Governor Newsom has signed legislation to end the ‘Montana loophole’ after schemes deprived the state of millions in annual tax revenue.
The text message was blunt, revealing the ease with which some drivers bypassed the state’s coffers: “70k saved… Stupid California. Paid 3k to own a 600k car for 5 years — lol in Cali that’s like 75k for 5 years. Hella dumb.”
That cycle of evasion officially ended last week when Governor Gavin Newsom signed Senate Bill 1406. Introduced by state Senator Jerry McNerney. D-Pleasanton. the law targets the practice of Californians registering high-end vehicles in states like Montana to skirt the state’s significant sales taxes and registration fees.
For years, buyers have established shell companies in jurisdictions without such levies, using those entities to purchase Ferraris, Porsches, and Lamborghinis while keeping the vehicles in California. The state estimates these schemes result in $10 million in lost tax revenue annually.
The new legislation, which took effect immediately, fundamentally reshapes how the state defines residency for sales tax purposes. It allows California to hold a company liable for taxes if even one of its members is a state resident. Beyond targeting the entities themselves, the law authorizes state tax agencies to pursue individual members for unpaid tax liabilities.
Investigators have long struggled to keep pace with the shell game. Earlier this year. the Department of Justice charged 14 people. including auto dealers and customers. with concealing the purchase of more than $20 million in luxury vehicles. Those charges involved efforts to evade $1.8 million in state taxes.
The legislative shift provides authorities with a sharper set of tools to identify fraudulent companies. If an LLC lacks a legitimate business purpose. operates without a physical location outside of California. employs no staff. or fails to file federal tax returns in another state. those factors may now be used as evidence of an evasion scheme.
These measures add teeth to existing requirements already on the books. Current state law mandates that residents pay sales tax on vehicles unless they are both first used and remain outside California for at least 12 months. Dealers are also required to maintain specific records to prove that vehicles sold to out-of-state buyers are actually delivered across the border. By expanding the criteria for what constitutes a shell company. the state aims to close the gap that allowed individual savings of tens of thousands of dollars to become a multimillion-dollar public loss.
California Gavin Newsom luxury cars tax evasion Montana loophole Senate Bill 1406 Jerry McNerney