- The manufacturer of Tito’s Vodka did not qualify for Public Law 86-272 protection for its sales of its spirits into Maine.
- Maine’s three-tiered system for regulating alcohol sales required the manufacturer to function as a bailor to the state-owned wholesaler whereby it retained title to the product while it was in the possession of the wholesaler within Maine.
- The decision highlights the ways in which regulated industries may face obstacles to claiming the benefits of P.L. 86-272 because of the restrictions placed upon them by those regulations.
Background
Fifth Generation (“FG”), based in Austin, Texas, is an S corporation that makes Tito’s Vodka (“Tito’s”). During the period that was the subject of the litigation (2011-2017), it increased its supply of Tito’s to Maine from 5.5 cases to 6,582 cases. The Tito’s was held in a bailment warehouse operated by Pine State Trading Co. (“Pine State”), a state contractor. FG, under a bailment arrangement with the Maine Department of Administrative and Financial Services (“DAFS”), retained title to the vodka while it was in the Pine State warehouse. During the first part of the period, this provision was governed by a contract between a predecessor to Pine State and DAFS. In 2014, the contract provision was overridden by a state law that required spirits delivered to the warehouse to remain the property of FG. Regardless, the Maine Bureau of Alcoholic Beverage and Lottery Operations (the “Bureau”) would take title when it was withdrawn from the warehouse for shipment to a state-owned liquor store for retail sale. FG used a licensed broker to work with the Bureau as required by Maine law.
Maine regulates the sale of spirits using a three-tiered system – manufacturers such as FG comprise the first tier. The second tier is the Bureau, which wholesales all liquor in the state. State-licensed liquor stores are the final tier, retailing to customers.
FG otherwise had no real or personal property in Maine, nor did it have any employees permanently located in the state. Two out-of-state employees would periodically visit the state several times a year during the period that was the subject of the litigation.
Procedural History
Maine Revenue Services (“Revenue”) audited FG and demanded that it file a pass-through entity return for each year during the audit period. After FG declined to do so, tax, interest, and penalties were assessed. The assessment was upheld upon reconsideration by Revenue after which the Maine Board of Tax Appeals reversed the assessment, finding that FG did not have nexus with Maine. The Assessor appealed to the Superior Court, and FG filed a cross-petition. After the Superior Court found in favor of the Assessor on summary judgment, at which point FG appealed to the Maine Supreme Judicial Court.
The Supreme Judicial Court’s Opinion
The standard of review for a grant of summary judgment, as in the instant case, is de novo, whereby the court would view any evidence in the light most favorable to the Assessor.
The court began by discussing the bailment relationship, whereby FG retained title to the vodka in Maine until such time as the vodka was removed from the warehouse and sent to the state store for sale. Since it owned tangible personal property within the state, the court reasoned, it had an appropriate nexus with the state. FG’s argument that, under Maine’s adoption of the Uniform Commercial Code, title passed before that point because FG had completed its performance was undercut, according to the court by the contract (and then, later, the statute that changed the regulatory scheme). FG also raised an argument that Me. Rev. Stat. Ann. tit. 28-A, § 2073(A)(1) barred anyone other than the Bureau from transporting spirits into the state. The court dismissed this argument, noting that this was an amendment to the statute after the audit period, and that the applicable statute that addressed this during the latter part of the audit period expressly allowed manufacturers to transport liquor into the state to the warehouses. It also noted that all other aspects of the transactions within the state, including FG’s physical access to the vodka, its understanding of the regulatory scheme requiring a bailment and the nature of the bailment itself, its brokers’ access to the warehouse, and the timing of purchase orders undermined its UCC-based argument. Thus, the court concluded that FG’s ownership of the vodka in Maine created nexus.
FG then claimed that its activities within the state constituted mere solicitation, and as such, was entitled to protection under P.L. 86-272. The court analyzed FG’s claim considering the United States Supreme Court’s decision in Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). It noted that, under the Supreme Court’s decision, the storage of gum at individual salespersons’ homes was found to exceed the protections of P.L. 86-272. The court noted that FG complied with the contractual and regulatory restrictions imposed by Maine was to facilitate current, rather than future sales, which was inconsistent with the Wrigley holding.
FG also made the claim that the Bureau’s purpose in requiring the bailment arrangement was to negate the limitations of P.L. 86-272. The court dismissed this argument; localizing sales allowed the state to regulate the price. The court noted that the Bureau had a legitimate state interest in doing so, and that the bailment arrangement was rationally related to the state’s interest. The court cited to a case decided by the U.S. Supreme Court in 1972, Heublein, Inc. v. South Carolina Tax Comm’n, 409 U.S. 275 (1972). On virtually identical facts, the Supreme Court found that the vendor in that case exceeded P.L. 86-272 protection because the vendor maintained in-state inventory of alcohol under South Carolina’s regulatory scheme. The court also found, citing Supreme Court precedent, that the three-tiered regulatory system did not otherwise violate the Commerce Clause.
The court also upheld the state’s refusal to abate penalties. It found that while FG’s defenses provided an arguable claim (especially considering the Board of Tax Appeals decision in its favor), its failure to consider contrary authority meant that the strength of its claim did not rise to the level of substantial authority as required for penalty abatement.
One justice offered a narrow dissent. The justice agreed with the decision considering Wrigley and Heublein. He would have remanded the case to further develop the record, which he characterized as “strikingly sparse,” to evaluate whether the bailment arrangement existed solely as a means for Maine to circumvent P.L. 86-272.
Forvis Mazars Insight: The decision highlights important considerations, and the stakes that can be involved given the refusal to abate penalties, when P.L. 86-272 forms the basis for a claimed income tax exemption for a business. It also illustrates how difficult claiming this exempt status can be in the context of highly regulated businesses.
How Forvis Mazars Can Help
We can help you consider the impact of P.L. 86-272 on your business and otherwise apply the sometimes-convoluted nexus provisions to your particular facts and circumstances.