California Law Ends 'Montana Loophole' for Luxury Vehicle Tax Evasion

Key points

• SB 1406 was signed into law by Gov. Gavin Newsom on Sept. 30, 2026, after being introduced by Sen. Jerry McNerney.
• The law eliminates the previous rule that exempted businesses from California sales tax if more than half of their operations were outside the state.
• Under the new rules, an LLC, partnership, or other entity is considered a California resident if any shareholder, partner, or beneficial owner lives in California.
• The legislation defines a 'shell company' as an entity lacking a physical location, employees, or active business purpose outside California.
• Individuals behind shell companies are now personally liable for unpaid taxes, interest, and penalties, which may constitute a crime.
• The California Department of Tax and Fee Administration estimates the state lost over $20 million in tax revenue over the last two years from more than 2,500 transactions using this loophole.

Background

This move follows a broader trend of California targeting tax loopholes, including a recent 25% tax on private detention centers and efforts to close charitable property tax exemptions. It also aligns with federal actions, such as the Treasury's recent ruling targeting ETF tax loopholes, which aims to prevent wealthy investors from avoiding capital gains taxes.

How outlets are covering it

USA Today and The Drive both emphasize the personal liability aspect of the new law, noting that individuals behind shell companies can now be held responsible for unpaid taxes and penalties. The Drive highlights that the law expands the definition of a 'California business' to include partnerships and limited liability partnerships, not just LLCs. AutoNotion focuses on the financial impact, noting that the state expects to recover up to $20 million annually but that the total historical loss is likely higher. All sources agree that the loophole was primarily exploited by wealthy individuals to avoid sales tax on luxury vehicles like Ferraris and Lamborghinis.

Why it matters

The closure of the Montana Loophole ensures that California residents pay sales tax on luxury vehicles regardless of where they are registered, restoring fairness to the state's sales tax system. It also allows the state to recover lost revenue for road repairs and other essential services, while holding individuals accountable for tax evasion.

What to watch

The California Department of Tax and Fee Administration will likely begin enforcing the new law and pursuing back taxes, interest, and penalties from individuals and shell companies that used the loophole. The state may also face legal challenges from those who argue the new residency definition is overly broad.