California is taking steps to address a tax loophole that allowed some luxury car owners to avoid significant taxes by registering their vehicles through companies based in Montana.
One Lamborghini owner, who spent $600,000 on the car, claimed to have saved $70,000 with this method. Now, however, California aims to eliminate this loophole, hoping to recover around $20 million in tax revenue each year.
This revelation surfaced in a criminal complaint from the California Department of Justice, where the buyer expressed excitement over five years of Montana registration for just $3,000, as reported by The Los Angeles Times.
The tactic relied on Montana’s absence of a statewide sales tax and its relatively relaxed rules for forming limited liability companies (LLCs). People outside of Montana could form a company there, register a pricey vehicle, and then take it back home while claiming to be legally registered in another state.
That option is now effectively closing.
Governor Gavin Newsom signed Senate Bill 1406 into law on September 30. The bill, which passed with a 59-19 vote in the Assembly and 31-8 in the Senate, broadens California’s criteria for recognizing when a shell company should be classified as a California resident for tax purposes.
This new ruling could hit owners hard who believed they were safe from California taxes by using an out-of-state firm. Under the new regulation, if any owner or stakeholder of the shell company is a California resident, the company can be treated as a California resident as well.
Additionally, the responsibility for unpaid taxes won’t just rest with the company alone. Officers, managers, and owners could also find themselves personally liable for any tax-related issues tied to vehicle purchases. Not paying these taxes could lead to criminal charges.
California officials estimate that this Montana loophole has cost the state about $20 million in lost tax revenue each year, which provides a strong incentive for Sacramento to pursue this issue.
The law also lists specific criteria to identify what constitutes a shell company. These include minimal business activity, no physical operation outside California, no W-2 employees, and a lack of federal or out-of-state tax filings.
It’s worth noting that the law does have some limitations. For instance, it won’t affect vehicles that are owned and operated entirely outside of California or those that remain outside the state in their first year of ownership.
State Senator Jerry McNerney, the legislation’s sponsor and chair of the Senate Revenue and Taxation Committee, emphasizes that this measure is designed to target wealthy individuals exploiting shell companies to buy expensive cars in Montana and driving them back to California.
He mentioned, “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.” By closing this loophole, McNerney believes it will help “restore some fairness to our sales tax system” and allow California to reclaim funds for essential services like road repairs.
