California is cracking down on the so-called Montana loophole, a practice where wealthy residents register luxury vehicles in Montana to evade local sales and use taxes.
Governor Gavin Newsom recently signed Senate Bill 1406 into law. The legislation targets residents who set up Limited Liability Companies (LLCs) in states like Montana to purchase and register high-end vehicles, such as Ferraris, Lamborghinis, and RVs, thereby avoiding California taxes. The state officially announced the bill’s signing.
Because Montana has no statewide general sales tax, registering a luxury vehicle there allows owners to save substantial amounts of money. For instance, purchasing a $500,000 car in California can incur over $50,000 in sales tax alone, depending on the local jurisdiction.
Under the new law, certain out-of-state LLCs with California residents as members can be treated as California corporations for the purpose of assessing vehicle use taxes. Furthermore, the California Department of Tax and Fee Administration (CDTFA) is now empowered to hold individual LLC members personally liable for unpaid taxes, interest, and penalties.
State Senator Jerry McNerney, who authored the bill, estimated that this tax-avoidance scheme costs California approximately $20 million in lost revenue annually. He pointed out that affluent tax evaders have long used nominal out-of-state entities to buy luxury supercars and bring them back to California without paying their fair share.
California tax authorities have continuously ramped up enforcement against out-of-state shell companies created solely for vehicle registration purposes. The primary goal of SB 1406 is to ensure that California residents can no longer easily bypass state vehicle taxes simply by registering automobiles under out-of-state LLC names.
