MAINE SUPREME JUDICIAL COURT Reporter of Decisions Decision: 2026 ME 30 Docket: Ken-24-490 Argued: September 11, 2025 Decided: April 2, 2026
Panel: STANFILL, C.J., and MEAD, CONNORS, LAWRENCE, and DOUGLAS, JJ. Majority: STANFILL, C.J., and MEAD, LAWRENCE, and DOUGLAS, JJ. Dissent: CONNORS, J.
STATE TAX ASSESSOR
v.
FIFTH GENERATION, INC.
MEAD, J.
[¶1] Fifth Generation, Inc., appeals from a summary judgment entered
by the Superior Court (Kennebec County, Lipez, J.) vacating a decision of the
Board of Tax Appeals and reinstating the State Tax Assessor’s assessment of
$748,531.95 in withholding, interest, and penalties against Fifth Generation for
an audit period spanning from 2011 to 2017. We agree with the Superior Court
that Fifth Generation was not exempt from state income tax during the audit
period, and we therefore affirm the judgment. 2
I. BACKGROUND
A. Facts
[¶2] The facts, as set out in the parties’ supported statements of material
facts and viewed in the light most favorable to Fifth Generation, see Avis Rent A
Car Sys., LLC v. Burrill, 2018 ME 81, ¶ 2, 187 A.3d 583; M.R. Civ. P. 56(h), are as
follows.
[¶3] Fifth Generation is a liquor manufacturer and supplier known for
producing Tito’s Vodka. Fifth Generation is based in Austin, Texas, and is a
subchapter S corporation, a “pass-through entity” for tax purposes. See
36 M.R.S. § 5250-B(1)(C) (2025). From 2011 to 2017 (the audit period), Fifth
Generation supplied a steadily increasing number of cases of vodka to Maine,
starting with roughly five and a half cases in 2011 and ending with 6,582 cases
in 2017. Fifth Generation never filed a Maine pass-through-entity withholding
return or a Maine income tax return.
[¶4] Fifth Generation had no real estate in Maine and did not hold itself
out to the public as conducting business in Maine during the audit period. It
had at least two employees, based outside of the state, who visited Maine on
sales-related trips each year during the audit period. 3
1. Maine’s Three-Tiered System
[¶5] Maine regulates the sale of spirits in the state using a “three-tiered
system” involving (1) suppliers—liquor companies that want to sell their
alcoholic products in Maine; (2) a single state wholesaler—the Bureau of
Alcoholic Beverage and Lottery Operations (the Bureau); and (3) retailers—
state-licensed liquor stores.
[¶6] During the entirety of the audit period, Fifth Generation was
required to ship its products to a “bailment warehouse” operated by Pine State
Trading Co., a state subcontractor.1 Fifth Generation paid regular “bailment
fees” to Pine State during this period. Typically, a sixty-day supply of spirits
was kept in the bailment warehouse. During the audit period, the State
subcontractor, Maine Beverage Co. or Pine State (beginning in June 2014),
maintained an online portal that allowed suppliers to keep track of inventory.
The Bureau would send low-inventory reports and out-of-stock reports to
suppliers.2
1 From the start of the audit period until June 2014, these requirements were governed by a ten-year contract between a company called Maine Beverage Co. (which subcontracted with Pine State for its warehouse space) and the Maine Department of Administrative and Financial Services (DAFS), the department that oversees the Bureau. From June 2014 onward, Pine State had a contract with the Bureau to provide space to store spirits in their bailment warehouse. 2 The parties disagree on whether the quantity of spirits that Fifth Generation would send to the bailment warehouse was based on Fifth Generation’s sales projections or if the quantity shipped was based on the required minimum inventory requirements set by the Bureau. 4
[¶7] Alcohol was then sold from the bailment warehouse to the Bureau,
which sold it to retailers. The Bureau generated revenue and regulated the
price of alcohol through this process. See 28-A M.R.S. §§ 83-B, 83-C (2014);3
28-A M.R.S. § 1703(5) (2017).4
[¶8] During the audit period, Maine required suppliers to use a licensed
broker to work with the Bureau. From the start of the audit period to May 2012,
Portland Beverage Co. served as Fifth Generation’s broker. From May 2012 to
the end of the audit period, M.S. Walker, Inc., a Massachusetts-based company,
served as Fifth Generation’s broker. Fifth Generation gave M.S. Walker broad
authorization to work on behalf of Fifth Generation. Fifth Generation also
provided incentives to M.S. Walker to sell more of its product. During the audit
3 Since the conclusion of the audit period, these statutes have been amended, though not in any
