Was GEO selling the Town of Clayton a license for resale when it built, managed, and operated a town-owned jail housing state prisoners?

Plain-English summary

The GEO Group was providing taxable services when it provisioned, managed, and operated the Town of Clayton's jail; it was not selling Clayton a license for resale. The AHO denied GEO's $875,417 state-and-local gross receipts tax refund claim for 2008 and 2009.

Clayton financed construction of the Northeastern New Mexico Detention Facility with tax-exempt project revenue bonds and retained ownership. It contracted with the New Mexico Corrections Department to house state prisoners, then selected GEO as the independent contractor responsible for providing and operating the 625-bed jail.

GEO timely paid gross receipts tax on its operating receipts. It later argued that accreditation gave it a license to house prisoners, which it sold to Clayton for resale to NMCD under Section 7-9-47.

Construction and operations dominated the agreement

GEO had to assume Clayton's responsibilities for the jail and pay applicable New Mexico gross receipts tax. It was required to construct or provision the facility, then operate it and care for inmates.

The agreement listed 23 service categories, including employee screening and training, staffing, classification, religious services, food, laundry, transportation, telecommunications, educational and therapeutic programs, health care, recreation, library access, visitation, commissary services, supplies, fiscal management, incident reporting, plant maintenance, discipline, grievances, and use-of-force procedures.

Those functions were essential to a lawful and secure correctional facility. The AHO held that the transaction was predominantly for construction, management, and operational services under Section 7-9-3(M).

The payment structure reinforced that result. GEO received per diem amounts and monthly facility or service fees rather than a separately priced license.

Accreditation followed the start of services

The agreements required GEO to contact the accreditor after services began and obtain accreditation within 18 months. GEO did not obtain accreditation until May 7, 2010, after the 2008-2009 refund period.

The AHO treated accreditation as a condition of continuing lawful operation, not the nature of the transaction. GEO was already constructing, managing, and operating the jail before accreditation existed.

Direct billing undercut the claimed resale

GEO billed NMCD and other governmental agencies directly for non-Clayton prisoners, and Clayton was not liable for those charges. Even if GEO had sold some license-like right, that payment arrangement indicated that Clayton was not reselling it to NMCD.

A correct NTTC still required an underlying deduction

Clayton timely executed a Type 2 NTTC covering a license for resale, the certificate type GEO claimed it needed. But Section 7-9-43(A)'s good-faith safe harbor protected only transactions otherwise covered by a recognized deduction.

Because GEO had not sold a license for resale, the NTTC could not transform its taxable services into a deductible transaction.

Result: protest DENIED on summary judgment. GEO's $875,417 refund was denied.

What this means for you

Government contractors

Courts and hearing officers look to contractual substance. Building a facility and supplying the people, systems, care, security, and maintenance needed to operate it supported service treatment here.

Private correctional operators

Required accreditation did not become a separately sold license when operations began before accreditation and the payments covered construction and ongoing services.

Businesses accepting NTTCs

Even the certificate type that matches your asserted deduction is not enough by itself. Verify that the actual transaction falls within the statutory deduction and that any claimed resale really occurs.

Common questions

Q: Who owned the Clayton jail?
A: The Town of Clayton retained ownership after financing construction with project revenue bonds.

Q: Did GEO have the correct NTTC type?
A: Yes. Clayton timely issued a Type 2 NTTC for a license for resale, but the underlying transaction was not such a license.

Q: Why did direct billing matter?
A: GEO billed NMCD directly for state prisoners, and Clayton had no liability for those charges, which indicated Clayton was not reselling a license to NMCD.

Q: Was accreditation in place during the refund years?
A: No. GEO obtained it on May 7, 2010, after the 2008-2009 period.

Citations and references

Statutes and regulation:

• NMSA 1978, §§ 7-9-3(M), 7-9-3.3, 7-9-4, and 7-9-5 — services, engaging in business, and gross receipts tax
• NMSA 1978, § 7-9-47 — tangible-property or license-for-resale deduction
• NMSA 1978, § 7-9-43(A) — good-faith NTTC safe harbor
• NMSA 1978, §§ 33-3-26 and 33-3-27 — private jail selection and operating standards
• Regulation 3.2.201.15 NMAC — good-faith acceptance of an NTTC

Cases cited:

• Corrections Corporation of America of Tennessee v. State, 2007-NMCA-148 — prison-housing agreement did not qualify as a real-property lease
• McKinley Ambulance Service v. Bureau of Revenue, 1979-NMCA-026 — safe harbor did not apply unless the certificate covered the receipts
• Gas Co. v. O'Cheskey, 1980-NMCA-085 — an NTTC does not transform an otherwise taxable transaction
• Transamerica Leasing Corp. v. Bureau of Revenue, 1969-NMCA-011 — substance and contractual intent control over form

