For years, a certain type of car has been a fixture outside the valet stands of Los Angeles and the tech campuses of San Francisco: a Ferrari, a Lamborghini or a McLaren wearing a Montana licence plate, thousands of miles from Big Sky Country. That mismatch was not a coincidence. It was a tax strategy, and California has moved to shut it down.
What the Montana Loophole Actually Was
The mechanics were simple enough. A California resident would form a limited liability company in Montana, register the car to that company, and keep the vehicle in California. Because Montana does not levy sales tax on vehicle purchases and does not require owners to smog or inspect their cars, the arrangement sidestepped thousands of dollars in California taxes and a layer of regulatory hassle.
The state’s own rules already caught individuals who brought vehicles, vessels or aircraft into California, regardless of where they were registered. Businesses, however, were assessed differently. If more than half of a company was held outside California, a vehicle could remain registered to that out-of-state business without triggering California use tax. Only companies and LLCs were subject to that “California-ness” test, which left a gap wide enough to drive a supercar through.
The New Law Signed by Governor Newsom
Governor Gavin Newsom signed the legislation, titled “Sales and Use Tax Law: vehicles: shell companies,” on Wednesday 30 September. The bill number is disputed in the reporting: Road & Track attributes it to SB 1046, while The Drive reports it as SB 1406. It was introduced by state senator Jerry McNerney, a Democrat from Pleasanton who chairs the Senate Revenue and Taxation Committee.
The bill (reported as SB 1046 by Road & Track and SB 1406 by The Drive) rewrites who counts as a California resident. Shell companies owned by state residents are now folded into that definition, and the residency test has been extended to partnerships, limited partnerships and limited liability partnerships. The old 50 per cent ownership threshold is gone entirely, replaced by a far stricter standard.
McNerney did not mince words about the target. “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,” he said in a statement. “Closing the Montana Loophole will help restore some fairness to our sales tax system by ensuring that everyone pays what they owe.”
Any Shareholder, Partner or Beneficial Owner
The practical shift is stark. Under the new rules, if even one shareholder, partner, member or beneficial owner of the business is a California resident, the entire entity is treated as a California resident. Assets held in the state then become subject to California taxation.
That single-member trigger is what gives the law its teeth. Previously, a structure could be engineered so that a majority of the business sat outside California, preserving the exemption. Now the threshold is effectively one person, and the California Department of Tax and Fee Administration can impose tax liability on vehicles registered through the entity.
Personal Liability and Criminal Risk
The law does not stop at the company. Any officer, manager, partner, beneficial owner or member of a shell company can be held personally liable for unpaid taxes, interest and penalties. According to the bill text, non-payment may constitute a crime.
For owners who assumed the corporate veil offered cover, that is a meaningful escalation. The exposure is no longer confined to a dormant LLC with no assets to speak of. It reaches the individuals behind it.
The New Shell Company Checklist
California tax officials will assess whether a company is genuinely operating, or simply a registration device, against five criteria. A business that lacks a specific business activity or purpose raises a flag. So does a failure to maintain a physical location outside California, a failure to employ people and provide them with W-2 wage and tax statements, a failure to file federal tax returns, and a failure to file a required state tax return in a state other than California.
Meet enough of those tests and the entity looks less like a business and more like a mailbox. The checklist gives enforcers a structured way to make that argument.
The Money at Stake: $20 Million a Year
This is not a niche problem. The California Department of Tax and Fee Administration estimates that residents used the loophole in at least 2,500 vehicle sales since 2023, costing the state roughly $20 million (about £15.8 million) in tax revenue annually. In his statement, McNerney said the new law enables California to recover up to that same $20 million each year for road repairs and other essential services.
The sums involved sit comfortably alongside the values of the cars themselves. When a single transaction can reach seven figures, the sales tax on a deal of that scale is not loose change. Multiply it across thousands of vehicles and the revenue gap becomes structural.
Enforcement Already Underway
California has not waited for the new law to start chasing cases. Earlier this year, state attorney general Rob Bonta charged 14 Bay Area residents over $20 million in unreported luxury vehicle sales. Among the cars caught wearing Montana plates were a McLaren Elva and a Ferrari F12 TdF.
Separately, the California DMV has launched more than 80 investigations into illegally registered vehicles since 2023, clawing back around $2.3 million (about £1.8 million) in owed taxes. The pattern is clear: investigators know what to look for.
What Happens Next for Owners and Would-Be Buyers
For anyone with a vehicle currently registered through an out-of-state entity, the sensible first step is to establish whether that entity now fails the residency test. If a single member is a California resident, the structure is exposed, and the assets held in the state follow.
Would-be buyers considering the same manoeuvre should note that the arithmetic has changed. Personal liability now travels with the individuals involved rather than stopping at the company. The era of the Montana-plated supercar in California traffic is unlikely to end overnight, but the legal gap that sustained it has narrowed considerably.
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