way that affects this appeal. See P.L. 2021, ch. 658, § 53 (effective Aug. 8, 2022) (codified at 28-A M.R.S. § 83-B (2025)); P.L. 2019, ch. 13, § 5 (effective Sept. 19, 2019) (codified as subsequently amended at 28-A M.R.S. § 83-B (2025)); P.L. 2023, ch. 632, §§ 1-2 (effective Aug. 9, 2024) (codified at 28-A M.R.S. § 83-C (2025)); P.L. 2023, ch. 516, § B-44 (effective Aug. 9, 2024) (codified as subsequently amended at 28-A M.R.S. § 83-C (2025)); P.L. 2021, ch. 658, §§ 54-57 (effective Aug. 8, 2022) (codified as subsequently amended at 28-A M.R.S. § 83-C (2025)); P.L. 2021, ch. 592, § B-1 (effective Aug. 8, 2022) (codified as subsequently amended at 28-A M.R.S. § 83-C (2025)); P.L. 2019, ch. 404, §§ 3-4 (effective Sept. 19, 2019) (codified as subsequently amended at 28-A M.R.S. § 83-C (2025)); P.L. 2019, ch. 13, § 6 (effective Sept. 19, 2019) (codified as subsequently amended at 28-A M.R.S. § 83-C (2025)); P.L. 2017, ch. 407, § A-115 (effective Aug. 1, 2018) (codified at 28-A M.R.S. § 1703(5) (2025)). 4 The Legislature amended 28-A M.R.S. § 1703(5) after the audit period concluded, though not in
any way that affects this appeal. See P.L. 2017, ch. 407, § A-115 (effective Aug. 1, 2018) (codified at 28-A M.R.S. § 1703(5) (2025)). 5
period, M.S. Walker, acting as Fifth Generation’s broker, accessed the
warehouse and withdrew spirits several times per year.5
2. Delayed Transfer of Title
[¶9] Maine’s regulatory scheme required the “delayed transfer of title”
to the spirits as a condition of the Bureau’s purchase of spirits from a supplier.
During the first part of the audit period, the contract between Maine Beverage
Co. and DAFS stated, “Product delivered to and stored at Warehouse Facilities
shall be the property of the supplier. The Product shall become the property of
the State upon removal from the Warehouse Facilities for shipment to an
agency store.”
[¶10] This contract served as the source of the delayed-transfer-of-title
requirement for the first part of the audit period. Then, beginning in 2014, a
new law provided that “spirits delivered to and stored at a warehouse approved
by the bureau are the property of the supplier. Spirits become the property of
the bureau upon removal from the warehouse for shipment to an agency liquor
store.” P.L. 2013, ch. 476, § A-9 (emergency, effective Mar. 16, 2014) (codified
at 28-A M.R.S. § 83-C(3) (2014)). Fifth Generation understood that to sell
5 Although the parties dispute whether the Fifth Generation or its broker had “control of” or access
to the spirits once they entered the bailment warehouse, Fifth Generation admits that M.S. Walker accessed the warehouse between two and four times per year during the audit period. 6
alcohol during the entirety of the audit period, Maine’s rules and laws required
the delayed transfer of title.
[¶11] During the audit period, the process for the Bureau’s purchase of
spirits proceeded as follows: each month, the warehouse operator, Maine
Beverage Co. (from 2011 to June 2014) or Pine State (from July 2014 to 2017),
sent Fifth Generation two purchase orders showing the number of cases of
alcohol that had been removed from Pine State’s bailment warehouse by the
Bureau on their way to agency liquor stores. In response to these purchase
orders, Fifth Generation sent invoices to Maine Beverage Co. or Pine State
showing the amount that the Bureau owed. Subsequently, the Bureau, through
Maine Beverage Co. or Pine State, paid Fifth Generation.
B. Procedural History
[¶12] In 2018, Maine Revenue Services initiated an audit of Fifth
Generation and formally demanded that Fifth Generation file a pass-through-
entity withholding return for each year during the audit period. Fifth
Generation never filed a tax return in response to the Assessor’s demands. On
August 5, 2019, the Assessor assessed $745,452.18 in withholding, interest, and
penalties against Fifth Generation for the income it generated during the audit
period. Fifth Generation requested reconsideration of the assessment, and on 7
August 28, 2019, Maine Revenue Services upheld the assessment and issued an
assessment of $748,531.95 of withholding tax, interest, and penalties against
Fifth Generation.6 Fifth Generation then appealed to the Maine Board of Tax
Appeals, which held in March 2021 that the Assessor erroneously determined
that there was an income tax nexus with the state and cancelled the assessment.
[¶13] On April 22, 2021, the Assessor filed a petition under 36 M.R.S.
