’s rationale and denied the refund claim.
Taxpayer appealed to the Texas trial court, asserting that the Comptroller’s rules which source receipts of tangible personal property as Texas-sourced sales if the property is delivered to a purchaser in Texas are invalid as they conflict with Texas statutes. Taxpayer claimed that the Texas statutes require sourcing receipts from tangible personal property by a market-based or ultimate-destination sourcing determination, treating sales as attributable to where the buyer intends to use or sell the property.
The Comptroller disagreed and contended that its promulgated rules are a valid reading of Texas statutes as the plain language of the statutes requires sourcing receipts of tangible personal property to Texas when the seller has physically transferred possession and control of the property to a buyer located in Texas.
Neither side disputed any material issues of fact and filed cross motions for summary judgment. The trial court denied Taxpayer’s motion and instead affirmed the Comptroller’s motion, finding that the Comptroller’s rules were a valid interpretation of Texas statutes.2
Taxpayer subsequently appealed the trial court’s decision to the Texas Court of Appeals. Here, the Court of Appeals upheld the trial court ruling and held that the statutory language at issue clearly states that sales of tangible personal property are sourced based “on where the buyer received the property, not where the buyer is ultimately located when they plan to use, sell, or otherwise dispose of the property.”3
Accordingly, the appellate court found the Comptroller’s rules were supported by statute and the denial of Taxpayer’s motion was proper. Taxpayer subsequently appealed to the Texas Supreme Court.
Court analyzes place of delivery / place of transfer test
A taxpayer’s Texas franchise tax liability is determined by a three-step process: (1) calculation of the entity’s margin (total revenue minus permitted deductions), (2) apportionment of margin to Texas, and (3) subtraction of other allowable deductions.4 Apportionment is determined by a single factor representing the proportion of the taxpayer’s total sales attributable to “business done in this state” which effectively compares the taxpayer’s gross receipts from business done in Texas (the numerator) with its gross receipts from its entire business (the denominator).5
The Texas apportionment statute at issue (Tex. Tax Code Sec. 171.103(a)(1)) provides that gross receipts from sales of tangible personal property are sourced to Texas “if the property is delivered or shipped to a buyer in this state regardless of the FOB point or another condition of the sale.”
The Comptroller promulgated rules and several examples interpreting the statute at issue under 34 Tex. Admin. Code Sec. 3.591(e)(29) under what was described by the Texas Court of Appeals’ decision as a “place of delivery or place of transfer test.” One such example provides that a Texas-source receipt occurs when tangible personal property is delivered in Texas.6 In this example, “delivery” means “transfer of possession or control [to the purchaser or purchaser’s employee] or [to] transportation vehicles [owned or leased by] the purchaser.” Further “FOB/title passage/other conditions” are not relevant when determining whether a sale is a Texas-sourced sale.
In response, Taxpayer argued that the phrase "to a buyer in this state" present in Tex. Tax Code Sec. 171.103(a)(1) requires the taxpayer “to look beyond the transfer point” to determine the location where the buyer uses or consumes the goods and therefore mandates ultimate-destination sourcing.
The key interpretive question facing the Texas Supreme Court was whether the term “to a buyer in this state” looks to where the buyer takes possession and control (delivery/transfer point) or instead to where the buyer ultimately uses or consumes the property (ultimate destination). The Court held that Tex. Tax Code Sec. 171.103(a)(1) unambiguously sources receipts from sales of tangible personal property to Texas when the seller yields possession and control of the goods to the buyer at a location in Texas, even if the buyer later transports the goods elsewhere for use or consumption.
Rejecting Taxpayer’s ‘ultimate destination’ interpretation, the Court emphasized that the statute speaks only in terms of delivery and shipment and does not reference the buyer’s subsequent use, consumption, market, or ultimate disposition of the property. The Court also addressed Taxpayer’s argument that the Comptroller improperly ‘transposed’ the statutory phrase (‘delivered or shipped to a buyer in this state’) into rule language (‘delivered in Texas to a purchaser’), concluding that the transposition did not create a substantive conflict because both formulations focus on the same objective point: where the buyer took possession or control.
