Texas Supreme Court Addresses Sourcing of Tangible Personal Property Sales

On March 13, 2026, the Texas Supreme Court ruled that the Texas apportionment statute “unambiguously” provides that receipts from sales of tangible personal property are sourced to Texas if the taxpayer yields possession and control of the goods to a buyer at a location in the state.¹ The sourcing does not change if the buyer immediately transports those goods out of the state to a non-Texas destination. While noting that both parties agreed that the statute “employs a destination-based sourcing rule,” the court’s decision effectively results in “dock sales” being sourced to the origin (e.g., the seller’s dock). This interpretation is punitive to in-state sellers, which is contrary to the objective most state legislatures seek to achieve when enacting a single-sales factor.

The taxpayer sold fuel for use in large commercial ships and delivered the fuel to the ships at Texas ports. By law, the type of fuel sold by the taxpayer could not be used or consumed by the ships in U.S. waters. On its original franchise tax returns, the taxpayer sourced these “dock sales” to Texas. The taxpayer later filed a refund claim requesting that the sales be removed from Texas receipts. The taxpayer argued that the apportionment statute established a destination test for sales of tangible personal property and that the destination or market for the fuel sales was not in Texas. The taxpayer noted that its buyers were not Texas buyers, were in the state only temporarily to take delivery, and did not use or consume the fuel in the state.

Under Texas Tax Code § 171.103(a)(1), 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 parties agreed that the statute employs a destination-based sourcing rule but differed on what is meant by “destination.” The Comptroller of Public Accounts (“Comptroller”) argued that the destination is where the goods are delivered to the buyer. The taxpayer argued that the destination is the buyer’s location (i.e., where the buyer consumes or uses the goods) and that sourcing under the Comptroller’s interpretation will often lead to origin-based sourcing, as in the taxpayer’s situation. The court ruled in favor of the Comptroller, holding that sales of tangible personal property are sourced to the place of delivery or transfer.

The court found that receipts are sourced to Texas when the tangible personal property is handed over to a buyer in the state, calling this “a simple, clear and objectively determinable sales point.” However, that assessment may not prove true, as there are many sales of tangible personal property that do not involve a physical handing over of property from the seller to the buyer. Nonetheless, the court rejected the taxpayer’s argument that one should look beyond the point of transfer to the destination of the goods (i.e., the buyer’s location for the goods). The court said that such an interpretation would be burdensome and complex in that it would require ascertaining and documenting a buyer’s post-acquisition journey.

The court pointed out that the statute does not mention the ultimate destination of the property, the market for that property, or the buyer’s consumption, use, or other disposition of the property. Moreover, the court found the statute’s phrase “if the property is delivered or shipped in the state” would not matter “one whit” if the inquiry turned on the location of the intended use or consumption. “What matters is the customer’s location when the seller surrenders the goods.”

Finally, while noting that the taxpayer was correct to be skeptical of the Comptroller’s “curious decision to transpose the text” of the statute, the court ruled that these changes in the apportionment rule [34 Tex. Admin. Code §3.591(e)] did not work “a substantive change in the statute’s operation.” The court found that the examples provided in the rule do not conflict with the statute by pointing to the location of delivery.

Ryan’s Take and Action Steps

The Supreme Court’s message was clear with regard to its interpretation of the destination sourcing rule: look to the transfer point and not to the ultimate destination, the market for the property, or the location where the buyer consumes, uses, or disposes of the property.

The court’s ruling on the apportionment statute stands in contrast to almost every other state Supreme Court and Court of Appeals that has reviewed and interpreted almost identical language, which is derived from the Uniform Division of Income for Tax Purposes Act (UDITPA). While noting similar interpretations in Mississippi and Utah, the court’s ruling is in opposition to the interpretation of courts in California, Connecticut, Florida, Georgia, Minnesota, Oregon, Pennsylvania, and Wisconsin, all of which ruled that the UDITPA language establishes a destination test and finding that the statutory phrase “in this state” refers to the buyer and not the location of delivery or shipment. The court shrugged off its minority view among the courts by citing minor textual differences between the Texas statute and the UDITPA language. The court also noted that the Texas franchise tax framework is different from other state tax frameworks and, therefore, uniformity with other states borrowing the UDITPA language is not essential.

While the decision will make it easier for certain sellers of tangible personal property to determine whether their sales are Texas sales, new complications may arise for transactions that do not involve a direct, physical transfer of goods from the seller to the buyer. Taxpayers engaged in sales of tangible personal property should evaluate the facts around their transactions to consider the impact of the court’s decision on their Texas sales factor.

¹ NuStar Energy v. Hancock, Texas Supreme Court, Dkt, No. 24-0037 (March 13, 2026).

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.