Source

• Listing: New Mexico Decisions & Orders
• Decision post: The GEO Group, Inc.
• Decision PDF: D&O 14-36

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
THE GEO GROUP, INC.
TO DEPARTMENT’S FAILURE TO GRANT No. 14-36
OR DENY A REFUND

DECISION AND ORDER
ON DEPARTMENT’S MOTION FOR SUMMARY JUDGMENT

A summary judgment hearing on the above-referenced protest occurred on July 22, 2014,

before Brian VanDenzen, Chief Hearing Officer. Chief Legal Counsel Brad Odell appeared

representing the Taxation and Revenue Department (“Department”), along with protest auditor

Andrick Tsbetsaye. Attorney Timothy R. Van Valen appeared representing The GEO Group, Inc.

(“Taxpayer”). Josh Cohen and Josh Killian of Ryan, LLC also appeared for Taxpayer. This matter

was presented on the parties’ cross-motions for summary judgment filed on February 28, 2014. On

April 7, 2014, both parties filed their respective responses to the other parties’ motions for

summary judgment. On June 13, 2014, the Department supplemented its Motion for Summary

Judgment and Taxpayer supplemented its response to the Department’s Motion for Summary

Judgment. On June 27, 2014, Taxpayer replied to Department’s Supplement to Motion for

Summary Judgment. All affidavits attached to the parties’ summary judgment pleadings are

admitted into the record. The parties submitted 15 stipulations of fact and stipulated to the

admission of exhibits A-F, all of which are incorporated into the administrative record in this

matter. Based on the Stipulation of Facts, review of stipulated exhibits and arguments presented,

IT IS DECIDED AND ORDERED AS FOLLOWS:
FINDINGS OF FACT

1. On December 28, 2012, Taxpayer timely filed a claim for refund of $875,417.00 in

state and local gross receipts tax for the reporting periods of December 31, 2008 through

December 31, 2009. [Stipulation of Facts #2-5].

2. The Department took no action to either approve or deny Taxpayer’s claim for

refund within 120-days. [Stipulation of Facts #6].

3. On July 24, 2013, Taxpayer timely filed a protest to the Department’s failure to

allow or deny Taxpayer’s claim for refund. [Stipulation of Facts #7].

4. On August 1, 2013, the Department acknowledged receipt of Taxpayer’s protest.

5. On September 9, 2013, the Department requested a hearing in this matter with the

Hearings Bureau.

6. On September 10, 2013, the Hearings Bureau set this matter for a telephonic

Scheduling Conference on September 25, 2013.

7. On September 25, 2013, a Scheduling Conference in this matter occurred, setting

the merits hearing for March 27, 2014.

8. On February 14, 2014, the parties filed their Stipulation of Facts, incorporated

herein.

9. On February 28, 2014, Taxpayer filed its Motion for Summary Judgment and Brief

in Support of Motion. On that same day, the Department filed its Motion for Summary Judgment.

10. On March 13, 2014, Taxpayer moved to vacate and reschedule the hearing on the

merits and motion for hearing on motions for summary judgment.

In the Matter of The GEO Group, Inc., page 2 of 20.

11. On March 25, 2014, the Hearings Bureau granted Taxpayer’s motion to vacate and

reschedule, setting a summary judgment motion hearing on April 14, 2014 and a merits hearing on

July 23, 2014.

12. On April 2, 2014, the Hearings Bureau issued a Notice of Reassignment of Hearing

Officer.

13. On April 7, 2014, the Department filed its response to Taxpayer’s Motion for

Summary Judgment. On that same date, Taxpayer also filed its response to the Department’s

motion for summary judgment.

14. On April 9, 2014, the parties jointly move to continue the April 14, 2014 summary

judgment motion hearing. On the same date, the parties also jointly moved to amend responses to

motion for summary judgment.

15. On April 15, 2014, the Hearings Bureau issued an order granting the continuance

request and resetting summary judgment motion hearing on July 22, 2014.

16. On May 14, 2014, Taxpayer filed its Special Request for Hearing.

17. On May 23, 2014, the Hearings Bureau issued an order granting request for setting

and amended notice of administrative hearing scheduling the merits hearing for November 5,

2014.

18. On June 11, 2014, staff attorney Peter Breen entered his appearance in this matter,

substituting for former staff attorney Aaron Rodriguez.

19. On June 12, 2014, the parties moved to change the joint prehearing statement

deadline. That request was granted through Hearings Bureau order on June 16, 2014.

In the Matter of The GEO Group, Inc., page 3 of 20.

