State Tax Assessor v. Fifth Generation, Inc.

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.