§ 151-D(10)(I) (2025)7 for judicial review of the Board’s decision. Fifth
Generation cross-petitioned.8 The Assessor moved for summary judgment in
6 This amount was higher than the August 5, 2019, assessment because additional interest of $3,079.77 had accrued from the date of assessment through the requested reconsideration period (October 15, 2019). 7 Section 151-D(10)(I) establishes the unique appeals procedure that allows a de novo review by
the Superior Court:
A determination by the board is not an adjudicatory proceeding within the meaning of that term in the Maine Administrative Procedure Act. The decision, as adopted, modified or rejected by the board or appeals officer pursuant to this paragraph is the final administrative decision on the appeal and is subject to de novo review by the Superior Court. Either the taxpayer or the assessor may appeal the decision to the Superior Court and may raise on appeal in the Superior Court any facts, arguments or issues that relate to the final administrative decision, regardless of whether the facts, arguments or issues were raised during the proceeding being appealed, if the facts, arguments or issues are not barred by any other provision of law. The court shall make its own determination as to all questions of fact or law, regardless of whether the questions of fact or law were raised before the division within the bureau making the original determination or before the board. The burden of proof is on the taxpayer. 8 The Superior Court determined that Fifth Generation lacked standing to bring a cross-appeal
because (1) there was no statutory basis for Fifth Generation to bring an appeal, see 36 M.R.S. § 151-D; M.R. Civ. P. 80C; and (2) Fifth Generation had prevailed on the merits before the board. Instead, the Superior Court considered Fifth Generation’s arguments in its cross-appeal as arguments it was raising in its opposition to the Assessor’s appeal. 8
September 2023. In October 2024, the Superior Court granted the Assessor’s
motion, entering summary judgment in favor of the Assessor. Fifth Generation
timely appealed. M.R. App. P. 2B(c)(1).
II. DISCUSSION
A. Standard of Review
[¶14] “We review a grant of a motion for summary judgment de novo,
viewing the evidence in the light most favorable to the nonmoving party.
A grant of summary judgment will be affirmed if there are no genuine issues of
material fact and the undisputed facts show that the prevailing party was
entitled to a judgment as a matter of law.” Badler v. Univ. of Me. Sys., 2022 ME
40, ¶ 5, 277 A.3d 379 (quotation marks omitted).
B. Fifth Generation was not subject to a tax exemption.
1. Fifth Generation had a nexus with Maine.
[¶15] Title 36 M.R.S. § 5250-B(2) (2025) requires, with some exceptions
not relevant here, that every pass-through entity that does business in Maine
withhold income tax. Maine regulations require pass-through entities that have
a “nexus” with Maine to withhold income tax that its shareholders or members
must pay. 18-125 C.M.R. ch. 803 § .06(A) (effective Sep. 12, 2010); 18-125
C.M.R. ch. 808 § .02 (effective May 20, 2000). A corporation has a “nexus” with 9
Maine if it (1) does business in Maine (including buying, selling, or procuring
services or property); or (2) owns property in Maine (including property that
is held by another person in Maine under a lease, consignment, or other
arrangement). 18-125 C.M.R. ch. 808 § .03.
[¶16] During the audit period, Fifth Generation retained title to the stock
of goods that it shipped to the bailment warehouse. See 28-A M.R.S. § 83-C(3)
(2014). Section 83-C(3) effectively creates a bailment relationship whereby the
supplier maintains title to the store spirits until they are removed from the
warehouse for shipment to an agency store. We have previously defined
“bailment” as a “delivery of personal property by one person to another in trust
for a specific purpose, with a contract, express or implied, that the trust shall be
faithfully executed and the property returned or duly accounted for when the
special purpose is accomplished, or kept until the bailor reclaims it.” Frost v.
Chaplin Motor Co., 138 Me. 274, 277, 25 A.2d 225, 226 (1942) (quotation marks
omitted). This well-established, black-letter law is founded upon the
understanding that the bailor retains ownership in the good while it remains
with the bailee. See, e.g., Cadwallader v. Clifton R. Shaw, Inc., 127 Me. 172,
177-80, 142 A. 580, 583-84 (1928). As a result, Fifth Generation maintained 10
title and right to possession to the stock of goods that were placed in the
bailment warehouse until they were removed or sold.
[¶17] Fifth Generation then sold its products from the bailment
warehouse to the Bureau, a transaction that occurred within the state. Because
Fifth Generation owned and sold tangible property in Maine, it had a nexus with
Maine for income-tax purposes. See 18-125 C.M.R. ch. 808, § .03.
[¶18] Fifth Generation challenges the nexus determination, asserting
that it did not own or sell any tangible property in Maine. Fifth Generation
maintains that the transfer of goods occurred when it sent spirits from Texas
via common carrier to the warehouse.
[¶19] Fifth Generation contends that Maine’s commercial code supports
its assertion that title passed from Fifth Generation to the Bureau when it
shipped the spirits by common carrier. Title 11 M.R.S. § 2-401(2) (2025), part
of the Uniform Commercial Code, provides that in the absence of an explicit
agreement, “title passes to the buyer at the time and place at which the seller
completes his performance.”9 Fifth Generation argues that it completed its
9As noted above, Fifth Generation’s broker entered into an explicit agreement with DAFS that provided, “Product delivered to and stored at Warehouse Facilities shall be the property of the supplier. The Product shall become the property of the State upon removal from the Warehouse Facilities for shipment to an agency store.” 11
performance when it shipped the product by common carrier to Maine.
