Newsom Signs Law to Close Montana Tax Loophole for Luxury Cars

California Gov. Gavin Newsom has signed Senate Bill 1406 into law, aiming to close a tax loophole that allowed some owners of luxury vehicles to avoid significant sales tax by registering their cars through shell companies in Montana. The state estimates this measure could recover up to $20 million annually in tax revenue.

The loophole exploited Montana's lack of a statewide sales tax on vehicle purchases and its lenient rules for establishing limited liability companies (LLCs). Individuals could create a Montana-based company, title an expensive vehicle through it, and then register the car in Montana before bringing it back to California.

A criminal complaint filed by the California Department of Justice revealed instances of buyers bragging about the savings. One owner of a $600,000 Lamborghini reportedly saved $70,000 over five years by paying $3,000 for Montana registration, while estimating that the same period would have cost $75,000 in California sales tax.

SB 1406 expands California's criteria for determining when a shell company is considered a California resident for tax purposes. Under the new law, if any shareholder, partner, member, or beneficial owner of a shell company is a California resident, the company can be treated as a California resident.

The legislation also introduces personal liability for unpaid taxes, interest, and penalties. Officers, managers, partners, and beneficial owners of these shell companies can be held personally responsible for the owed amounts related to vehicle, vessel, or aircraft purchases. Failure to comply may result in criminal charges.

State Sen. Jerry McNerney, who introduced the bill and chairs the Senate Revenue and Taxation Committee, stated that the measure targets wealthy individuals using fabricated shell companies to evade sales taxes on high-end vehicles. He indicated that closing this loophole would restore fairness to the sales tax system and generate funds for essential services like road repairs.

The law includes provisions to avoid penalizing vehicles legitimately owned and operated outside of California, or those that were outside the state during their first 12 months of ownership. However, factors like a shell company having little to no business activity outside California, no physical office, no employees receiving W-2s, and failure to file federal or out-of-state tax returns can be used as evidence of non-compliance.