“Review by trial de novo has all the attributes of an original action in the reviewing court. The trial court must weigh the evidence by a ‘preponderance of the evidence’ standard.”
How later courts described this case
- “Review by trial de novo has all the attributes of an original action in the reviewing court. The trial court must weigh the evidence by a ‘preponderance of the evidence’ standard.”
Written by the judges who cited it.
The opinion
Supreme Court of Texas
══════════
No. 23-0149
══════════
The GEO Group, Inc. and GEO Corrections and Detention, LLC,
Petitioners,
v.
Glenn Hegar, Comptroller of Public Accounts of the State of
Texas, and Ken Paxton, Attorney General of the State of Texas,
Respondents
═══════════════════════════════════════
On Petition for Review from the
Court of Appeals for the Seventh District of Texas
═══════════════════════════════════════
Argued October 30, 2024
JUSTICE BUSBY delivered the opinion of the Court.
Justice Lehrmann did not participate in the decision.
This tax refund case concerns whether a private, for-profit
corporation qualifies as an “agent” or “instrumentality” of the federal or
state government and is thus exempt from certain state taxes. See TEX.
TAX CODE § 151.309; 34 TEX. ADMIN. CODE § 3.322. The Comptroller
assessed a deficiency in sales and use taxes against The GEO Group,
Inc., a Florida corporation that contracts with federal and state
government entities to detain their inmates in GEO Group’s correctional
facilities. GEO Group challenged the deficiency in an administrative
hearing, and the Comptroller denied the claim. GEO Group paid all
additional taxes due and sued for a refund in district court, arguing the
purchases at issue were tax-exempt because they were made on behalf
of GEO Group’s government clients.
The trial court ruled GEO Group was not entitled to its requested
exemption because it failed to prove by clear and convincing evidence
that it was an “agent” or “instrumentality” of the government. The court
of appeals affirmed, holding GEO Group’s relationship with its
government clients was too attenuated to warrant a tax exemption.
Although we conclude that a preponderance of the evidence standard
applies, we agree that GEO Group is not entitled to a tax refund because
it is neither a government “agent” nor “instrumentality” under the
statute and rules. We therefore affirm.
BACKGROUND
GEO Group is a corporation organized under the laws of Florida1
that owns and operates correctional facilities throughout the United
States for the detention of federal and state inmates. Some of these
facilities are managed and operated through GEO Group’s wholly owned
subsidiary, GEO Corrections and Detention, LLC (GEO LLC). GEO
Group and GEO LLC (collectively GEO) contracted with various
government clients to operate detention facilities in Texas between
January 1, 2011, and December 31, 2014. In some instances, GEO
1 GEO Group is also registered with the Texas Secretary of State.
2
entered into service agreements directly with federal or state agencies
to house detainees at the facilities. In other instances, federal agencies
contracted with Texas counties to house federal detainees, and the
counties in turn subcontracted this function to GEO.
While operating its facilities in Texas, GEO purchased various
supplies it deemed necessary to operate the facilities, such as electricity,
natural gas, food, and furniture. GEO did not pay tax on these
purchases. Following a compliance audit, the Comptroller assessed a
deficiency against GEO. GEO challenged the deficiency ruling, arguing
the purchases at issue were tax-exempt. An administrative hearing was
held on the deficiency, and the Comptroller rejected GEO’s challenge.
When GEO’s motion for rehearing was denied, GEO paid all additional
tax due in the stipulated amount of $3,937,103.71 and filed suit in
district court seeking a taxpayer refund under Chapters 112 and 151 of
the Tax Code.
The trial court conducted a bench trial and rendered judgment
denying GEO’s refund claim. In its findings of fact and conclusions of
law, the trial court concluded that GEO was neither an agent nor an
instrumentality of the United States or Texas and that GEO failed to
meet its burden to show exemption entitlement by “clear and convincing
evidence.” GEO appealed.