20. On June 13, 2014, the Department filed its supplement to its motion for summary

judgment.

21. On June 13, 2014, Taxpayer filed its supplement to its response to the

Department’s motion for summary judgment.

22. On July 18, 2014, Chief Legal Counsel Brad Odell entered his appearance as co-

counsel on behalf of the Department.

23. On July 22, 2014, the summary judgment motion hearing occurred.

24. On October 15, 2014, the Hearings Bureau issued an order vacating the November

5, 2014 merits hearing pending ruling on the parties’ cross motions for summary judgment.

25. Taxpayer is a private prison company that contracted to construct, manage, and

operate the Town of Clayton’s jail and detention facility (“Clayton Jail1”) in the Town of Clayton

(“Clayton”), Union County, New Mexico.

26. Taxpayer timely paid gross receipts tax to the state in 2008 and 2009 for its receipts

derived from its operation of the Clayton Jail and detention facility.

27. Clayton funded the construction of the Clayton Jail using tax-exempt project

revenue bonds. Clayton retained all ownership, subject to security interests under the bonds, of the

Clayton Jail. [Stipulated Ex. B8].

28. On September 21, 2006, the New Mexico Corrections Department (“NMCD”)

reached an agreement (“NMCD Agreement”) with the Town of Clayton to house NMCD prisoners

at the Clayton Jail operated by Taxpayer. [Stipulated Ex. C].

1
The facility, once completed and operational, was named the Northeastern New Mexico Detention Facility.
[Stipulated Ex. D]

In the Matter of The GEO Group, Inc., page 4 of 20.

29. The NMCD Agreement required Clayton to “house all NMCD inmates in full

compliance with Standards, Court Orders, and NMCD Polices set forth in subsection 1.1 through

1.6… and shall operate, maintain and manage the Jail in compliance with all applicable federal

and state constitutional requirements and laws.” [Stipulated Ex. C1].

30. In subsection 1.1 through 1.6 of the NMCD Agreement, Clayton was required to

operate the Clayton Jail in accord with American Correctional Association Standards, the

Monitor’s standards, all federal, state, and local codes applicable to the Jail, court orders, NMCD

policies, and the policies of other sending agencies to the Clayton Jail. [Stipulated Ex. C1-2].

31. Under the NMCD Agreement, NMCD agreed to pay Clayton a per diem rate, an

incremental service fee, a facility fee, and a base service fee. [Stipulated Ex. C2-6].

32. The NMCD Agreement required ACA Accreditation by Clayton or its independent

contractor Taxpayer at the Clayton Jail within 18-months of the service commencement date.

[Stipulated Ex. C6]. The service commencement date is the date when Clayton began providing or

caused to begin providing management and operations services at the Clayton Jail. [Stipulated Ex.

C2]

33. The NMCD Agreement required Taxpayer to provide an operational plan for all

Clayton Jail inmates that met all applicable standard. [Stipulated Ex. C8].

34. Under the NMCD Agreement, NMCD paid for inmate health care and mental

health services. [Stipulated Ex. C10-12].

35. Under the NMCD Agreement, Clayton was required to provide meaningful

programming of eight hours per day five days a week, educational and vocational programming,

In the Matter of The GEO Group, Inc., page 5 of 20.
substance abuse/addiction education, library services, legal services, adequate recreation, and

inmate religious programs to NMCD inmates. [Stipulated Ex. C13-18].

36. Under the NMCD Agreement, Clayton was required to provide clothing, linens,

laundry services, hygiene supplies, and cell furnishings for NMCD inmates. [Stipulated Ex. C18].

37. Under the NMCD Agreement, Clayton was required to provide food service to

NMCD inmates. [Stipulated Ex. C19].

38. Under the NMCD Agreement, Clayton was required to provide adequate staffing at

the Clayton Jail. [Stipulated Ex. C24].

39. On or about September 20, 2006, Taxpayer and Clayton entered into a Jail

Provision and Operations Agreement (“Qualified Management Agreement”). [Stipulated Ex. B].

40. Under the Qualified Management Agreement, Clayton selected Taxpayer in accord

with NMSA 1978, Section 33-3-26 and 33-3-27 for the “provision and operation” of the Clayton

Jail in accord with applicable standards. [Stipulated Ex. B1].

41. Taxpayer agreed under the Qualified Management Agreement, in referencing the

NMCD Agreement, to “assume such responsibilities and obligations of Clayton relating to the

provision and operation of the Jail.” [Stipulated Ex. B1].

42. Under the Qualified Management Agreement, Taxpayer was required to “pay any

applicable New Mexico Gross Receipts Tax.” [Stipulated Ex. B4-5; Stipulated Ex. B20].