However, this argument is undercut by Fifth Generation’s admission that to sell
alcohol in Maine, the State required suppliers to store their product in a
bailment warehouse and to delay the transfer of title. Because Maine’s
regulatory scheme prescribed a specific system and the parties voluntarily
entered into contracts that specified when title was transferred, Maine’s default
rules of contract do not apply. Id. § 401(1) (“Subject to [the provisions of the
statute] and to the provisions of the Article on secured transactions (Article 9),
title to goods passes from the seller to the buyer in any manner and on any
conditions explicitly agreed on by the parties.” (emphasis added)); id. § 401(2)
(“Unless otherwise explicitly agreed, title passes to the buyer at the time and
place at which the seller completes his performance . . . .” (emphasis added)).
[¶20] Fifth Generation cites 28-A M.R.S. § 2073-A(1) (2025), which
provides that “a person other than the bureau may not transport spirits into the
State or cause spirits to be transported into the State,” to support their
proposition that Fifth Generation had no legal right to transport spirits into
Maine. However, this statute was enacted after the audit period had concluded.
See P.L. 2021, ch. 658 § 267 (effective Aug. 8, 2022) (codified at 28-A M.R.S.
§ 2073-A(1) (2025)). From 2014 through the end of the audit period, a Maine 12
statute provided that “[m]anufacturers may transport liquor within the State to
liquor warehouses.” 28-A M.R.S. § 2073(3)(D) (2014), repealed by P.L. 2021,
ch. 658 § 266 (effective Aug. 8, 2022).
[¶21] While we do not find that physical control over the goods while
stored within the warehouse facility is determinative, the fact that Fifth
Generation had the right, either directly or through an agent, to access and
retrieve bottles from the warehouse further supports the contention that Fifth
Generation, even if it never actually retrieved bottles, held title to the goods in
the warehouse.10
[¶22] Fifth Generation’s arguments are further undermined by the
summary judgment record, which establishes that Fifth Generation understood
that the regulatory scheme required it to store spirits at a bailment warehouse,
that the transfer of title to those spirits did not occur until the spirits left the
warehouse, and that this transfer occurred within the state. Supporting this
understanding is the timing of the purchase orders—which were sent to Fifth
Generation after the spirits had been removed from the warehouse; the fact
10 We are satisfied that the summary judgment record provides a sufficient factual springboard
to review the legal issues presented in this appeal. We respectfully disagree with the Dissent’s suggestion that a remand for further fact finding is necessary to determine whether the bailment “is a fiction designed solely to establish a [tax] nexus or is a real bailment in which Fifth Generation in fact retained control over the supply of Tito’s in the warehouse.” Dissenting Opinion ¶ 51. 13
that M.S. Walker, as Fifth Generation’s licensed broker, accessed the warehouse
and withdrew spirits several times per year during the audit period; and the
fact that the warehouse was called a “bailment warehouse.”
[¶23] Fifth Generation contests the Assessor’s assertions in its statement
of material facts that “spirits delivered to and stored at the Bailment Warehouse
remained property of the suppliers,” and that “spirits stored at the Bailment
Warehouse, including Tito’s Vodka, became the property of the State only upon
removal from the Bailment Warehouse for shipment to an agency liquor store.”
However, as discussed above, Fifth Generation acknowledged that Maine rules
required the bailment and delayed transfer of title.11 Therefore, there is no
genuine dispute of material fact as to those facts.
11 From the start of the audit period to March 2014, it is unclear who communicated these rules
to suppliers and how it was done. Maine Beverage Co.’s contract with DAFS contained these requirements. Likely, Maine Beverage Co. then instituted these requirements for suppliers. After March 2014, the compelled bailment and delayed transfer of title became statutory requirements. See P.L. 2013, ch. 476, § A-9 (emergency, effective Mar. 16, 2014) (codified at 28-A M.R.S. § 83-C(3) (2014)).
Fifth Generation argues that the nebulous circumstances surrounding these requirements before March 2014 adds weight to its position that title transferred when it completed its performance by shipping the spirits to the bailment warehouse. However, Fifth Generation’s position is contradicted by its admission, without differentiating between different times within the audit period, that Maine required the compelled bailment and delayed transfer of title as part of doing business in Maine. 14
[¶24] Accordingly, because Fifth Generation owned a stock of goods at
the bailment warehouse and it sold products from the bailment warehouse to
the Bureau, it had a nexus with Maine under 18-125 C.M.R. ch. 808, § .03.
2. Federal Law Exemption to Pass-Through Taxation
[¶25] Despite any nexus with the state, a corporation is not subject to
income tax, and its shareholders are therefore not subject to pass-through
income tax, if it is entitled to an exemption provided by federal law. See id. § .02;
see also Peterson v. State Tax Assessor, 1999 ME 23, ¶ 7, 724 A.2d 610
(explaining that the federal government has “plenary power to regulate
interstate commerce, pursuant to the commerce clause of the United States
Constitution” and can limit “Maine’s broad authority to impose a net income tax
on nonresidents who solicit interstate sales in Maine”). Title 15 U.S.C.A.
