Exotic Car Owners Are Losing Their Favorite Tax Dodge in California

The bill was introduced in the spring by state Senator Jerry McNerney. It was formally titled Sales and Use Tax Law: vehicles: shell companies, and it was meant to close a loophole that the Senator claimed cost California millions in revenues every year. Under the previous state law, California residents could set up a shell company in Montana. They could then register a car, truck, or RV in that state even though the car and driver lived in California.

With the passing of SB1406, California now defines a tax resident to include any shell company when at least one member is a California resident. It adds new criteria to flag a shell company as being involved in tax evasion, including that it lacks a business activity, fails to employ people, and fails to maintain a physical location outside of California.

Under the law, any company meeting those criteria is flagged as potentially involved in an illegal tax evasion scheme. The state can put the tax liability on the members of the shell company, not just on the corporate entity.

"The Montana Loophole is widening, with increasing numbers of tax evaders creating bogus shell companies so they can avoid paying sales taxes on Ferraris, Porsches and pricey RVs, costing California tens of millions in revenue," said Sen. McNerney. "SB 1406 will close the Montana Loophole for good and restore much-needed state revenues to fill potholes and make other essential road repairs."

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