43. Under the Qualified Management Agreement, Taxpayer was required to provide a

625 bed jail to Clayton in accord with all applicable standards. [Stipulated Ex. B7].

44. Under the Qualified Management Agreement, Taxpayer was required to “operate

the Jail and house and care for Clayton’s male and female inmates …” [Stipulated Ex. B8].

In the Matter of The GEO Group, Inc., page 6 of 20.

45. Taxpayer was an independent contractor under the Qualified Management

Agreement. [Stipulated Ex. B20].

46. Subject to the terms of the Qualified Management Agreement, Taxpayer had the

“sole right to supervise, manage, operate, control, and direct the performance of the details

incident to its duties…” under Qualified Management Agreement. [Stipulated Ex. B20].

47. In the Scope of Services section, Taxpayer was required to manage, provide or

perform 23 services under the Qualified Management Agreement: Employee background checks,

screening, and training; adequate staffing at the jail; an inmate classification system; inmate

religious services; food service; laundry and clothing services; transportation and off-site security;

telecommunications; inmate educational, vocational, and therapeutic programming; inmate

volunteer programs; inmate health care; recreation and exercise programming; a library of literary,

educational, and legal materials; visitation services; commissary services; essential supplies and

equipment; fiscal management; serious incident reporting procedures; maintenance of physical

plant; inmate programming activity; disciplinary rules, regulations, and grievance process;

development of use of force policy and training in accord with applicable standards; and with

Clayton’s consent, selection of the jail administrator. [Stipulated Ex. B9-16].

48. Under the Qualified Management Agreement, Clayton had the right to house non-

Clayton inmates at the jail. [Stipulated Ex. B16].

49. Taxpayer was required under the Qualified Management Agreement to obtain

American Correctional Association accreditation within 18-months of completion of the Clayton Jail.

Taxpayer was also required to contact ACA about accreditation within six months of the services

commencement date. [Stipulated Ex. B17]. The service commencement date was the date that

In the Matter of The GEO Group, Inc., page 7 of 20.
Taxpayer began providing management and operations services at the Clayton Jail. [Stipulated Ex.

B2].

50. Under the Qualified Management Agreement, Clayton paid Taxpayer a monthly

service fee that included the sum of the NMCD fixed monthly service fee, the NMCD per diem

rate, a Clayton Monthly service fee, and any other per diems collected for the housing of non-

NMCD and non-Clayton inmates at the Clayton Jail. [Stipulated Ex. B17-18].

51. Under the Qualified Management Agreement, Taxpayer billed NMCD and other

governmental agencies allowed to house prisoners at the Clayton Jail directly rather than through

Clayton. [Stipulated Ex. B19].

52. Under the Qualified Management Agreement, Clayton was not liable for non-

Clayton prisoners, including NMCD or other governmental agency prisoners. [Stipulated Ex.

B24].

53. On or about May 7, 2010, Taxpayer sought and obtained accreditation of the

Clayton Jail from the American Correctional Association, Commission on Accreditation for

Corrections. [Stipulated Ex. D].

54. On October 3, 2013, after the initiation of this protest, Lizzy Vedamanikam of the

Department’s Protest Office told Taxpayer that she could not obtain approval of Taxpayer’s claim

for refund. [Stipulation of Facts #8].

55. On October 23, 2013, Lizzy Vedamanikam also provided Taxpayer with 60-days

notice to obtain any applicable non-taxable transaction certificates (“NTTC or NTTCs”).

[Stipulation of Facts #8].

In the Matter of The GEO Group, Inc., page 8 of 20.

56. On October 25, 2013, Clayton executed a Type 2 NTTC covering the purchase of a

license for resale to Taxpayer. [Stipulation of Facts #9; Stipulated Ex. A].

57. Taxpayer provided the Department with the executed Type 2 NTTC on December

2, 2013, within the 60-day deadline. [Stipulation of Facts #9].

DISCUSSION

The primary issue in this matter is whether for the purposes of NMSA 1978, Section 7-9-

47 (1994), Taxpayer provided Clayton a license, which Clayton resold to the NMCD for the

housing of NMCD inmates at the Clayton Jail in the regular course of its business. Taxpayer

moved for summary judgment, arguing it was entitled to a deduction under Section 7-9-47 because

it was selling a license to Clayton to house prisoners in an accredited facility, which Clayton in

turn resold to NMCD. The Department moved for summary judgment, arguing that that Taxpayer

was selling services to Clayton rather than a license, which the Department argued as a matter of

law did not qualify for the claimed deduction under Section 7-9-47. Taxpayer also argued that

since it timely accepted the proper type 2 NTTC from Clayton in good faith, the NTTC is

conclusive of its entitlement to claimed deduction.