§ 381(a) (Westlaw through Pub. L. No. 119-59) provides that “[n]o State . . . shall
have power to impose . . . a net income tax on the income derived within such
State by any person from interstate commerce if the only business activities
. . . are . . . (1) the solicitation of orders . . . for sales of tangible personal property
. . . and (2) the solicitation of orders . . . in the name of or for the benefit of a
prospective customer.” 15
[¶26] Because a nexus exists between Fifth Generation and Maine, the
next question is whether Fifth Generation is entitled to an exemption from
taxation under § 381(a). See Peterson, 1999 ME 23, ¶¶ 7-8, 724 A.2d 610. To
survive summary judgment, the burden is on the taxpayer to “make a prima
facie showing of the applicability of the exemption.” BCN Telecom, Inc. v. State
Tax Assessor, 2016 ME 165, ¶ 13, 151 A.3d 497.
[¶27] The United States Supreme Court in Wisconsin Department of
Revenue v. William Wrigley, Jr., Co., held that the term “solicitation of orders” in
§ 381(a) includes (1) “requests for purchases” (whether “explicit verbal
requests for orders” or “any speech or conduct that implicitly invites an order”);
and (2) activities “ancillary to requests for purchases” (i.e., activities that “serve
no independent business function apart from their connection to the soliciting
of orders”). 505 U.S. 214, 223-33 (1992). The Court noted that to be ancillary
to a request for purchases “it is not enough that the activity facilitate sales; it
must facilitate the requesting of sales.” Id. at 233. Additionally, the Court held
that in-state activities other than “solicitation of orders” may still benefit from
the federal tax exemption if such activities are merely “de minimis” (i.e.,
activities that establish only a trivial connection with the taxing state). Id. at
232. 16
[¶28] In determining whether an exemption applies, courts look at each
of a business’s activities to determine whether the activity fits into a category
of exempted activities discussed in Wrigley. In Wrigley, for instance, Wisconsin
attempted to impose a pass-through income tax on the owners of Wrigley
chewing gum; Wrigley employed traveling salespeople based in the state, but
all of its orders went through an out-of-state office and were shipped by a
common carrier from out of state. Id. at 216-19. The Supreme Court
determined that many of Wrigley’s activities in the state could be characterized
as “requests for purchases” or “ancillary to requests for purchases” (e.g.,
providing a car and a stock of free samples to sales representatives; the regional
manager’s recruitment, training, and evaluation of sale representatives in the
state; and the regional managers’ interventions in credit disputes). Id. at
228-29, 231-32, 234-35.
[¶29] The Court emphasized that “Wrigley did not own or lease real
property in Wisconsin, did not operate any manufacturing, training, or
warehouse facility, and did not have a telephone listing or bank account” that
might have created a nexus with the state. Id. at 219. Notably, however, the
Court held that the storage of gum at individual salespersons’ homes and the
replacement of stale gum by sales representatives at retail stores (for which 17
retailers were charged) served business functions independent from the
solicitation of orders (or ancillary to the solicitation of orders), and therefore
the company was not subject to the tax exemption provided by § 381(a). Id. at
233-34.
[¶30] Fifth Generation’s argument that the compelled bailment and the
compelled delay in the transfer of title are activities that are entirely ancillary
to the request for purchases is unavailing. It contends that these activities are
ancillary because the only reason it complied with these requirements was to
avoid imperiling future orders. However, in Wrigley, the Court stated that “it is
not enough that the activity facilitate sales; it must facilitate the requesting of
sales.” 505 U.S. at 233. Despite its assertions, Fifth Generation complied with
Maine’s requirements primarily to sell alcohol rather than to facilitate future
sales. Although Fifth Generation’s compliance with these regulations might
indirectly relate to its hope for future orders, its business function was most
directly the sale of alcohol itself.
3. Heublein
[¶31] Fifth Generation contends that the Bureau’s purpose in requiring
the delayed transfer of title and the compelled storage in bailment was to evade
the limitations that § 381 placed on the State’s power to tax. However, the 18
Bureau has a legitimate state interest in regulating the sale and distribution of
alcohol in the state. See Heublein, Inc. v. S.C. Tax Comm’n, 409 U.S. 275, 282-83
(1972); 28-A M.R.S. § 83-C(2) (2014). Localizing the sale of alcohol in Maine is
reasonably related to its purpose of regulating the price because it allows the
Bureau to more easily establish wholesale prices for items when it purchases
the items through a single, in-state warehouse. See Heublein, 409 U.S. 275,
282-83 (1972).
[¶32] The Supreme Court has permitted states to regulate solicitation in
a manner that might cause an out-of-state company to forfeit its tax immunity.