The court of appeals affirmed the trial court’s judgment. 661
S.W.3d 470, 471 (Tex. App.—Amarillo 2023). “Although GEO houses
federal detainees, a function closely identified with the government, and
must comply with specific government regulations while carrying out its
responsibilities,” the court of appeals held that “GEO is a distinct entity
3
engaged in commercial, for-profit activities” and thus “has not
established that it is an agency or instrumentality of the federal or state
government immune from the payment of state tax.” Id. at 475-76. The
court of appeals also rejected GEO’s argument that the trial court
erroneously applied a heightened standard of proof, reasoning “GEO has
cited no cases holding that a trial court is precluded from applying the
[clear and convincing] standard established in Rule 3.322.” Id. at 477.
This petition followed.
ANALYSIS
I. GEO must prove its entitlement to an exemption by a
preponderance of the evidence.
We begin by addressing our standard of review. “We review the
trial court’s conclusions of law de novo and its findings of fact for
sufficiency of the evidence.” Hegar v. Am. Multi-Cinema, Inc., 605
S.W.3d 35, 40 (Tex. 2020) (citations omitted).
In its first issue, GEO contends the trial court and court of
appeals erred in concluding that it was required to meet a heightened
standard of proof.2 Specifically, the court of appeals reviewed whether
2 Courts sometimes use the “slipper[y]” term “burden of proof” to
describe not only which party “must persuade the [factfinder] in its favor to
prevail,” but also “how difficult it will be for the party bearing the burden of
persuasion to convince the [factfinder] of the facts in its favor”—that is, “the
degree of certainty by which the factfinder must be persuaded of a factual
conclusion to find in [its] favor.” Microsoft Corp. v. i4i Ltd. P’ship, 564 U.S. 91,
100 n.4 (2011). Like the Supreme Court of the United States, we have referred
to this latter concept as the “standard of proof,” and we use that term here for
clarity. See, e.g., id.; Columbia Med. Ctr. of Las Colinas, Inc. v. Hogue, 271
S.W.3d 238, 248 (Tex. 2008); Great Am. Ins. Co. v. Langdeau, 379 S.W.2d 62,
70-71 (Tex. 1964). “Various standards of proof are familiar—beyond a
4
GEO proved its entitlement to an exemption by clear and convincing
evidence. 661 S.W.3d at 477.3 The court pointed to a Comptroller rule
that sets out the “guiding principles” the agency uses to “administer[]”
the exempt status of entities, which include that “[a]n organization must
show by clear and convincing evidence that it meets the requirements of
this section and the relevant statutes.” Id. (citing 34 TEX. ADMIN. CODE
§ 3.322(a)(2)).
GEO argues that the Tax Code controls instead, providing that in
suits for a tax refund in district court, “the issues shall be tried de novo
as are other civil cases.” TEX. TAX CODE § 112.154. As we have long
recognized, “[t]he preponderance of the evidence test is . . . a feature of
a trial de novo.” Sw. Bell Tel. Co. v. Pub. Util. Comm’n, 571 S.W.2d 503,
511 (Tex. 1978). We therefore agree with GEO that it was required to
prove its entitlement to an exemption in court by a preponderance of the
evidence.
An examination of the relevant statutory and regulatory
framework supports this conclusion. In Texas, an administrative
determination may be challenged in a court of law if the claimant “has
exhausted all administrative remedies available within [the relevant]
state agency.” TEX. GOV’T CODE § 2001.171. Judicial review of an
agency determination is governed by the Texas Administrative
Procedure Act, which applies the scope of judicial review “provided by
reasonable doubt, by clear and convincing evidence, and by a preponderance of
the evidence.” Microsoft Corp., 564 U.S. at 100 n.4.
3 As we have explained, an elevated standard of proof at trial requires
an elevated standard of appellate review. See Columbia Med. Ctr. of Las
Colinas, 271 S.W.3d at 248-49.
5
the law under which review is sought.” Id. § 2001.172. “[I]f the law does
not define the scope of judicial review,” the reviewing court must apply
a “substantial evidence” standard of review, which affords significant
deference to the agency’s prior determination. Id. § 2001.174; City of
Dallas v. Stewart, 361 S.W.3d 562, 566 (Tex. 2012). By contrast, if the
manner of review specified is trial de novo, no deference is afforded the
agency’s determination. Instead, “the reviewing court shall try each
issue of fact and law in the manner that applies to other civil suits in
this state as though there had not been an intervening agency action or
decision.” TEX. GOV’T CODE § 2001.173.
