It may be that you haven't defined MDEP within the select - it's having to call all the way up to the UPDATE statement to find it, and that's outside of the GROUP range. What happens if you add MDEP into the the query, like this:

Update MDEP

Set MDEP.POObligations =

(

select SUM(PerPO.SumOfPurchaseOrder) from

(

Select PO_MX.PONumber, PO_MX.MDEP, ((PO_MX.PaymentPosted * -1 ) + POD.SumOfLineItems) * (cast(PO_MX.PrimarySplit as decimal(5,2))/100) As SumOfPurchaseOrder

from PO_MX

inner join

(

select PONumber, SUM(PO_DX.QuantityOrdered * PO_DX.Price) As SumOfLineItems

from PO_DX

join MDEP ON PO_MX.MDEP = MDEP.MDEP --add MDEP as a join here

where (QuantityOrdered * Price) is not NULL

group by PO_DX.PONumber

)

as POD

on PO_MX.PONumber = POD.PONumber

--where PO_MX.MDEP = MDEP.MDEP --move this to the ON clause above

)

as PerPO

)

where MDEP.MDEP In

(select MDEP from PO_MX)