Burden of Proof and Standard of Review.

Although the Department did not issue Taxpayer an assessment in this matter, Taxpayer

still has the burden of establishing it was entitled to the claimed refund at issue. Taxpayer’s claim

for refund is premised on a deduction from gross receipts tax. “Where an exemption or deduction

from tax is claimed, the statute must be construed strictly in favor of the taxing authority, the right to

the exemption or deduction must be clearly and unambiguously expressed in the statute, and the right

must be clearly established by the taxpayer.” Wing Pawn Shop v. Taxation and Revenue Department,

In the Matter of The GEO Group, Inc., page 9 of 20.
1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also TPL, Inc. v. N.M. Taxation

& Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447; See also Corr. Corp. of Am. of Tenn. v. State,

2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779 (Court of Appeals reviewed a refund denial through

“lens of presumption of correctness” and applied the principle that deductions underlying the claim

for refund are to be construed narrowly). Consequently, Taxpayer still must show that it is entitled to

the deduction that is the basis of its claim for refund.

Summary Judgment is appropriate when there is no genuine dispute as to any material fact

and the moving party is entitled to prevail as a matter of law. See Romero v. Philip Morris, Inc.,

2010-NMSC-035, ¶7, 148 NM 713. If the movant for summary judgment makes a prima facie

showing that it is entitled to a judgment as a matter of law, the burden shifts to the opposing party

to show evidentiary facts that would require a trial on the merits. See Roth v. Thompson, 1992-

NMSC-011, ¶17, 113 N.M. 331. Both parties moved for summary judgment motion in this matter

and as such both sides implicitly acknowledged that there were no genuine disputes of fact,

making this matter ripe for a decision upon summary judgment to the party entitled to prevail as a

matter of law.

Gross Receipts Tax and the Claimed Deduction

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). “Engaging in

business” is defined as “carrying on or causing to be carried on any activity with the purpose of

direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Under the Gross Receipts and

Compensating Tax Act, there is a statutory presumption that all receipts of a person engaged in

business are taxable. See NMSA 1978, § 7-9-5 (2002).

In the Matter of The GEO Group, Inc., page 10 of 20.
For the purposes of this case, Taxpayer is engaged in business in New Mexico in

provisioning, operating, and managing the Clayton Jail. As such, all receipts of Taxpayer are

presumed subject to New Mexico’s gross receipts tax. Taxpayer did timely pay gross receipts tax on

its receipts from operating the Clayton Jail, but now seeks a refund based on the claimed deduction.

In this case, Taxpayer’s claim for refund is premised on the deduction for sale of tangible

personal property or licenses for resale found under Section 7-9-47. Section 7-9-47 states that:

Receipts from selling tangible personal property or licenses may be
deducted from gross receipts or from governmental gross receipts if
the sale is made to a person who delivers a nontaxable transaction
certificate to the seller. The buyer delivering the nontaxable
transaction certificate must resell the tangible personal property or
license either by itself or in combination with other tangible personal
property or licenses in the ordinary course of business.

License is not specifically defined either under Section 7-9-47 or broadly defined under the

Gross Receipts and Compensating Tax Act or under the Tax Administration Act. See

Quantum Corp. v. State Taxation & Revenue Dep't, 1998-NMCA-050, ¶10, 125 N.M. 49. In the

absence of a statutory definition, the New Mexico Court of Appeals turned to Black’s Law Dictionary

to define “license” as “[a] permission, by a competent authority to do some act which without such

authorization would be illegal or would a trespass or a tort…” N.M. Sheriffs & Police Ass'n v. Bureau

of Revenue, 1973-NMCA-130, ¶7, 85 N.M. 565; See also Quantum Corp., ¶10.

The fundamental question in this case is whether Taxpayer was providing a license to Clayton

for resale to NMCD potentially deductible under that section or was instead predominately

performing a service. NMSA 1978, Section 7-9-3 (M) (2007) defines “service” as “all activities

engaged in for other persons for a consideration, which activities involve predominantly the

performance of a service as distinguished from selling or leasing property.” Section 7-9-3 (M)

In the Matter of The GEO Group, Inc., page 11 of 20.
indicates that “[i]n determining what is a service, the intended use, principal objective or ultimate

objective of the contracting parties shall not be controlling.”

In constructing the Qualified Management Agreement between Taxpayer and Clayton, the

form does not determine the character of the instruments; instead, it is the intention of the parties as

shown by the contents of the instruments that controls. See Transamerica Leasing Corporation v.

