Newsom Signs McNerney’s Bill to Close ‘Montana Tax Loophole’ that Costs CA Millions

Gov. Gavin Newsom signed Sen. Jerry McNerney’s SB 1406, closing the so-called “Montana Loophole,” which costs California approximately $20 million a year in lost tax revenue.

SB 1406 cracks down on tax scams in which wealthy Californians create phony shell companies to buy luxury vehicles in Montana and other states to avoid paying California sales taxes and vehicle license fees.

“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,” said Sen. McNerney, D-Pleasanton, chair of the Senate Revenue and Taxation Committee. “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.”

Gov. Newsom signed SB 1406 on Wednesday evening. It took effect immediately.

Under the Montana Loophole, California tax evaders create phony shell companies to purchase luxury vehicles 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.

Under existing California law, vehicles purchased in another state, such as Montana, must remain in that state 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 set up phony shell companies to purchase and title vehicles in Montana, even when they are primarily used in other states.

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

In addition, SB 1406 adds 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.
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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.