Governor Newsom has signed legislation to end the ‘Montana loophole,’ a scheme used by luxury car buyers to avoid millions in California vehicle taxes.
The text message was blunt, mocking the system while boasting of the payday: “70k saved,” the buyer wrote, celebrating the $3,000 paid to register a $600,000 Lamborghini through a Montana shell company. To that owner, California’s tax laws were merely “hella dumb.”
That loophole. which has allowed buyers to register Ferraris. Porsches. and Lamborghinis in states without sales tax or registration fees. officially closed last week. Gov. Gavin Newsom signed Senate Bill 1406, authored by state Sen. Jerry McNerney (D-Pleasanton), to stop a practice that drains millions of dollars from state coffers annually.
For years, wealthy buyers bypassed California’s steep levies by creating shell companies in tax-free jurisdictions. The new law, which took effect immediately, expands the definition of state residency for sales tax purposes. If even one member of a business is a California resident, the company is now liable for state taxes. The state tax agency is now also authorized to pursue individual members of a business for unpaid liability.
State officials have long struggled with the fallout of these schemes. estimating that California loses $10 million in revenue every year to out-of-state registrations. Earlier this year. the Department of Justice launched a crackdown. charging 14 people—including both auto dealers and customers—with concealing over $20 million in high-end vehicle purchases. The charges allege more than $1.8 million in evaded state taxes.
The new legislation provides investigators with sharper tools to identify phantom companies. If an LLC lacks a physical location outside California. fails to employ workers. does not file federal tax returns in another state. or lacks a verifiable business purpose. those factors can now be used as evidence of a tax evasion scheme.
This shift moves beyond the previous enforcement standard. which relied on the requirement that vehicles remain out of state for at least 12 months before avoiding California tax. While dealers have historically been required to keep delivery records to prove out-of-state sales. the new law targets the shell entities themselves. aiming to dismantle the infrastructure that turned state tax avoidance into a high-end luxury perk.
California tax law Montana loophole Gavin Newsom luxury car taxes tax evasion SB 1406