See id. at 281-82. In Heublein, South Carolina had a regulatory scheme for the
sale of alcohol that required suppliers to employ an in-state representative who
would receive the alcohol from outside the state and then either store it in an
in-state warehouse or transfer it to a licensed in-state private wholesaler. Id. at
277-78. Heublein, a Connecticut-based liquor manufacturer, had complied
with South Carolina’s regulatory scheme, employing an in-state representative
to receive shipments before transferring them to a private wholesaler. Id.
at 276-78. The Court held that because the transfer occurred within the state
and did not constitute the solicitation of orders, Heublein was not entitled to
immunity under § 381(a). Id. at 278-83. 19
[¶33] The Court then held that this type of regulatory scheme—which
effectively required certain entities to forfeit their tax immunity to do business
in the state—is permissible so long as it serves a legitimate state purpose, and
it concluded that South Carolina had a legitimate purpose in regulating the sale
and distribution of alcohol in the state.12 Id. at 282-83. Notably, the Court in
Wrigley, 505 U.S. at 224, distinguished Heublein and left Heublein’s holding
undisturbed because Heublein involved a state regulatory scheme designed to
regulate the price of alcohol. Therefore, Heublein’s conclusion—that states can
impose regulatory schemes that might cause an entity to lose tax immunity so
long as they are related to legitimate state interests—remains good law.
[¶34] Maine, like South Carolina, has a legitimate purpose in regulating
the sale and distribution of alcohol in the state. In order to effectuate this
regulation, Maine must have a way to control and supervise the entry process
of liquor into the state utilized by liquor distributors before their products can
be sold to consumers. Maine’s regulatory scheme allows the State to “ensure
proper administrations of the spirits business in the State and protect the
12 The Supreme Court, using a rational-basis test, determined that South Carolina’s Alcoholic Beverage Control Act’s requirement that sales occur within the state was reasonably related to South Carolina’s legitimate purpose of regulating the wholesale price of alcohol. Heublein, 409 U.S. at 282-83. 20
public safety.” P.L. 2013, ch. 476, preamble. Ensuring proper administration of
the spirits business within the state and protecting public safety by regulating
the transporting of liquor into the state before it can be sold within the state is
undoubtably a legitimate state purpose. Accordingly, the Bureau’s
requirements do not unlawfully evade limitations created by federal law.
[¶35] As a result of the firm nexus with the state and the still-good law
of Heublein, we conclude that § 381(a) does not provide an exemption from
state tax.
C. No Commerce Clause Violation
[¶36] Fifth Generation contends that the requirements of a delayed
transfer of title and storage in a bailment warehouse violate the Commerce
Clause, U.S. Const. art. I, § 8, cl. 3. “We review issues of constitutional
interpretation de novo. A person challenging the constitutionality of a statute
bears a heavy burden of proving unconstitutionality, since all acts of the
Legislature are presumed constitutional. To overcome the presumption of
constitutionality, the party challenging the statute must demonstrate
convincingly that the statute and the Constitution conflict.” Goggin v. State Tax
Assessor, 2018 ME 111, ¶ 20, 191 A.3d 341 (alteration and quotation marks
omitted). 21
[¶37] The Commerce Clause “prohibits state laws that unduly restrict
interstate commerce.” Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 588 U.S.
504, 514 (2019). “[I]f a state law discriminates against out-of-state goods or
nonresident economic actors, the law can be sustained only on a showing that
it is narrowly tailored to advance a legitimate local purpose.” Id. at 518
(alteration and quotation marks omitted). The Supreme Court has held that
three-tiered systems of alcohol distribution and sale are “unquestionably
legitimate,” see North Dakota v. United States, 495 U.S. 423, 432 (1990), but has
struck down requirements that have discriminated between in-state and
out-of-state businesses or individuals. For example, in Tennessee Wine, the
Supreme Court struck down a two-year-residency requirement to open a liquor
store as part of Tennessee’s three-tiered system because it facially
discriminated against nonresidents and had a highly attenuated relationship to
public health or safety. See 588 U.S. at 539-43. Similarly, in Granholm v. Heald,
the Court struck down both New York’s and Michigan’s laws that created an
exemption from the three-tiered system that allowed in-state wineries to sell
wine directly to consumers and bypass the wholesaler because the exemption
did not apply to out-of-state wineries and thus discriminated against
out-of-state businesses. 544 U.S. 460, 493 (2005). 22
[¶38] Here, the Bureau’s requirements delaying the transfer of title and
storing spirits in a bailment warehouse do not discriminate between in-state
and out-of-state businesses and individuals. Both in-state and out-of-state
suppliers are subject to the three-tiered system and to income taxation.
Accordingly, Fifth Generation’s argument fails to provide a constitutional
ground for striking down the Bureau’s requirements.
D. The Superior Court did not abuse its discretion when it declined to waive or abate penalties.
[¶39] Fifth Generation contends that the Superior Court should have
waived or abated penalties because it provided substantial authority justifying
its failure to pay. Title 36 M.R.S. § 187-B(7)(F) (2025) provides that the
Assessor must waive or abate penalties if “[t]he taxpayer has supplied
substantial authority justifying the failure to file or pay.” “The taxpayer has the
burden of proving the grounds for waiver or abatement.” John Swenson Granite,
Inc. v. State Tax Assessor, 685 A.2d 425, 429 (Me. 1996). We have defined the
“substantial authority” standard as follows:
The substantial authority standard is less stringent than the more likely than not standard but more stringent than the reasonable basis standard. There is substantial authority for the tax treatment of an item only if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. 23
Id. at 429 n.3 (alterations and quotation marks omitted). Moreover, we have
held that a position that is “arguable” or that is “merely a colorable claim” does
not satisfy the reasonable-basis standard, let alone the higher
substantial-authority standard. State Tax Assessor v. Kraft Foods Grp., Inc., 2020
ME 81, ¶ 37, 235 A.3d 837 (quotation marks omitted).
