Maine Forced Tito’s Into a State Warehouse — Then Taxed It for Being There

The Maine Supreme Judicial Court’s decision in State Tax Assessor v. Fifth Generation, Inc., 2026 ME 30, should get the attention of beer, wine, and spirits manufacturers, importers, and distributors. The case involved Fifth Generation, Inc., the Texas-based S corporation behind Tito’s Vodka, which had no Maine real estate, did not hold itself out to the public as doing business in Maine, and did not file Maine pass-through-entity withholding or income tax returns for the 2011–2017 audit period. But Maine is a control state for spirits. To sell Tito’s in Maine, Fifth Generation had to use Maine’s state-controlled spirits system: it shipped product to a so-called bailment warehouse operated by a state contractor, paid bailment fees, used a licensed broker, and kept inventory available for the Bureau of Alcoholic Beverage and Lottery Operations, Maine’s single state wholesaler. Maine’s rules also delayed transfer of title. The vodka remained Fifth Generation’s property while it sat in the warehouse and became the Bureau’s property only when the Bureau removed it for shipment to agency liquor stores. That compelled title retention became the basis for a $748,531.95 assessment of withholding tax, interest, and penalties.

The Law Court affirmed the assessment. The majority’s reasoning was formally simple: Fifth Generation owned tangible property in Maine because title to the vodka remained with Fifth Generation while the product sat in the bailment warehouse; Fifth Generation sold tangible property in Maine because the sale occurred when the Bureau removed product from that warehouse; and owning and selling tangible property in Maine created income-tax nexus. The court also rejected Fifth Generation’s argument that Public Law 86-272, 15 U.S.C. § 381, protected it from Maine income tax. Relying on Wisconsin Department of Revenue v. William Wrigley, Jr. Co., 505 U.S. 214 (1992), the court concluded that storing product in Maine and selling it from the warehouse was not merely solicitation of orders. It was part of the sale itself.

That may be a tidy tax analysis, but it skips the harder alcohol-law question: what if the only reason the supplier owned property in Maine was because Maine required it to own property in Maine?

That is where Heublein, Inc. v. South Carolina Tax Commission, 409 U.S. 275 (1972), did the heavy lifting. In Heublein, the U.S. Supreme Court held that a state alcohol regulatory scheme can require in-state activity that causes a supplier to lose Public Law 86-272 protection, so long as the scheme serves “legitimate State purposes other than assuring that the State may tax the firm’s income.” The Maine majority treated Heublein as validating Maine’s warehouse/title structure because Maine has a legitimate interest in regulating spirits, controlling distribution, and protecting public safety.

Justice Connors’s dissent read Heublein more carefully. She did not dispute that Maine can operate a control-state system, and she did not say that compulsion alone defeats nexus. Her point was narrower and stronger: the relevant question is not whether Maine may regulate spirits generally, but whether Maine’s specific delayed-title rule serves any legitimate purpose other than creating taxable in-state presence. On that question, she found the record “strikingly sparse.” The dissent noted that the Board of Tax Appeals had viewed the bailment as one “in name only,” with Fifth Generation retaining only “bare legal title,” and would have remanded for a trial to determine whether this was a real bailment or a fiction designed solely to establish nexus.

That distinction matters. A real bailment ordinarily means that the bailor retains meaningful rights in the goods. The supplier should have some practical ability to reclaim, redirect, control, or benefit from the stored product. But Maine’s structure looks less like ordinary commercial warehousing and more like a state inventory pipeline. The Bureau removed product when it chose. Purchase orders were issued after removal. Payment followed later. The State already controlled the wholesale tier, the warehouse arrangement, inventory reporting, pricing, and distribution to agency stores. So the unresolved question is obvious: what regulatory purpose was served by forcing the supplier to retain title until the State removed the product?

If the answer is public health and safety, Maine should have to explain how delayed supplier title advances those interests. If the answer is warehouse administration, Maine should have to explain why the same goals could not be achieved if title transferred when product arrived at the state-controlled warehouse. If the answer is that suppliers pay bailment fees and remain taxable while product sits in Maine, then the “bailment” begins to look less like a service and more like state-created tax exposure.

This is not just a Tito’s problem, and it is not just a Maine problem. Beer, wine, and spirits companies should review any state-mandated warehouse, bailment, consignment, control-state, franchise, or title-transfer arrangement that leaves product sitting in a state while title remains with the supplier. The tax risk may not appear in the sales contract alone. It may be buried in warehouse rules, control-state statutes, broker agreements, purchase-order timing, inventory requirements, or the practical reality of who actually controls the product.

The practical questions are straightforward: when does title transfer; who controls release; who bears risk of loss; can the supplier reclaim or redirect the goods; are inventory minimums voluntary or effectively required; are bailment fees tied to a real service for the supplier; and has the state revenue department taken the position that this arrangement creates income-tax nexus? Those questions should be answered before an audit, not after an assessment.

The penalty piece makes the decision even more important. Fifth Generation had persuaded the Maine Board of Tax Appeals to cancel the assessment, but the Superior Court reversed, the Law Court affirmed, and the Law Court also upheld penalties. In other words, a taxpayer can have a serious legal argument, win at the administrative level, and still be told on appeal that its position was not strong enough to avoid penalties. For manufacturers, importers, and distributors, that means protective filings, disclosures, ruling requests, reserves, and penalty-defense planning may be as important as the merits argument.

The better future challenge may not require overruling Heublein. It may require enforcing it. Heublein already says a state cannot structure alcohol regulations merely to evade Public Law 86-272 and create taxability. The missing piece is a factual record showing whether a particular state-mandated bailment or delayed-title system does real regulatory work or merely manufactures nexus. Justice Connors wanted that record. The majority did not.

The takeaway for alcohol suppliers is simple: in a control state, “bailment” is not just a logistics word, and title is not just a contract detail. If a state requires product to sit in a warehouse while title remains with the supplier, that arrangement may become the tax hook. And if the state created the hook, suppliers should be prepared to ask what legitimate purpose it serves other than making them taxable.

Bonus: for those interested in the oral arguments and seeing how they went compared to the opinion, here is the video: