Gavin Newsom closes ‘Montana-loophole’ as damning texts reveal what luxe car buyers saved on taxes

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California is cracking down on a tax strategy that allowed some luxury-car owners to save tens of thousands of dollars by registering their vehicles through shell companies in Montana.

A $600,000 Lamborghini owner bragged about saving $70,000 through the arrangement, but California has now moved to shut down the strategy as the state estimates it could recover $20 million a year.

The boast appeared in a criminal complaint filed by the California Department of Justice, with the buyer celebrating five years of Montana registration for just $3,000, according to The Los Angeles Times.

“70k saved — I can’t believe Montana registration lasts for 5 years — that’s crazy. Stupid California. Paid 3k to own a 600k car for 5 years — lol in Cali that’s like 75k for 5 years. Hella dumb.”

The strategy was built around Montana’s lack of a statewide sales tax on vehicle purchases and its permissive rules for forming LLCs. People living outside the state could create a Montana company, title an expensive vehicle through it and register the car there before bringing it home.

That escape hatch is now getting slammed shut.

Gov. Gavin Newsom signed Senate Bill 1406 into law Sept. 30 after it passed the Assembly 59-19 and Senate 31-8. The measure expands California’s rules for determining when a shell company is effectively a California resident for tax purposes.

The new standard could be particularly painful for owners who thought they had insulated themselves through an out-of-state company. If any shareholder, partner, member or beneficial owner of a shell company is a California resident, the company can be treated as a California resident under the new law.

And the liability does not necessarily stop at the company.

Officers, managers, partners, beneficial owners and members can be held personally liable for unpaid taxes, interest and penalties connected to purchases of vehicles, vessels or aircraft. Failure to pay may constitute a crime.

California officials estimate the Montana arrangement has been costing the state $20 million in tax revenue every year, giving Sacramento a sizable financial incentive to pursue the practice.

The law also lays out factors that can be used as evidence of a shell company, including little or no business activity, no physical location outside California, no W-2 employees and failure to file federal or out-of-state tax returns.

There are limits. The law does not target vehicles owned and operated outside California, or vehicles owned and operated outside the state during their first 12 months of ownership.

State Sen. Jerry McNerney, who introduced the legislation and chairs the Senate Revenue and Taxation Committee, said the measure targets wealthy owners who use shell companies to buy luxury vehicles in Montana and bring them back to California.

“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.”

McNerney said closing the loophole will help “restore some fairness to our sales tax system” while allowing California to recover up to $20 million annually for road repairs and other essential services.

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