[¶40] In its appeal, Fifth Generation has cited its interpretation of the
federal and state laws discussed above as the basis for its argument that it has
presented substantial authority justifying its failure to pay. Although Fifth
Generation provides an arguable claim (especially considering that the Board
of Tax Appeals reached a different conclusion than the Superior Court did), it
does not provide sufficient authority to compel the application of the
“substantial authority” standard when one considers the weight of authorities
supporting the contrary interpretation. Fifth Generation’s arguments hinge on
its belief that title to the spirits passed to the Bureau when the spirits were
shipped to Maine via common carrier even though it acknowledges that Maine’s
rules and statute during the audit period required the delayed transfer of title
as part of doing business in Maine. See 28-A M.R.S. § 83-C(3) (2014). Fifth
Generation’s belief, in the face of Maine rules and statutes, does not amount to 24
substantial authority. Accordingly, the Superior Court did not err when it
declined to waive or abate penalties.
The entry is:
Judgment affirmed.
CONNORS, J., dissenting.
[¶41] The scope of this dissent is narrow. I believe that a remand is
needed in order to expand the factual record as to the nature and purposes of
the “bailment” of Fifth Generation’s spirits located in the State-controlled
warehouse.
[¶42] The basic factual predicate is not in dispute: under Maine’s version
of a “control” State,13 Fifth Generation may import its Tito’s Vodka (Tito’s) into
the State only if bought by the State; Fifth Generation must deliver Tito’s to a
warehouse run by a State contractor; and Fifth Generation must maintain a
thirty-to-sixty-day inventory of Tito’s at the warehouse. The State wholesaler
(the Bureau) removes Tito’s from the warehouse when it chooses, and a bill and
13 An “ABC” or “control” State is a state that exercises direct control over the distribution and sale
of alcoholic beverages, often through State-run outlets or monopolies. See Paul Byrne & Dmitri Nizovtsev, Exploring the Effects of State Differences in Alcohol Retail Restrictions, 50 Int’l Rev. L. & Econ. 15, 16, 18 tbl. 1 (2017); North Dakota v. United States, 495 U.S. 423, 431 (1990). 25
payment between Fifth Generation and the Bureau for the removed Tito’s then
ensues.
[¶43] The primary argument asserted by Fifth Generation on appeal is
that the presence of Tito’s in the warehouse prior to removal by the wholesaler
does not provide a legal predicate for the State to require Fifth Generation to
withhold Maine taxes because the State compels Fifth Generation to ship Tito’s
into the warehouse until the spirits are removed by the State. I agree with the
majority that the fact that Fifth Generation is compelled to do so is immaterial
under the holding in Heublein, and nothing in Wrigley or section 381(a) disturbs
that holding. See Heublein, Inc. v. S.C. Tax Comm’n, 409 U.S. 275, 279-83 (1972);
Wisc. Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214, 222-35 (1992);
15 U.S.C.A. § 381(a) (Westlaw through Pub. L. No. 119-59).
[¶44] In Heublein, the Supreme Court also stated that if it were persuaded
that the State in that decision (South Carolina) had structured its regulations to
“evade the intent of [section 381(a)] we would, of course, be reluctant to uphold
its actions.” Heublein, 409 U.S. at 279. The Court went on to say that a State
could tax when its regulatory scheme serves “legitimate State purposes other
than assuring that the State may tax the firm’s income,” i.e., when the State is
“pursuing permissible ends in a manner that Congress did not address.” Id. at 26
282. South Carolina was not a control State, and its framework required a
supplier to maintain a supplier employee as a middleman within the State.
See id. at 277-78. The scheme was deemed to pass the legitimate purpose test
because by requiring suppliers “to localize their sales,” South Carolina had
established a means to check on the accuracy of “records of the quantities,
brands, and prices involved at every stage of each liquor sale.” Id. In sum,
requiring an in-state middleman advanced South Carolina’s legitimate purpose
of ensuring accurate record-keeping.
[¶45] The Maine in-state presence on which the ability to require Fifth
Generation to withhold tax is based on storage of Tito’s in the State-controlled
warehouse. Hence, the question under Heublein is whether the State has a
legitimate State purpose in this regulatory framework other than ensuring an
in-state presence so that a nexus is obtained on which the State can base a tax.
