By Michael Nunes

Texas Supreme Court justices questioned Wednesday whether a private prison operator is eligible to receive a sales tax exemption granted to governmental entities, mulling over whether the company functions as an agency or instrumentality of the state.

An attorney representing The GEO Group, which operates multiple facilities in Texas and several other states, told the state's justices during oral arguments that the group is owed a $3.9 million sales tax refund because it was acting as an agency or instrumentality of the state and should be exempt from the tax. However, the state comptroller's office said while the company was acting as a governmental contractor, it wasn't acting on its behalf.

Danielle Ahlrich, an attorney at the Ryan Law Firm who represented GEO, said the justices should look at the plain and ordinary meaning of what is an instrumentality. Justice Brett Busby interjected, saying that Section 151.309 of the state's tax statutes appeared to limit tax exemptions to a corporation that is wholly owned by the United States.

"It seems that under the plain language, you couldn't qualify for that exemption as to any contracts with the United States," Justice Busby said.

Ahlrich countered that GEO is an unincorporated instrumentality of the state, despite being a for-profit corporation.

Justice Jane Bland countered by asking how a for-profit corporation can be considered an incorporated instrumentality.

Ahlrich said that the court should look at the Vermont Supreme Court's decision in Human Rights Defense Center v. Correct Care Solutions . That court held that a private contractor performing a quintessential government function was an instrumentality of the state.

The GEO Group lists 11 Texas locations on its website, including detention facilities, processing centers, a correctional facility and an immigration processing center.

The Seventh Court of Appeals, in January 2023, ruled that being a contractor doesn't mean that the GEO Group is an instrumentality of the government, citing the Texas Supreme Court's opinion in Day & Zimmermann Inc. v. Calvert. 

The company, the court of appeals said, is a for-profit business that has a "substantial independent role in procuring and managing its property" and isn't controlled by the federal government or the state.

Rance Craft, of the Texas Office of the Attorney General, argued that the GEO Group purchased property at its own discretion, with its own money, that it retained title to for use in its for-profit business.

"They are simply not so intertwined with the United States as to that activity to be an instrumentality of the United States," he said.

Rance argued that a corporation like GEO wouldn't be considered an unincorporated instrumentality.

Justice Evan Young questioned whether "GEO LLC could get [an exemption] but GEO Inc. can't because of that."

Rance responded by saying that there are statutes that "lump LLCs in with unincorporated entities simply because they are not incorporated under state law."

In rebuttal, the attorney for GEO Group said the justices should consider if a contractor is performing a function that the government established exclusive domain over and if a contractor would be unable to perform its service in the absence of a government contract.

"If GEO is going to build a building and detain human beings without a grain of authority from the government, it's going to be engaged in kidnapping or false imprisonment," Ahlrich said.

The GEO Group is represented by Danielle Ahlrich of the Ryan Law Firm.

The Texas Comptroller of Public Accounts is represented by Rance Craft of the Texas attorney general's office.

The case is The GEO Group Inc. et al. v. Hegar et al., case number 23-0149, in the Texas Supreme Court.

--Additional reporting by Jaqueline McCool. Editing by Neil Cohen.