When a taxpayer sues the Comptroller for a tax refund in district
court, the Tax Code provides that “the issues shall be tried de novo as
are other civil cases.” TEX. TAX CODE § 112.154. Although most civil
disputes “apply the preponderance-of-the-evidence” standard of proof,
some civil claims “elevate the evidentiary standard to require proof by
clear-and-convincing evidence.” In re Lipsky, 460 S.W.3d 579, 589 (Tex.
2015).
This Court has long identified the preponderance standard as an
attribute of a trial de novo. Key W. Ins. Co. v. State Bd. of Ins., 350
S.W.2d 839, 846 (Tex. 1961) (“Review by trial de novo has all the
attributes of an original action in the reviewing court. The trial court
must weigh the evidence by a ‘preponderance of the evidence’
standard.”); see also Sw. Bell Tel. Co., 571 S.W.2d at 511. We have been
reluctant to depart from the preponderance standard in civil cases,
doing so “[o]nly in extraordinary circumstances, such as when we have
6
been mandated to impose a more onerous burden.” Ellis County State
Bank v. Keever, 888 S.W.2d 790, 792 (Tex. 1994).4
The Comptroller contends several principles from our cases
support a heightened standard of proof: “[s]tatutory exemptions from
taxation are subject to strict construction”; “the burden of proof of clearly
showing that the organization falls within the statutory exemption is on
the claimant”;5 and “an exemption cannot be raised by implication, but
must affirmatively appear, and all doubts are resolved in favor of taxing
authority and against the claimant.”6 But these principles are rules of
construction used to understand the legal meaning of statutory or
regulatory language and resolve any close calls resulting from their
application. Rules of construction help courts answer questions of law;
they do not alter the standard for proving facts. This Court has
acknowledged as much, clarifying that although in some cases
“reference has been made to the importance of positive, clear and
satisfactory proof, all issues of fact are resolved from a preponderance of
the evidence.” Id. at 793 (footnote and internal quotation marks
omitted). Indeed, “a requirement of ‘clear and satisfactory proof’
represents only an admonition to exercise great caution in weighing the
4 Similarly, the Supreme Court of the United States has only “mandated
an intermediate standard of proof—‘clear and convincing evidence’—when the
individual interests at stake are both ‘particularly important’ and ‘more
substantial than a mere loss of money.’” Santosky v. Kramer, 455 U.S. 745,
756 (1982) (quoting Addington v. Texas, 441 U.S. 418, 424 (1979)).
5 N. Alamo Water Supply Corp. v. Willacy County Appraisal Dist., 804
S.W.2d 894, 899 (Tex. 1991).
6 Bullock v. Nat’l Bancshares Corp., 584 S.W.2d 268, 272 (Tex. 1979).
7
evidence and does not supplant the usual standard of proof by a
preponderance of the evidence.” Id. (citing Rhodes v. Cahill, 802 S.W.2d
643, 645 n.2 (Tex. 1990)).
The Comptroller’s rule also supports our conclusion. Although
the rule provides that “[a]n organization must show by clear and
convincing evidence” that it satisfies exemption requirements, with
“[a]ny unresolved question about the qualifications of an organization
[to] result in denial of exempt status,” 34 TEX. ADMIN. CODE
§ 3.322(a)(2), it specifies that the “section is administered” using that
standard, id. § 3.322(a) (emphasis added). This language suggests that
the rule applies only to the administrative process, not to a court’s trial
de novo. That is also the reading that best comports with the scope of
the Comptroller’s authority as part of the executive branch, which does
not extend to dictating the standard of proof to be applied in court.
The very first section of the Comptroller’s rules also supports this
reading by limiting the matters subject to the rules to “contested case
proceedings that may be referred to the jurisdiction of [the State Office
of Administrative Hearings].” Id. § 1.1(a).7 A taxpayer suit brought
after all administrative remedies have been exhausted cannot be
referred to the State Office of Administrative Hearings; “[t]he district
courts of Travis County have exclusive, original jurisdiction of a
taxpayer suit.” TEX. TAX CODE § 112.001. And a party need not
challenge the application of the clear and convincing standard in the
7 “Contested case—A proceeding in which the legal rights, duties, or
privileges of a party are to be determined by the agency after an opportunity
for an adjudicative hearing.” 34 TEX. ADMIN. CODE § 1.2(8) (emphasis added).