Bureau of Revenue, 1969-NMCA-011, ¶17, 80 N.M. 48. Looking at the Qualified Management

Agreement and the NMCD Agreement, it is clear that the intention of the parties was that Clayton

contracted for the provision of services: the provisioning/building, operation, and management of the

Clayton Jail in accord with relevant law and standards.

There is no indication in the content or structure of the NMCD Agreement that Clayton

and NMCD considered the transaction the sale of a license. If this transaction was not the sale a

license, then the license Taxpayer claims to have sold to Clayton was not resold to NMCD in

Clayton’s regular course of business, as required under Section 7-9-47. The NMCD Agreement

between Clayton and the NMCD required Clayton to “house all NMCD inmates in full

compliance with Standards, Court Orders, and NMCD Polices…” The NMCD Agreement listed

numerous services that Clayton was required to provide in order to comply with requisite policies

and procedures. Clayton or Taxpayer was required to obtain American Correctional Association

Accreditation within 18-months of the service commencement date, which is the date that Clayton

began to perform the management and operation services at the jail. In other words, Clayton,

through Taxpayer, was performing the contracted services even before accreditation was in place.

Along with the importance of the services throughout the document, this provision suggests that

the services were the predominate portion of the NMCD agreement.

In the Matter of The GEO Group, Inc., page 12 of 20.
Services were also the predominant component of the Qualified Management Agreement

between Clayton and Taxpayer. Under that agreement, Taxpayer was required to provision—as in

contract for the design and construction of the facility—a jail for Clayton, and had the sole right to

supervise, manage, operate, control the Clayton Jail. The Qualified Management Agreement

identified more than 20 services that Taxpayer was required to arrange, perform, or manage. These

services included the critical security, training of officers, maintenance of facility, medical, and food

services necessary to operate a jail. Without performance of most of these services, Taxpayer could

not have operated the facility as a correctional facility because these services were necessary for

Taxpayer, as operator of the Clayton Jail, to fulfill its duty of maintaining public order and holding

prisoners in secure custody. See Methola v. County of Eddy, 1980 NMSC 145, ¶17, 95 N.M. 329

(jailers are charged with a public duty to maintain order and hold persons in custody). Without these

core contracted services involving security, training, staffing, and operational standards, Clayton

could not have entered into agreement with Taxpayer. See NMSA 1978, Section 33-3-27 (2007)

(setting minimum comprehensive standards for a private independent contractor for the operation of

jail before approval of operation agreement).

The payment structure in this case included both per diems and general facility fees. Although

the per diem rate does not necessarily establish a license because those fees pay for core significant

daily services, the general facility fee is clearly the payment for the provisioning of myriad services at

the facility. The general facility fee further supports that the Qualified Management Agreement was

predominately for the performance of services.

Regarding accreditation, the Qualified Management Agreement did also require Taxpayer to

obtain accreditation within 18-months of the completion of the facility that Taxpayer was tasked with

In the Matter of The GEO Group, Inc., page 13 of 20.
finishing. Taxpayer was also required to contact ACA within six months of beginning to perform its

operational and managerial services at the Clayton Jail. Constructing the jail, operating the jail, and

managing the jail are services, and the agreement contemplated that these services would be

performed even before Taxpayer obtained accreditation.

The accreditation that Taxpayer was required to obtain was not the nature of the transaction

between Taxpayer and Clayton, but a condition of continuing operation of the Jail after the first 18-

months. The predominant component of the agreement between Taxpayer and Clayton was

performing the services necessary to operate, manage, and maintain a detention facility in accord with

legal requirements and standards, which after 18-months included accreditation. Without

performance of these services, there would be no secure facility for Clayton to house any inmates.

Taxpayer argues that the services contracted for and rendered are merely incidental to the

license in a similar manner to the incidental services rendered by a hotel as part of the guest’s license

to use the room for the evening. This argument does not persuade. A hotel may still provide its

essential function—the licensing of a room for the evening—even when an incidental service like

providing cable television or climate control do not function. If the complimentary breakfast

promised at a hotel never materializes, a person may leave the hotel grounds to get something to eat

around the corner. However, if a jail fails to provide food service, a prisoner is not at liberty to walk

to the local coffee shop for breakfast.

Unlike the incidental services of a hotel, the contracted services Taxpayer provided are

critical to providing a functioning and lawful correctional facility. Without trained guards, security

protocols, and maintained premises, a jail cannot meets is essential function as a secure detention

facility. Nor can a correctional facility meets its rehabilitation purpose without the programming

In the Matter of The GEO Group, Inc., page 14 of 20.
services contained in the Qualified Management Agreement. Without appropriate medical care, legal

visits, and court transportation services, a correctional facility cannot comply with its legal

obligations. Without all of those services, the ostensible license that Taxpayer claims would be

meaningless for the purposes of housing NMCD prisoners because there would not be a functional

correctional facility. See Section 33-3-27 (setting minimum comprehensive standards for a private

independent contractor for the operation of jail before approval of operation agreement).

