Can a state’s rules force a company to have a taxable presence in that state? The Maine Supreme Judicial Court addressed Maine’s scheme to force nexus in its recent decision in State Tax Assessor v. Fifth Generation, Inc, 2026 ME 30 (Me. Apr. 2, 2026).
That case involved Fifth Generation, Inc. (the “Company”), which produces the award-winning Tito’s Vodka. From 2011 through 2017, the Company had explosive growth in its Maine sales of over 100,000%. To temper that success, Maine Revenue Services conducted an audit for that period and issued an assessment, asserting that the Company had nexus with the State.
To understand the basis for the assessment, it is important to understand Maine’s requirements for the sale of spirits. In particular, liquor companies are required to deliver their products to a bailment warehouse in Maine, which is operated by a state subcontractor. The alcohol sits in the warehouse for approximately 60 days before it is purchased by the Bureau of Alcoholic Beverage and Lottery Operations (the “Bureau”). The Bureau then sells the alcohol to retailers in the State.
Due to these requirements, alcohol distributors own property in the State while it sits in the warehouse. In addition, title to the alcohol transfers to the Bureau while the product is located in the State. There is no way for alcohol distributors to circumvent these provisions. For tax purposes, a company has nexus with the State if it owns property in the State.
Upon reviewing the assessment, the Maine Supreme Judicial Court found that as a result of the liquor regulations, the Company had nexus in the State. The Court shot down the Company’s claims of P.L. 86-272 protection finding that the storage of product in the State and the sales in the State related directly to the sale of that product and was not ancillary to future sales.
Moreover, while the Court acknowledged that the State’s requirements created nexus for the Company, it held that the State had a legitimate interest in regulating the sale and distribution of alcohol. Thus, the State could require the Company to forfeit its tax immunity that P.L. 86-272 may otherwise provide.
And if that were not egregious enough, the Court condoned the imposition of penalties. The Court stated that penalties could only be abated if there was substantial authority for the Company’s argument. While the Court noted that the Company put forth an arguable claim, it did not rise to the level of substantial authority – despite the fact that the Board of Tax Appeals ruled for the Company!
This case serves as an important reminder that states can force a company to have a physical presence in the state and then penalize them for questioning the resulting assessment. Definitely not a shining example of good tax policy.
