McNerney Announces Bill to Close ‘Montana Tax Loophole’ that Costs CA Millions Each Year

SACRAMENTO – State Sen. Jerry McNerney, D-Pleasanton, today announced new legislation – SB 1406 – that would close the so-called “Montana Loophole,” which costs California approximately $20 million a year in lost tax revenue.

SB 1406 would strengthen state law by barring tax scams in which California residents create an out-of-state shell company to buy exotic luxury cars or recreational vehicles in Montana to avoid paying California sales taxes and vehicle license fees.

The Montana Loophole was the subject of a recent sweeping criminal investigation in which 14 Californians allegedly engaged in an illegal tax evasion scheme to evade the reporting of over $20 million in luxury vehicle purchases and avoid paying over $1.8 million in California taxes.

“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, who is chair of the Senate Revenue and Taxation Committee. “SB 1406 will close the Montana Loophole for good and restore much-needed state revenues to fill potholes and make other essential road repairs.”

Under the Montana Loophole, California tax evaders create an out-of-state shell company and use it to purchase luxury cars and expensive RVs in Montana, which has no statewide sales tax or vehicle registration fees. 

Since 2023, the Montana Loophole has been utilized in at least 2,500 vehicle sales involving California residents, according to the California Department of Tax and Fee Administration. CDTFA estimates that the Montana Loophole costs California approximately $20 million in lost annual revenue – funds that could have been used to pay for road repairs and other essential programs.

Under existing California law, vehicles purchased in another state, such as Montana, must be shipped to that state and remain there for at least one year to legally avoid California use taxes. But California tax evaders circumvent that law with the help of Montana’s loose rules, which allow out-of-state owners to purchase and title vehicles in Montana on paper, even when they are primarily used in other states.

SB 1406 would close the Montana Loophole by expanding California’s definition of who is a resident under state use tax law to include a shell company when at least one member of the business is a California resident. SB 1406 would also authorize CDTFA to impose tax liability on the individual members of a shell company.

In addition, SB 1406 would add the following criteria as evidence that a business is a shell company, and thus potentially involved in an illegal tax evasion scheme regarding out-of-state vehicle purchases:

• Lacks a specific business activity or purpose,
• Fails to maintain a physical location outside California,
• Fails to employ people and provide those persons with W-2 wage and tax statements, and
• Fails to file federal tax returns or fails to file a required state tax return in a state other than California.

SB 1406 is expected to be heard in a Senate Committee in the weeks ahead.

Sen. Jerry McNerney is chair of the Senate Revenue and Taxation Committee, and his 5th Senate District includes all of San Joaquin County and Alameda County’s Tri-Valley.