Luxury-car buyers who use ‘Montana loophole’ to dodge California taxes are target of new law
Gov. Gavin Newsom last week signed legislation cracking down on the practice of luxury-car buyers in California registering cars out of state to avoid taxes.
Senate Bill 1406, introduced by state Sen. Jerry McNerney (D-Pleasanton), closes the so-called Montana loophole, in which tax evaders create shell companies in Montana or other states without sales tax or vehicle registration fees and use them to purchase Ferraris, Porsches and other luxury cars. The state estimate it loses millions of dollars annually because of such schemes.
The new law expands California’s definition of who is a resident under state sales tax law in an effort to weed out phony shell companies, making a company liable for state taxes when at least one member of the business is a California resident.
The law, which went into effect immediately, also authorizes the state tax agency to impose tax liability on individual members of a business.
California had already looked to enforcement efforts to investigate suspicious out-of-state car sales, which officials estimate amount to $10 million annually in lost tax revenue.
Under state law, residents were already required to pay California sales tax on vehicles unless they are first used out of state and stay out of state for at least 12 months. Dealers are required to maintain records showing sales of vehicles so that authorities can ensure vehicles sold to buyers in another state are actually delivered there.
Earlier this year, the state’s Department of Justice charged 14 people — including auto dealers and customers purchasing cars — with concealing the purchase of more than $20 million worth of high-end vehicles including Ferraris, Porsches and Lamborghinis, and evading upward of $1.8 million in state taxes.
Text messages included in the criminal complaint showed buyers seeking to conceal their purchases. One Lamborghini buyer boasted about fees avoided: “70k saved — I can’t believe Montana registration lasts for 5 years — that’s crazy. Stupid California. Paid 3k to own a 600k car for 5 years — lol in Cali that’s like 75k for 5 years. Hella dumb.”
The new law further develops criteria to help show an LLC as a shell company involved in a potential tax evasion scheme.
If the LLC lacks a specific business activity or purpose, fails to maintain a physical location outside California, fails to employ people, or fails to file federal tax returns in another state, it could now be considered as evidence of such a scheme.