[¶46] The Supreme Court has upheld the States’ ability to establish a
control framework of liquor regulation. See Granholm v. Heald, 544 U.S. 460,
488-89 (2005) (noting that a three-tiered system of supplier-single
wholesaler-retailers is “unquestionably legitimate” and that the “Twenty-first
Amendment grants the States virtually complete control over whether to
permit importation or sale of liquor and how to structure the liquor 27
distribution system” (quotation marks omitted)); see also Cherry Hill Vineyard,
LLC v. Baldacci, 505 F.3d 28, 30-31 (1st Cir. 2007) (stating that the “three-tiered
system has been justified on multiple grounds: as an efficient means of
controlling the distribution of alcoholic beverages, as an effective means of
promoting temperance, and as a facilitating means of collecting excise taxes”).
The Assessor cites this case law to assert the legitimacy of Maine’s framework.
But the issue here is not whether a State may enact a control framework in
which the State exercises monopoly control over retail sales in order to advance
legitimate State purposes in regulating the sale of liquor generally, such as
temperance or efficiency in tax collection. Rather, to me the question under
Heublein is whether the State’s declaration that the supplier retains ownership
of the spirits shipped into the State-controlled warehouse until their removal
from the warehouse by the State serves a purpose other than creating a taxable
in-state presence.
[¶47] The record is strikingly sparse on this front. Only one sentence in
the Assessor’s brief appears to articulate a reason—other than creating a
taxable in-state presence—for the delay in the transfer of title once the product
is shipped to the State’s warehouse: by charging suppliers a “bailment fee,” the
State “generates revenue.” 28
[¶48] If the “bailment fee” were in fact a fee, as opposed to simply more
tax, then this in theory might be a sufficient legitimate State purpose under a
forgiving rational basis analysis. The fundamental difference between a fee and
a tax is that a tax is imposed to raise revenue for general governmental
purposes, while fees are intended to cover the cost of providing a service.
See, e.g., Strater v. Town of York, 541 A.2d 938, 938 (Me. 1988). If the storage of
Tito’s in the warehouse were a true bailment in which Fifth Generation was
receiving a service beneficial to Fifth Generation, then I agree that the test for
taxability would likely be met.
[¶49] When this matter came before the Maine Board of Tax Appeals, the
Board essentially concluded that, based on the record before it, the answer to
the question whether there was a legitimate State purpose for the bailment
other than taxation was no—the “bailment” was in name only, with Fifth
Generation retaining nothing but “bare legal title” and, as such, under the
relevant Maine regulation, the spirits could not be taxed.14
14 A tax can be imposed on a foreign corporation that “owns or uses property in Maine,” including
one that “[m]aintains a stock of goods in this State.” 18-125 C.M.R. ch. 808 § .03(B)(3). The Board concluded that Fifth Generation did not use the warehouse within the meaning of the regulation because Fifth Generation effectively lost control over the spirits once they entered the warehouse. 29
[¶50] When the Assessor appealed the Board’s decision to the Superior
Court, the facts and law were reviewed de novo, with a new factual record and
no deference to the Board’s factfinding or legal reasoning. See 36 M.R.S.
§ 151-D(10)(I) (2025). The summary judgment record presented to the court
was voluminous, but the factual material cited in the paragraphs of the relevant
statements of material fact in the briefing as to the nature of the “bailment” is
meager. The Assessor notes that from time to time, an agent of Fifth Generation
removed a few bottles of Tito’s from the warehouse, suggesting that Fifth
Generation retained control over the spirits in the warehouse. Fifth Generation
disputes that the record shows that any non-de minimis removals in fact
occurred establishing that it maintained control over the spirits.
[¶51] On remand, a trial could establish whether the “bailment” is a
fiction designed solely to establish a nexus or is a real bailment in which Fifth
Generation in fact retained control over the supply of Tito’s in the warehouse
prior to its removal by the Bureau, and whether there were other indicia of an
actual bailment in which Fifth Generation, as the bailor, received a benefit from 30
the bailee. The Assessor could also identify any other legitimate purposes for
the delay in the transfer of title aside from generation of a “bailment fee.”15
[¶52] In sum, I certainly do not foreclose the possibility that Fifth
Generation, in any or all of the tax years in question, engaged in activities that
created an in-state nexus such that Fifth Generation was obligated to withhold
Maine income tax and should be subjected to penalties for not withholding such
tax. But I believe that the record is insufficient as to the legally relevant issue
of whether Fifth Generation’s storage of Tito’s was a true bailment based on
which the State had a legitimate purpose to demand that Fifth Generation retain
title in the warehouse until the State removed the spirits.
Daniel J. Murphy, Esq. (orally), Bernstein Shur, Portland, for appellant Fifth Generation, Inc.
Aaron M. Frey, Attorney General, Thomas A. Knowlton, Dep. Atty. Gen. (orally), and Lawrence S. Delaney, Asst. Atty. Gen., Office of the Attorney General, Augusta, for appellee State Tax Assessor
Kennebec County Superior Court docket number AP-2021-14 FOR CLERK REFERENCE ONLY
The Assessor has also argued that, aside from storage, Fifth Generation engaged in non-de 15
minimis, non-solicitation activities establishing a nexus sufficient to tax. A trial could include a year-by-year record of the cited activities and their precise nature.