California has closed what's known as the Montana loophole, the trick of buying an expensive car through a Montana company to skip California's sales tax. Gov. Gavin Newsom signed Senate Bill 1406 on September 30, and it took effect immediately.
Montana doesn't charge sales tax on vehicle purchases, and it lets people form a limited liability company there without living in the state. Out-of-state buyers form an LLC, buy and register the car through it, and drive it home on Montana plates. The loophole costs California about $20 million a year in lost tax revenue, according to state estimates cited by the bill's author, state Sen. Jerry McNerney.
"For years, wealthy tax evaders have avoided paying California sales taxes by setting up phony shell companies to buy Ferraris, Lamborghinis, and other luxury vehicles in Montana and then bringing the vehicles back to our state," McNerney said, according to Motor1.
What changed
Under the old rule, a closely held company or LLC counted as a California resident for use tax only if Californians held 50% or more of it. The new law adds partnerships, limited partnerships, and limited liability partnerships to that 50% test.
Shell companies get a stricter rule. A shell company now counts as a California resident if any shareholder, partner, member, or beneficial owner lives in California. The law defines a shell company as one used to evade the tax, and lists signs of one:
It has no specific business activity or purpose.
It keeps no physical location outside California.
It doesn't employ people on W-2 wage forms.
It fails to file federal tax returns or required tax returns in another state.
The tax bill can now land on a person. Any officer, manager, partner, beneficial owner, or member of a shell company can be held personally liable for the unpaid tax, plus interest and penalties. The state has to show the company kept or used the vehicle in California within 12 months of buying it. The law covers boats and aircraft as well as cars. It also isn't retroactive. Its changes don't apply to anything bought, or under a binding purchase contract, on or before the date they took effect.
The Drive notes that Montana also doesn't require owners to smog their cars. Because the bill raises taxes, it needed a two-thirds vote in both houses of the Legislature.
Sources:
Bill text, signing date, and rules: California Legislative Information
Signing and revenue estimate: California Senate Democrats
McNerney's statement: Motor1
Smog rules and background: The Drive
Photo via Wikimedia Commons: Damian Morys (CC BY 2.0)
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Jeffrey Wiley has spent more time than he'd like to admit thinking about what makes a car look right. He writes about automotive design, car culture, and the opinions people have strong feelings about. He lives in north Georgia.