As part of its textual analysis, the Court contrasted Tex. Tax Code Sec. 171.103(a)(1) with other subsections that expressly source other types of receipts based on ‘use’ in Texas. For example, Tex. Tax Code Sec. 171.103(a)(4) treats certain receipts as Texas-sourced receipts based on ‘the use of a patent, copyright, trademark, franchise, or license in this state. The Court reasoned that if the Texas legislature intended tangible personal property sourcing to turn on where the buyer uses or consumes goods, it could have said so explicitly—as it did in other sections of the statute.
Finally, the Court noted that the Comptroller’s rules regarding sourcing of tangible personal property delivered by common carrier do not conflict with Tex. Tax Code Sec. 171.103(a)(1).7 Instead, the Court found this rule is ultimately consistent with the statute's "place-of transfer” sourcing rule as under a possession and control analysis, the buyer will take control of the property upon delivery destination.
Commentary
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.”
However, this place of delivery or place of transfer test effectively endorsed by the Texas Supreme Court may, and likely will, create additional questions, confusion, or dilemmas for taxpayers. For example, consider the complex fact patterns that may exist in contract manufacturing arrangements. A buyer in these scenarios may require a manufacturer to ship via common carrier, may pick-up items at the manufacturer’s dock, or even require shipment to third-party logistics facilities.
Given the myriad of complex shipment and delivery methods that exist, the facts and circumstances surrounding delivery, possession, and control of tangible goods need to be carefully considered to determine proper Texas-sourcing. The decision also provides an opportunity for taxpayers to review their historic sourcing methodology for material revenue streams from the sale of tangible personal property, which may lead to the identification of potential refund claims for tax years still open under the statute of limitations.
1 NuStar Energy, L.P v. Hegar, 683 S.W.3d 831, 2023 Tex. App. LEXIS 9497 (Dec. 21, 2023).
2 NuStar Energy, L.P v Hegar, Texas 98th Civil District Court, No. D-1-GN-19-000793, Nov. 10, 2021.
3 NuStar Energy, L.P v. Hegar, 683 S.W.3d 831 (2023).
4 See Tex. Tax Code § 171.101(a)(1)-(3).
5 Id. at § 171.103(a).
6 34 Tex. Admin. Code § 3.591(e)(29)(A).
7 Compare 34 Tex. Admin. Code § 3.591(e)(29)(A) ("Delivery is complete upon transfer of possession or control of the with 34 Tex. Admin. Code § 3.591(e)(29)(C) ("The sale of tangible personal property that is delivered in Texas to an independent contract carrier, common carrier, or freight forwarder that a purchaser of the property hires [does not result in a Texas sale] if the carrier transports or forwards the property to the purchaser outside this state.")
8 Sirius XM Radio, Inc. v. Hegar, 643 S.W.3d 402, 404 (Tex. 2022).
9 See Model Compact Article IV. Division of Income [UDITPA], § 16(a), as revised by the Multistate Tax Commission, July 29, 2015. Under UDITPA, “receipts from the sale of tangible personal property are in this State if: the property is delivered or shipped to a purchaser, other than the United States Government, within this State regardless of the f.o.b. point or other conditions of the sale”).
10 See McDonnell Douglas Corp. v. Franchise Tax Bd., 26 Cal. App. 4th 1789 (1994). In this case, Cal. Rev. & Tax. Code § 25135 provided that “sales of tangible personal property are in this state if the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale.”
11 See Hercules Inc. v. Utah State Tax Comm'n, Auditing Div., 877 P.2d 133 (Utah 1994). In this case, the Utah Supreme Court examined Utah Code Ann. § 59-7-318, which provided in pertinent part, “[s]ales of tangible personal property are in this state if . . . the property is delivered or shipped to a purchaser . . . within this state, regardless of the f.o.b. point or other conditions of the sale.”
12 601 S.W.3d 769 (Tex. 2020).
13 The sales of the F-16s at issue were made under the Foreign Military Sales (“FMS”) program. Sales under the FMS program involve two separate contracts: the first between a domestic defense contractor and the U.S. government, and the second between the U.S. government and a foreign government. Under the program, the defense contractor must deliver the military equipment to the U.S. government, which then delivers the equipment to the foreign government.
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