The Qualified Management Agreement between Taxpayer and Clayton was predominately about

Taxpayer’s performance of services, satisfying the definition of a “service” under Section 7-9-3 (M).

Corrections Corp. of America v. State of N.M., 2007-NMCA-148, 142 N.M. 779 presents a

similar set of facts to this case, although with a few notable distinctions. In Corrections Corp., ¶1, the

taxpayer sought a refund of gross receipts tax because it claimed its agreements to house prisoners for

governmental agencies at facilities that taxpayer owned and operated constituted a lease not subject to

gross receipts tax under a different applicable deduction. Because Corrections Corp. was arguing that

its agreement was a lease, the case involved a different deduction than at issue here. The agreements

in Corrections Corp., ¶3-10, were quite similar to the Qualified Management Agreement at issue in

this case. The taxpayer in Corrections Corp., ¶6, charged the governmental entities on a per diem

basis, similar to this protest, though it must be noted that Taxpayer receives both a per diem rate and

monthly service fee. Unlike the present protest where Clayton was the owner of the Clayton Jail, the

Corrections Corp. taxpayer owned the prison facilities outright. The Court of Appeals in Corrections

Corp., ¶28, ultimately held that the contract was not a lease that qualified for the claimed deduction in

that case because the “government entities did not pay a fixed amount in exchange for the guarantee

of physical real property to house inmates…” After reaching its holding, the Court of Appeals in

In the Matter of The GEO Group, Inc., page 15 of 20.
Corrections Corp., ¶28, suggested that the arrangement between that taxpayer and the governmental

agencies was “more like” the arrangement between hotels and lodgers than leases of real property.

That does not mean, as Taxpayer argues, that the Court of Appeals found in Corrections Corp., ¶28,

that arrangement was a license, especially since this statement appears to be dicta after the Court of

Appeals had already reached its holding.

The Court of Appeals in Corrections Corp., ¶29, reiterates that its holding was an accord with

the presumption of taxation and the requirement that deduction be construed narrowly. The Court of

Appeals stated that “[w]e find nothing in our law to support CCA’s position that we should expand

the definition of ‘lease for real property…’ to include agreements between governmental entities and

private prison companies.” Corrections Corp., ¶29. That same principal would certainly apply to

Taxpayer’s attempt to expand the concept of a license to include Taxpayer’s agreement to provision,

manage, and operate Clayton’s jail. In the absence of clear proof that Taxpayer sold a license for

resale, there is nothing to suggest that the Legislature intended Section 7-9-47 to apply to Taxpayer’s

provision, management, and operation of the Clayton Jail.

Even assuming that Taxpayer sold a license, as the Department argues, there is an issue in this

protest as to whether that license was resold. Taxpayer billed NMCD directly for NMCD inmates

housed at the Clayton Jail. Clayton was not liable for payment of non-Clayton inmates at the Clayton

Jail. The direct billing between Taxpayer and NMCD without any Clayton liability indicates that

Clayton was not reselling to NMCD.

Good Faith Acceptance of a NTTC.

Taxpayer argued during the summary judgment motion hearing that its timely acceptance of

the correct type 2 NTTC timely executed by Clayton entitled it to the safe harbor protection of

In the Matter of The GEO Group, Inc., page 16 of 20.
NMSA 1978, Section 7-9-43 (A) (2011). In support of this argument, Taxpayer cited Leaco Rural

Tel. Coop. v. Bureau of Revenue, 1974-NMCA-076, ¶15, 86 N.M. 629 and a decision and order of

the Hearings Bureau, In the Matter of the Protest of Rio Grande Electric Co., Inc, No. 13-16 (June

10, 2013) to support its argument2.

NMSA 1978, §7-9-43(A) (2011) grants taxpayers a good-faith acceptance, conclusive

evidence safe harbor in some circumstances:

[w]hen the seller or lessor accepts a nontaxable transaction certificate within
the required time and in good faith that the buyer or lessee will employ the
property or service transferred in a nontaxable manner, the properly executed
nontaxable transaction certificate shall be conclusive evidence, and the only
material evidence, that the proceeds from the transaction are deductible from
the seller's or lessor's gross receipts.

In other words, the statute grants the seller of the nontaxable property or service safe harbor from

taxation when the seller timely accepts a properly executed NTTC in good faith from the buyer.

