California Launches A Bill To Specifically Target People Using Montana LLCs To Dodge Taxes On Cars

The battle against out-of-state registrations is heating up in California. The illicit practice, which sees in-state residents form out-of-state LLCs to register their high-priced exotics in places like Montana, is a well-known way to avoid registration taxes and emissions testing. For years, it’s been commonly referred to as the “Montana loophole.”

The loophole’s longstanding grey area of legality was dealt a serious blow earlier this month when California’s Attorney General charged 14 people with conspiracy, filing false sales tax returns, failing to file tax returns, perjury, and money laundering over their failure to report $20 million in luxury vehicle purchases, using the trick to skirt taxes.

Now, things are getting even more interesting. Just a few weeks following those charges, State Senator Jerry McNerney announced plans to introduce a new piece of legislation that would tighten up California’s legal definitions for residents to include shell companies like those used to register vehicles in Montana, when at least one member of that company is a California resident.

The Golden Era Of Montana Registrations Might Be Coming To An End

If you’re a gearhead who spends a lot of time online, you’re probably already familiar with the Montana loophole. Basically, to register a vehicle in Montana, all you need is an LLC registered in the state—you don’t need to be there, and you don’t need to live there yourself. The car is registered to the LLC, and, via a host of relatively affordable third-party services, you get plates and a title in the mail. Because the car isn’t registered in your state, you don’t have to pay taxes where you live. And because Montana doesn’t charge sales tax on vehicle registrations, you don’t have to pay tax to that state, either.

For years, rich people who don’t want to pay taxes on their high-priced exotics, folks who can’t get their vehicles to pass a state emissions inspection, and Kei truck owners whose home states refuse to register their mini pickups nationwide have used the Montana loophole without penalty. But it feels like lawmakers are finally getting wise to it. Here’s what I wrote about the changing attitudes of some state lawmakers when I covered those charges brought against those 14 people earlier in March:

Last year, Utah signed into law a new data-sharing arrangement between Utah and Montana “to locate and assess tens of thousands of Utah tax evaders, with a particular focus on the owners of cars and boats registered in Montana,” according to Bloomberg. Back in July, California’s tax agency identified over 1,500 vehicles that had potentially been improperly registered to Montana to avoid registration fees.

[…]

According to Bloomberg, supporters of the bill in that state say the data-sharing arrangement could yield up to $100 million in recovered taxes and penalties. That suggests officials are prepared to hand out more than just slaps on wrists.

The steps follow states like Iowa, Illinois, and Massachusetts, which, over the past decade, have cracked down on out-of-state registrations by residents using Montana LLCs. Most recently, Tennessee has very publicly cracked down on YouTuber Cody “WhistlinDiesel” Detwiler’s Montana registrations, arresting him twice.

California, with its higher taxes and extra-tight emissions regulations, remains the highest-profile State in this situation. And it shows no sign of backing down. As I mentioned above, the California Department of Tax and Fee Administration (CDTFA) has already identified over 1,500 vehicles that may have been improperly registered in Montana for tax avoidance purposes.

Zeroing In

Now, the state is going one step further. In order to hold California residents accountable for paying the appropriate taxes on their vehicles, the state is attempting to change the law so that even if a person registers a vehicle out of state using a shell company—a.k.a., an LLC—the CDTFA can still tax them accordingly. The bill, SB 1406, is being introduced into the California legislature by state senator Jerry McNerney. From the release:

SB 1406 would close the Montana Loophole by expanding California’s definition of who is a resident under state use tax law to include a shell company when at least one member of the business is a California resident. SB 1406 would also authorize CDTFA to impose tax liability on the individual members of a shell company.

But what if there’s a legit reason behind a California resident registering a car with an out-of-state LLC? There are plenty of perfectly acceptable motives, such as if someone has a second home out of state. Well, the bill considers that, outlining a list of potential ways to spot a real business entity from a shell corporation used to finesse the tax system:

In addition, SB 1406 would add the following criteria as evidence that a business is a shell company, and thus potentially involved in an illegal tax evasion scheme regarding out-of-state vehicle purchases:

• Lacks a specific business activity or purpose,

• Fails to maintain a physical location outside California,

• Fails to employ people and provide those persons with W-2 wage and tax statements, and

• Fails to file federal tax returns or fails to file a required state tax return in a state other than California.

McNerney’s office says that the CDTFA has identified at least 2,500 vehicle sales as possibly involved as of 2023, which is a stark increase from the agency’s estimates just a few weeks ago. They also say the loophole costs California taxpayers roughly $20 million in lost revenue, “funds that could have been used to pay for road repairs and other essential programs,” according to McNerney’s press release.

If you’re a frequent reader of The Autopian, you probably know that we have a couple of cars registered in Montana. That happened before I started working here, so I’ll let our publisher Matt Hardigree explain:

We did it for a couple of reasons. The first was educational. What’s the process like, et cetera. Once the Murano is sold I’ll write about it. The second was convenience, as the vehicles were going to be spread around the country and not based in any particular place. We didn’t actually end up saving any significant amount of money by doing so. If anything, we may have paid slightly more given how cheap it is to register a car in North Carolina.

McNerney’s office says SB 1406 is expected to be heard in a Senate committee in the coming weeks. If it makes it through the first stages, it’ll eventually get a House vote, then go to the Governor to be signed into law. My advice to those with Montana registrations in California hasn’t changed since the last time I wrote about this: If you can, just register your car in your home state. Sure, it might be more expensive up front, but in the long run, it’ll likely be the cheaper option, especially if you have to start paying lawyers.

Top graphic images: DepositPhotos.com; ABC/Disney