Texas Supreme Court Rules on Sales and Use Tax Exemption for Private Prisons

When considering indirect taxes, prisons and other correctional facilities are not among the first matters that come to mind. However, in the United States, it is not uncommon for corporations to operate private prisons and enter into agreements with federal or state government agencies to house inmates.

In a case involving a privately operated prison, the Supreme Court of Texas published a decision on whether a corporation operating those prisons may be exempt from sales and use taxes, similar to government agencies of the US or Texas.

Background of the Case and Court's Decision

GEO Group (GEO), a Florida-based corporation, owns and operates correctional facilities throughout the United States for the detention of federal and state inmates. Between 2011 and 2014, the corporation entered into agreements with various government clients to operate detention facilities in Texas. During this period, GEO bought various supplies to manage facilities, including electricity, natural gas, food, and furniture, for which it did not pay taxes.

Although the GEO held that those purchases are tax-exempt, the Texas Comptroller rejected these arguments and requested a payment of nearly USD 4 million. The GEO paid the stated amount and filed a lawsuit in the District Court, requesting a refund.

The Court determined that GEO is neither an agent nor an instrumentality of the United States or the State of Texas, and that the corporation failed to prove that these transactions are tax-exempt. GEO appealed against the decision to the Court of Appeals, which confirmed that the corporation had not provided any evidence or cited relevant case law to support its claims.

Following such a decision, GEO brought the case before the Supreme Court of Texas. The Supreme Court emphasized that a corporation is responsible for demonstrating its entitlement to an exemption by providing convincing evidence to support its claim. Additionally, the Supreme Court ruled that the corporation is not an instrumentality of the United States or the State of Texas.

As a result of failing to provide the necessary evidence to support its arguments, and given that it is a private corporation rather than a government agency, the Supreme Court concluded that GEO is not exempt from Texas sales and use tax. Consequently, the corporation is not entitled to a refund.

Conclusion

The Supreme Court of Texas's decision confirms the complexity of navigating US sales and use taxes, as well as the distinctions between this system and VAT and GST systems. Moreover, the very fact that the subject of the dispute was the application of sales and use taxes in private prisons is specific enough in itself. Nevertheless, taxable persons operating in this sector should carefully consider the arguments stated in the decision.

Source: Supreme Court of Texas