Oct. 8, 2026Updated Oct. 9, 2026, 8:26 p.m. ET
California legislators have officially moved to close a tax-evasion practice that wealthy Californians used to avoid paying taxes on newly purchased luxury cars through the so-called “Montana Loophole.”
Under current California law, residents must pay state and local taxes when they purchase a vehicle, vessel, or aircraft to be used or stored in the state. However, an exception allowed limited liability companies to avoid paying local and state taxes on vehicles if they conducted more than half of their business outside California.
For decades, Californians exploited this exemption by creating fake shell companies in other states, registering their luxury vehicles or RVs there to avoid California taxes, then driving them back to the state. The exploit was dubbed the “Montana Loophole,” as many people bought and registered their vehicles in Montana because it has no statewide sales tax or vehicle registration fees.
The California Department of Tax and Fee Administration estimates that California has lost more than $20 million in tax revenue over the last two years and determined that more than 2,500 sales have used this tax-evasion practice.
In response to the growing use of the exploit, State Sen. Jerry McNerney (D-Pleasanton), Chair of the Senate Revenue and Taxation Committee, introduced Senate Bill 1406, which would close the loophole by expanding how the state determines a “company’s” residency. California Gov. Gavin Newsom signed the law into law on Sept. 30.
Specifically, if the state determines that at least one “shareholder, partner, member, or beneficial owner” is a California resident, the shell company will be considered a California business.
In addition, the state will consider an LLC a shell company if it lacks a specific business activity or purpose, does not maintain a physical location outside California, does not employ anyone or provide those people with a W-2, or does not file federal tax returns or fails to file a required state tax return in a state other than California.
The new law also allows the California Department of Tax and Fee Administration to hold individuals behind these shell companies liable for unpaid taxes and penalties.
“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. Closing the Montana Loophole will help restore some fairness to our sales tax system by ensuring that everyone pays what they owe,” McNerney said in a statement. “SB 1406 also enables the state to recover up to $20 million in lost revenue each to pay for road repairs and other essential services.”
Noe Padilla is a Northern California Reporter for USA Today. Contact him at npadilla@usatodayco.com, follow him on X @1NoePadilla or on Bluesky @noepadilla.bsky.social. Sign up for the TODAY Californian newsletter or follow us on Facebook at TODAY Californian.
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