8
administrative hearing to get this result—the taxpayer is entitled to
trial de novo on the issues once it brings suit in the district court. In
that de novo trial, the taxpayer must prove its entitlement to the
exemption by the familiar preponderance of the evidence standard of
proof. We recognize the oddity created by the Comptroller’s choice to
apply an administrative standard of proof higher than the one a court
will apply if the organization requesting an exemption seeks a trial de
novo, but that choice is unchallenged here.
II. GEO is not an instrumentality of the United States or
Texas.
With the applicable standard of proof and standard of review thus
clarified, we turn to GEO’s second issue: that it is entitled to an
exemption as an unincorporated instrumentality of the federal and state
governments. The parties’ arguments on this issue principally concern
the proper constructions of statutes and administrative rules, which are
questions of law we consider de novo. State v. Shumake, 199 S.W.3d
279, 284 (Tex. 2006). We look first and foremost to the plain and
common meaning of the statute’s or rule’s words in context and to any
definitions the statute provides. Am. Multi-Cinema, 605 S.W.3d at 40.
“When the words read in context are clear, they determine intent; a
court must never rewrite them under the guise of interpretation.” Id. at
41.
Taxable items sold or used in Texas—which include tangible
personal property and certain services—are generally subject to sales
and use taxes unless an exception applies. See TEX. CONST. art. VIII,
§§ 1-2; TEX. TAX CODE § 151.051(a). These taxes are remitted to the
9
Comptroller, who has discretion to “adopt rules that do not conflict with
the [Constitution or] laws of this state or the United States” for the
enforcement of the Tax Code and the collection of taxes. TEX. TAX CODE
§§ 111.001, .002(a). Thus, when the Tax Code’s directives are not
decisive, the Comptroller’s rules may provide further guidance so long
as they are reasonable and consistent with state and federal law.
TGS-NOPEC Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex.
2011).
The Tax Code provides a sales and use tax exemption for
“governmental entities,” which are defined in pertinent part as “(1) the
United States; (2) an unincorporated instrumentality of the United
States; (3) a corporation that is an agency or instrumentality of the
United States and is wholly owned [directly or indirectly] by the United
States . . . ; [or] (4) this state.” TEX. TAX CODE § 151.309(1)-(4). The
Comptroller’s rule (which we address more fully below) seemingly
expands this exemption to “unincorporated agencies and
instrumentalities” of the State of Texas as well as the United States.
34 TEX. ADMIN. CODE § 3.322(c)(1), (4).8 We need not decide whether this
expansion is permissible, however, as GEO does not qualify for the
exemption even under the Comptroller’s broader rule.
8 The portion of the Comptroller’s rule that applies the exemption to
“[t]he State of Texas, its unincorporated agencies and instrumentalities” is
identical to an earlier version of the statute. See Act of May 29, 1981, 67th
Leg., R.S., ch. 710, 1981 TEX. GEN. LAWS 2652, 2652 (codified as amended at
TEX. TAX CODE § 151.309). The quoted language was changed to “this state”
when it was incorporated into the Tax Code.
10
GEO contends the purchases it made pursuant to its contracts
with the federal government, state government, and various counties9
are exempt from taxation because it qualifies as an “unincorporated
instrumentality” of the United States and this State. Id. We disagree.
As an initial matter, GEO does not explain how a private,
for-profit corporation or limited liability company can be characterized
as “unincorporated.” The statute and rule refer to “a corporation” or
“incorporated instrumentality” wholly owned by the government and
separately to an “unincorporated instrumentality” of the government,
which indicates that a corporation does not fall within the latter
category.10 Later provisions of the rule similarly distinguish between a
“corporation” and an “unincorporated entity” when it comes to
submission of governing documents.11 Given these textual clues,
9 In some cases, the federal government contracted with Texas counties,
which in turn subcontracted with GEO to operate federal detention centers.
