- The GEO Group, Inc., and a related limited liability company (collectively, “GEO”) owns and operates correctional facilities throughout the United States, including facilities in Texas
- GEO did not pay sales tax on purchases of supplies used in operating the correctional facilities.
- GEO unsuccessfully claimed it was an instrumentality of the government and therefore exempt from sales tax on these purchases.
Background
GEO owns and operates prison facilities throughout the United States, including several in Texas. It operates these facilities either as a direct contractor with the federal or state government, or as a subcontractor to Texas counties who had contracted with federal agencies to incarcerate detainees. It did not pay sales tax on purchases of supplies, such as electricity, furniture, and other items during tax years 2011 through 2014. The Texas Comptroller of Public Accounts (the “Comptroller”) assessed sales tax on these purchases, resulting in the litigation at hand. GEO claimed that it was an instrumentality of the government and therefore exempt under applicable Texas law.
Applicable Evidentiary Standard
GEO did win a pyrrhic victory on one issue before the Texas Supreme Court. The Comptroller claimed that a regulation required GEO to prove its entitlement to the exemption by clear and convincing evidence. GEO, on the other hand, pointed to a provision in the Texas Tax Code that required district court level tax trials to be conducted de novo, and that the evidentiary standard in such trials had always been a preponderance of the evidence. The Supreme Court agreed with GEO’s opinion, noting that its interpretation of the regulation upon which the Comptroller was relying was the standard for administrative hearings, and that any statutory construction arguments that the Comptroller advanced were related to interpretations of law and not the evidentiary standard in a trial de novo.
Government Instrumentality
The court then turned to the substantive issue – the eligibility for the sales tax exemption. The critical question was whether GEO was entitled to an exemption as an “unincorporated instrumentality” of the United States. The Texas Tax Code exempts, “…a corporation that is an agency or instrumentality of the United States and is wholly owned…by the United States.” The Comptroller, in a regulation, extends the exemption to unincorporated agencies and instrumentalities of either the United States or the State of Texas. GEO contended that it meets the definition of an unincorporated agency or instrumentality of both the United States and the State of Texas.
As an initial matter, the court noted that GEO did not offer a satisfactory explanation as to how a corporation (or its related limited liability company) could be considered an unincorporated agency or instrumentality. The regulation in question makes provisions for incorporated and unincorporated entities, clearly indicating two enumerated categories within the regulation. However, the court did not base its decision on this issue as it was not addressed in the courts below.
The court turned to the language of the exemption itself. According to the rule, certain classes of entities are always exempt from sales tax. The opinion summarily dismissed the application of several types of these entities to GEO as it plainly did not apply to it. The decision turns on GEO’s argument that it qualifies as an unincorporated instrumentality of the United States (and of Texas).
GEO argued that the plain meaning of the word “instrumentality” applied to its role with respect to the United States and the State of Texas; further, since it was performing a “quintessentially government function,” it was entitled to the exemption. The Comptroller’s regulation on point provides an exemption when an entity has been labelled "explicitly and unequivocally" a qualifying agency or instrumentality either by statute or contract or that it could reasonably be viewed to be an arm of the government rather than merely performing a government function. In this context, the court found that there was nothing in the evidentiary record to indicate that GEO was considered a government instrumentality. To the contrary, the court noted that the terms of the relevant contracts provided that GEO was to be considered an independent contractor, explicit language noting that the contracts did not create a principal-agent relationship between the relevant governments and GEO, and that GEO was responsible for any taxes imposed on the facilities. The court upheld the lower courts’ denial of the exemption.
How Forvis Mazars Can Help
Forvis Mazars can work with you to “begin with the end in mind” when entering into contracts. We can help you understand the tax environment within which you will be operating, the ramifications thereof, and the potential risks and opportunities presented.