Regulation 3.2.201.15 NMAC (05/31/01) discusses good faith acceptance of a NTTC:

Acceptance of [NTTCs] in good faith that the property or service sold
thereunder will be employed by the purchaser in a nontaxable manner is
determined at the time of each transaction. The taxpayer claiming the
protection of a certificate continues to be responsible that the goods delivered
or services performed thereafter are of the type covered by the certificate.

As recently made clear in another Hearings Bureau decision and order In the Matter of the

Protest of Adecco USA, No. 14-16 (May 22, 2014), even under the broader reading of the safe harbor

exception applied by the Hearings Bureau in In the Matter of the Protest of Case Manager and In the

Matter of the Protest of Rio Grande Electric Co., Inc, the safe harbor protection only applies when

the underlying transaction itself is covered by a recognized deduction. That is, the safe harbor

2
Rio Grande Electric Co., Inc. was premised on the Hearings Bureau decision and order In the Matter of Case Manager
(Theresa Maestas), No. 13-12 (May 15, 2013). In the Matter of Case Manager is currently on appeal.

In the Matter of The GEO Group, Inc., page 17 of 20.
provision cannot serve to make a taxable transaction not covered by any deduction into a nontaxable

transaction merely by possession of a NTTC. In McKinley Ambulance Serv. v. Bureau of Revenue,

1979-NMCA-026, ¶10, 92 N.M. 599, the Court of Appeals held that the good faith safe harbor

provision did not protect a seller from taxation “unless the certificate covered the receipts in

question.” The court went on to say that since there was “no certificate applicable” for the type of

services that taxpayer provided, the Department’s denial of the deduction was proper. See McKinley,

¶13. Although perhaps dicta, the Court of Appeals stated in Gas Co. v. O'Cheskey, 1980-NMCA-085,

¶12, 94 N.M. 630 that “[t]he issuance of a ‘Nontaxable Transaction Certificate’ does not operate to

transform an otherwise taxable transaction into a nontaxable transaction.” In order for the safe harbor

provision to apply, the receipts in question must otherwise be covered by a recognized deduction.

That is not the case in this protest.

Because Taxpayer did not establish it was entitled to the Section 7-9-47 deduction, the

transaction is not covered by a recognized deduction, Taxpayer cannot rely on its acceptance of the

NTTC in good faith to convert this taxable transaction into a nontaxable transaction. Because there is

no genuine dispute of material fact and the Department is entitled to judgment as a matter of law, the

Department’s summary judgment motion is granted. Consequently, Taxpayer’s protest is denied.

CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest of the Department’s failure to grant or deny

Taxpayer’s claim for refund and interest, and jurisdiction lies over the parties and the subject matter

of this protest.

B. Under NMSA 1978, § 7-9-3.3 (2003), Taxpayer is engaged in business in the

management and operation of Clayton’s Jail in Clayton, Union County, New Mexico.

In the Matter of The GEO Group, Inc., page 18 of 20.
C. Under NMSA 1978, Section 7-9-5 (2002), all of Taxpayer’s receipts in New Mexico

are presumed subject to New Mexico’s gross receipts tax.

D. Taxpayer had the burden to establish its claim for refund premised on the deduction

articulated under NMSA 1978, Section 7-9-47 (1994), a deduction that must be narrowly construed.

See Corr. Corp. of Am. of Tenn. v. State, 2007-NMCA-148, ¶17 & ¶29, 142 N.M. 779.

E. The Qualified Management Agreement between Taxpayer and Clayton predominately

involved the performance of services, satisfying the definition of “services” under NMSA 1978,

Section 7-9-3 (M) (2007) subject to gross receipts tax.

F. As a matter of law, without establishing that the transaction involved the sale of a

license for resale, Taxpayer did not meet its burden of establishing it was entitled to the deduction

under NMSA 1978, Section 7-9-47 (1994). See Corr. Corp. of Am. of Tenn. v. State, ¶29.

G. Because there is no genuine dispute as to any material fact and the Department is

entitled to judgment as a matter of law, summary judgment is appropriate in this matter. See

Romero v. Philip Morris, Inc., 2010-NMSC-035, ¶7, 148 NM 713.

For the foregoing reasons, Taxpayer’s protest is DENIED.

DATED: November 20, 2014.

Brian VanDenzen, Esq.
Chief Hearing Officer
Taxation & Revenue Department
Post Office Box 630
Santa Fe, NM 87504-0630

In the Matter of The GEO Group, Inc., page 19 of 20.
NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this Decision

and Order will become final. Either party filing an appeal shall file a courtesy copy of the appeal

with the Hearing Bureau contemporaneous with the Court of Appeals filing so that the Hearing

Bureau can begin to prepare the record proper.

In the Matter of The GEO Group, Inc., page 20 of 20.