Here's what I found after digging some more. For whatever reason, when I have paired headphones and turn them on and connect them, the SP3 does not automatically switch to use the headphones. Instead it still shows the built it speakers as the default device and sends SOME sound through the headphones and mutes the speakers.
If I go in and set the Stereo headphones as default, I get what I expect. But I have to manually set as default.
(My other non Surface computers auto switch to Bluetooth)