The “Montana loophole” is pretty simple.
Luxury car buyers in California and other states wanting their fancy ride but not wanting to pay sales taxes turn to Montana, which has no sales or personal property tax. They register the car there, which they can do from anywhere with paperwork, and bring it back to their home state.
The Montana detour has become a well-known path for the rich to save some money on their Maybach and Maserati.
But California is now fighting back.
Facing its own budget problems, state officials are investigating more Montana car registrations. Shannon Robinson of the California Department of Tax and Fee Administration said those who register in Montana simply to avoid takes could be violating the law.
More than a year ago, the agency sent a letter to California auto dealers, warning that they could be held liable for taxes if they neglected to maintain proper shipping and delivery documents, or if they maintained such documentation but did not actually ship the vehicle out of state. The letter also urged dealers to explain the potential tax issues associated with out-of-state limited liability companies.
Robinson said there is a “significant tax gap” the state is looking to close through investigations.
“We’re talking about really large, hefty sales prices on these vehicles. So uncovering even a handful of them makes a large, large impact on our revenue for our state that provides vital services for Californians,” Robinson said.
Under state law, residents are 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.
Since 2023, California tax investigators have identified 500 California dealers involved in some 2,500 vehicle sales to customers claiming to have used the vehicle in Montana. These sales, many of which involve luxury or exotic cars, cost the state more than $10 million a year in lost tax revenue, the agency said.
Investigators have grouped suspicious auto sales by location, listing the top 10 cities where such sales have taken place. Beverly Hills had the highest number, with 416. Costa Mesa followed with 359, Van Nuys with 273 and San Diego with 269. Irvine, Santa Monica and Newport Beach also made the list.
And earlier this year, the state’s Department of Justice charged 14 people — including auto dealers and customers purchasing cars — for 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.
The criminal complaint, filed in February, lists more than 50 charges, including conspiracy to commit tax evasion, filing false sales tax returns, money laundering and perjury. A general manager and another employee at San Francisco Exotic Cars in San Rafael were named in the complaint, according to the dealership staff directory.
In text messages, defendants explicitly sought to conceal their purchases, according to the criminal complaint.
“Don’t want the state of California to know anything about this car,” one defendant in Santa Clara County said in message to another defendant, who was allegedly involved in the logistics of the transport of vehicles and preparation of fraudulent documents.
The defendant went on to ask whether any customers with Montana license plates “had any issues.” The defendant handling the logistics and documents replied “Not yet” and added: “But they are always paranoid lol.”
“We need to ship a 488 pista [Ferarri] from San Mateo to Campbell but on the bill Of lading put it’s going to Montana,” another defendant said in a message. “Is that doable lol.”
Yet another defendant, who according to the complaint bought a Lamborghini worth hundreds of thousands of dollars, gloated about the avoided fees.
“70k saved — I can’t believe [Montana] registration lasts for 5 years — that’s crazy,” the defendant said in a text. “Stupid California. Paid 3k to own a 600k car for 5 years — lol in Cali that’s like 75k for 5 years. Hella dumb.”
That defendant, according to the complaint, failed to report and pay $38,094 in sales tax.
San Francisco Exotic Cars did not immediately respond to a request for comment.
Mark Milton, managing attorney at Milton Law Group in Missouri, said people should be cautious of tax shelters that sound too good to be true. Milton said he has had clients who have received bills for unpaid sales and personal property taxes after getting pulled over on the highway.
He said there are situations where one could legitimately have Montana plates, but that is different from those “ordering an LLC over the internet just for the purpose of avoiding California taxes.”
“If you have nexus to Montana, like if you own property there, or you have a second home, or something like that, you have a better defense,” Milton said. “It’s a very case-by-case basis.”
Milton explained that some dealers get involved because it may more easily allow them to facilitate sales if they can help customers avoid hefty taxes. Kickbacks in theory could be involved as well, he said.
He said some who participate in such schemes might “think there’s nothing wrong with it” because some attorneys advertise the service and tell them it’s aboveboard.
A quick internet search reveals a cottage industry of sorts in Montana seeking to help people with such LLCs.
An FAQ on the website of a law office based in Missoula, for example, answers the question “Is this legal?” by stating that the scheme is in fact legal “as long as you meet and follow your state’s laws and regulations.”
“The conditions and law vary from state to state. Virtually every state has statutes that can make this available to you. Please contact our office for more information,” the website of Bennett Law Office states.
Thad Brinkman, an attorney with the firm, said it’s “a big hurdle” that California law requires the vehicle be delivered outside of the state of California and remain outside of the state.
Therefore, Brinkman said, many clients are people who are buying a car for collection or investment purposes, rather than for use, so they can more easily store the vehicle outside of California. Some, for example, might be purchasing an RV to travel outside of California when they retire, he said.
If people actually keep the vehicle out of state, Brinkman said, there shouldn’t be any reason for authorities to go after them for tax evasion.
But California lawmakers are seeking to the tighten rules.
State Sen. Jerry McNerney, (D-Pleasanton) this year introduced a billthat aims to develop criteria to help label 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 be considered as evidence, according to the proposed law.
The media attention and awareness that comes with an enforcement crackdown, particularly with publicized cases such as Tennessee’s arrestof YouTuber Cody Detwiler — known as WhistlinDiesel — is thought to help with deterrence, experts said.
Robinson of the California Department of Tax and Fee Administration said the agency’s objective is to get more people into compliance, hoping they will step forward to pay their taxes before being contacted by the department. And the agency, on a case-by-case basis, may grant leniency if those who come forward voluntarily request relief from late penalties, she said.
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