Private jail owes tax on inmate items, court rules

The Missouri Supreme Court ruled that a company operating a private jail in Johnson County must pay the state sales and use taxes on consumable items it supplies to inmates.

But one judge is questioning whether a private company is even legally authorized to operate a jail.

ICC Management Inc. is in charge of operating a private jail facility in the Johnson County town of Holden. While contracting with various municipalities to house prisoners, ICC also divvies out food, clothing and toiletries to incarcerated individuals. The company charges a per-inmate fee to municipalities.

Since municipalities are exempt from paying sales taxes, ICC didn’t charge such levies to the governmental entities. But the company argues that the fee includes the cost of consumable items, which it says constitutes a resale to municipalities. According to ICC, that entitles the company to a resale exemption from sales and use tax for the purchase of consumable items.

After the company didn’t pay sales or use tax from January 2002 to December 2005, the Department of Revenue conducted an audit. It concluded the company owed $14,056.25 in sales tax and $5,459.79 in use tax, plus interest, for purchases of food, clothing and various other items. The decision was affirmed by the Administrative Hearing Commission.

In a 7-0 decision written by Chief Justice Laura Denvir Stith, the Supreme Court affirmed the AHC’s decision. The resale exemption, Stith wrote, was meant to prevent companies from paying taxes twice. Since municipalities don’t pay sales taxes, ICC did not fall into that exception.

“Indeed, if ICC were correct in its argument that its purchases of consumables are not subject to tax because they will be served to inmates, but that its sales are not subject to tax because of the governmental tax exemption, then no tax would be imposed on the purchase, use or sale of these consumables at all,” Stith wrote. “The purpose of the exemption is not to provide a special benefit to ICC that is not enjoyed by other taxpayers.”

Additionally, Stith wrote that ICC does not meet the definition of a “seller.” Under state statute, seller is defined as “a person selling or furnishing tangible personal property or rendering services, on the receipts from which a tax is imposed.”

“All parties concede that no tax is imposed … on the property or services that ICC provides to the municipalities with which it contracts,” Stith wrote. “ICC, therefore, does not meet the definition of a ‘seller.’ The exemption for goods held for resale is contained in [state statute], which defines ‘sale at retail.'”

While he agreed with Stith’s ruling, Judge Michael Wolff questioned whether private corporations had the right to run private prisons.

“The opinion seems to assume that the activities of ICC Management Inc., a private corporation operating a jail, are not unlawful. Is there any constitutional or statutory authority for a private corporation to hold human beings in jail against their will?” Wolff wrote. “I am not willing to assume that private jailing is lawful. But whether the business of operating a private jail is lawful or not, I do agree it is not entitled to a tax exemption.”

The Missouri Legislature passed a bill this year that sought to enact more regulations on private jail facilities. A footnote in the decision noted that bill – which passed in 2009 – “would not affect the time period involved in this case.”

Rep. Denny Hoskins, R-Warrensburg, was the House sponsor of the legislation mentioned in Wolff’s opinion. He said the legislation was meant to place regulations onto private jails after inmates escaped from facilities within his district.

Hoskins added that since the bill – which has yet to be signed by Gov. Jay Nixon – places regulations on the facilities, the legislation could alleviate doubts about whether such structures are “dutiful” or legal. However, he said Wolff’s concurrence does raise a legitimate question about whether the facilities were legal before the law took effect.

ICC’s attorney, John W. Simpson, of Shook, Hardy & Bacon, declined to comment. A call to ICC was not returned.