Texas Supreme Court Affirms Sales Tax Liability for Private Correctional Contractor

In a recent ruling, the Texas Supreme Court (Court) denied The GEO Group, Inc and its subsidiary, GEO Corrections and Detention, LLC’s (“GEO”) claim for a sales tax exemption on $4 million in purchases used to run correctional facilities under government contracts.

Between 2011 and 2014, GEO, a Florida based, for profit provider purchased essentials such as electricity, food, and furniture for correctional and immigration detention centers across Texas, without paying sales tax. After the Texas Comptroller completed an audit, GEO paid $4 million on assessed taxes and then filed a refund suit. GEO argued that it should be exempt as a government agent or instrumentality. The Court, however, disagreed noting the following:

• GEO is a for-profit corporation, not government owned or controlled.
• Contracts labeled GEO as an independent contractor with no principal-agent relationship.
• Contracts stated GEO was responsible for its own taxes.
• GEO did not meet the strict criteria necessary to satisfy the test for unincorporated government instrumentalities.

The Court did clarify that refund claims should follow the normal “preponderance of the evidence” standard, not the stricter “clear convincing” standards used during administrative reviews. Despite lowering the evidentiary bar, the Court unanimously ruled GEO is ineligible for the tax refund and the state must retain its paid taxes. This ruling sends a clear signal, performing government work does not make a private business tax-exempt. Entities contracted for public services, including correctional facilities, should carefully assess their legal structure and contractual terms when evaluating eligibility for government exemptions. (The GEO Group, Inc. v. Hegar, No. 23-0149, Supreme Court of Texas, March 14, 2025)