California has closed a tax loophole that cost the state an estimated $20 million annually. Governor Gavin Newsom signed SB 1406 into law, targeting residents who used Montana-based LLCs to avoid taxes on luxury vehicles. Authored by Senator Jerry McNerney, the bill was signed on September 30 and took effect immediately, giving officials new tools to pursue unpaid taxes.
How the Montana Loophole Worked
Wealthy buyers exploited Montana’s lack of sales tax by establishing out-of-state LLCs. They registered vehicles in Montana while driving them in California, avoiding taxes. The new law considers a shell company a California resident if any owner or shareholder lives in the state, effectively closing this loophole.
Officials can now hold individuals personally liable for unpaid taxes, interest, and penalties. The law identifies potential evidence of a shell company, including no specific business activity, no physical location outside California, no employees receiving W-2 forms, and missing federal or required out-of-state tax returns. This gives California additional tools to collect unpaid taxes and deter future evasion.
Read Also: Jaguar unveils radical electric flagship with bold design shifts
Crackdown on Luxury Vehicle Tax Evasion
California was already pursuing tax evaders before the new law. In March, Attorney General Rob Bonta announced charges against 14 individuals accused of concealing $20 million in luxury vehicle purchases. The cars included a $1.8 million McLaren Elva, a $1.5 million Porsche 918 Spyder, and a $1.26 million Ferrari F12TDF. Investigators alleged that documents falsely claimed the vehicles were for use outside California, despite remaining in the state.
New Law’s Impact on Tax Collection
The new law expands California’s ability to collect taxes on vehicles purchased out of state. It goes beyond existing legislation, which required dealers to keep records of sales to out-of-state buyers. Now, officials can target individuals behind shell companies, making it harder to evade taxes. The law also allows for personal liability of shell company officers, managers, and owners, further strengthening enforcement.
To prove tax evasion, the government must show that the vehicle was used, stored, or consumed in California within 12 months of purchase and that taxes were not paid. By addressing the shell company tactic, the state expects to recover significant revenue and ensure tax compliance among wealthy residents.