Because tax exemptions are not available for instrumentalities of the county—
instead, only the county itself may qualify, see 34 TEX. ADMIN. CODE
§ 3.322(c)(5)—GEO claims an exemption for purchases and uses at its
county-contracted facilities as a subcontractor of the federal government. We
express no view regarding whether such an exemption is available.
10 TEX. TAX CODE § 151.309(2), (3); 34 TEX. ADMIN. CODE § 3.322(c)(1),
(2), (4). This is consistent with ordinary principles of English language
construction, which would exclude “incorporated” entities from
“unincorporated” classification.
11 A “corporation” must submit “its formation documents and certificate
of existence from [its] home state of incorporation,” while an “unincorporated
organization” must submit “its formation documents, such as bylaws,
constitution, articles of association, certificate of formation, or applicable trust
agreement, and any related amendments.” 34 TEX. ADMIN. CODE
§ 3.322(e)(2)(A)(i-ii). Other Texas legal sources recognize a similar distinction.
E.g., Cox v. Thee Evergreen Church, 836 S.W.2d 167, 169 n.3 (Tex. 1992)
11
nothing in this opinion should be understood to suggest that GEO
Group, Inc.12 could qualify as an “unincorporated” instrumentality.
Because the parties did not address this “unincorporated” requirement
below, however, we do not rest our decision on it.
Instead, we examine the rule in its entirety and apply it to
determine whether GEO qualifies as an exempt instrumentality. The
rule provides:
(c) Entities that are always exempt. Certain entities and
organizations are exempt under the law and are not
required to request and prove exempt status, except to send
information as requested by the comptroller to verify its
exempt status under this subsection.
(1) The United States, its unincorporated agencies and
instrumentalities. . . . Instrumentalities and agencies
of the United States include:
(A) various military entities under the supervision of
a base commander;
(B) organizations that contract with the United
States and whose contracts explicitly and
unequivocally state that they are agents of the
United States;
(“Unincorporated associations have long been a problem for the law. They
are . . . analogous to corporations, and yet not corporations . . . .”); TEX. R. CIV.
P. 28 (“Any partnership, unincorporated association, private corporation, or
individual . . . may sue or be sued . . . .” (emphasis added)).
12 Determining whether GEO LLC qualifies as “unincorporated” is a
similar conundrum: although a limited liability company is not “incorporated”
per se under Texas law, it does have the status of a separate juridical person,
see Rieder v. Woods, 603 S.W.3d 86, 97-98 (Tex. 2020), and we have been
pointed to no authority that definitively classifies it as “unincorporated.”
12
(C) organizations wholly owned by the United States
or wholly owned by an organization that is itself
wholly owned by the United States;
(D) organizations specifically named as agents of the
United States or exempted as instrumentalities of
the United States by federal statutes; and
(E) organizations having substantially all of the
following characteristics:
(i) they are funded by the United States;
(ii) they carry out a specific program of the
United States;
(iii) they are managed or controlled by officers of
the United States;
(iv) their officers are appointed by the United
States;
(v) they perform commitments of the United
States under an international treaty; and
(vi) they are not organized for private profit;
(2) any incorporated agency or instrumentality of the
United States wholly owned by the United States or by
a corporation wholly owned by the United States. . . ;
....
(4) the State of Texas, its unincorporated agencies and
instrumentalities; and
(5) any county, city, special district or other political
subdivision of the State of Texas . . . .
34 TEX. ADMIN. CODE § 3.322(c). GEO claims exemption under
subsections (c)(1) and (4). Although subsection (c)(4) does not define
“unincorporated agencies and instrumentalities” of the State of Texas,
we agree with the parties that the extensive definition of
13
“unincorporated agencies and instrumentalities” of the United States in
subsection (c)(1) is also instructive in determining the meaning of the
quoted phrase as applied to the State.
GEO cannot qualify for exemption under the first four parts of the
definition because it is not a “military entit[y],” its contracts do not
“explicitly and unequivocally state” that it is an agent of the United
States or Texas,13 it is not “wholly owned [directly or indirectly] by” the
United States or Texas, and we have found no instance where GEO is
“specifically named as [an] agent[]” of the United States or Texas or
“exempted as [an] instrumentalit[y] of the United States” or Texas
“by . . . statutes.” Id. § 3.322(c)(1)(A)-(D). GEO also gets no help from
the last part of the definition because it lacks “substantially all” of the
listed characteristics. Id. § 3.322(c)(1)(E). At best, GEO could argue it
satisfies two of the six characteristics because it is (partially) funded by
the federal and state governments and carries out a specific program of
those governments by housing federal and state detainees.
