TL;DR: Nobody thinks that the Tornado Cash smart contracts are themselves persons. The government is clearly operating along the reasoning that a human being had to be (and was, in fact) in the loop as part of deploying the smart contracts. That brings us back to the initial analogy I used: you can't absolve yourself by building a robot that does the crime for you.
But the argument isn't at all about absolving the robot builder. In fact, they explicitly take no view on whether the sanctions against the Tornado Cash entity are justified. They also do not take a view on whether the government would be justified in prosecuting the individuals behind Tornado Cash.
They are saying the government does not have the statutory authority to sanction the robot you built.
(Defending the TCE also continues below that, on a mostly irrelevant and unargued tangent about software IP.)
"So there is potentially an entity called Tornado Cash that is controlled by certain individuals, and the web address and some of the Ethereum addresses in the notice can be thought of as either pseudonyms for that entity or, alternatively, as its property. At this point, we’re not offering an opinion on whether it was appropriate to sanction that entity—we do not know all the facts that have led to this action—but we would agree that there may be an entity behind those donation addresses and that said entity may be legally eligible for listing. "
In short: they're trying to have it both ways, and it's not coming off well. If they had restricted their attention to just the TCA the argument would be more interesting, but ultimately still not compelling: everybody involved understands that there were some humans who decided to "pull the trigger" and deploy the TCA.