GEO declined to make this argument in its briefing, instead
contending that based on a dictionary definition of “instrumentality”
and an out-of-state case, our inquiry should simply be whether the entity
performs a “quintessential government function.”14 But when “a
13 To the contrary, as discussed further below, several of the contracts
GEO entered into with its government clients characterize GEO as an
“independent contractor.”
14 Instrumentality, BLACK’S LAW DICTIONARY 952 (11th ed. 2019) (“A
means or agency through which a function of another entity is
accomplished . . . .”); Hum. Rights Def. Ctr. v. Correct Care Sols., LLC, 263 A.3d
1260, 1265-66 (Vt. 2021).
14
different, more limited, or precise definition is apparent from the term’s
use in the context of the statute, we apply that meaning.” Am.
Multi-Cinema, 605 S.W.3d at 41. Moreover, a taxpayer must clearly
show its entitlement to an exemption and all doubts are resolved against
granting it. Odyssey 2020 Acad., Inc. v. Galveston Cent. Appraisal Dist.,
624 S.W.3d 535, 540-41 (Tex. 2021). For these reasons, we decline to
substitute GEO’s proposed inquiry for the rule’s narrower and more
elaborate definition.
Other tools of statutory interpretation reinforce the conclusion
that GEO does not qualify for tax-exempt status. We do not consider
statutory words and phrases in isolation. Aleman v. Tex. Med. Bd., 573
S.W.3d 796, 802 (Tex. 2019). Rather, “we consider the context and
framework of the entire statute.” City of Conroe v. San Jacinto River
Auth., 602 S.W.3d 444, 451 (Tex. 2020) (internal quotation marks
omitted). And when listed phrases or words “are associated in a context
suggesting that the words have something in common, they should be
assigned a permissible meaning that makes them similar.” ANTONIN
SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF
LEGAL TEXTS 195 (2012) (explaining the principle noscitur a sociis, a
Latin phrase translating to “it is known by its associates”).
To determine what commonality exists among the “[e]ntities that
are always exempt” listed in subsection (c) of the Comptroller’s rule, we
are guided by the Tax Code provision that the Comptroller’s rule aims
to illuminate. Entitled “Governmental Entities,” that section of the
Code extends a sales and use tax exemption to “any of the following
governmental entities,” including “an unincorporated instrumentality of
15
the United States.” TEX. TAX CODE § 151.309(2). This additional context
confirms that the entities the Comptroller’s rule intends to cover are
those that have either been “explicitly and unequivocally” declared to be
a qualifying agency or instrumentality by the government (whether by
statute or by contract) or those that could reasonably be viewed as an
arm of the government as opposed to merely performing a governmental
function. 34 TEX. ADMIN. CODE § 3.322(c).
Having reviewed the record with this construction of the statute
and rule in mind, we conclude there is ample evidence supporting the
trial court’s finding that GEO is not a government instrumentality.
Many of the contracts GEO entered into with its government clients
include provisions recognizing that “GEO is an independent contractor,”
that “[n]othing contained in this Agreement shall be deemed or
construed to create a . . . principal-agent relationship between the
[government] and GEO,” and that GEO “shall be responsible for any
taxes . . . imposed on the Facility and related property.”15 Like the trial
court and the court of appeals, we agree with the contracting parties’
characterization of GEO’s role.
CONCLUSION
We hold GEO failed to prove by a preponderance of the evidence
that it is an agent or instrumentality of the federal and state
governments; thus, GEO is not exempt from Texas’ sales and use taxes
15 One such contract declares that GEO “shall be solely responsible
for . . . taxes owed or claimed to be owed by [GEO], arising out of [GEO]’s
association with the [Texas] Department [of Criminal Justice] pursuant
hereto . . . .”
16
and is not entitled to a refund. Accordingly, we affirm the court of
appeals’ judgment.
J. Brett Busby
Justice
OPINION DELIVERED: March 14, 2025
17