New California law targets the "Montana loophole" used to dodge tax on luxury cars

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A white Ferrari sports car driving down a tree-lined street

New California law targets the "Montana loophole" used to dodge tax on luxury cars

The $20 million figure is the author's estimate; the state tax agency has separately cited losses of more than $10 million a year.

By Alberto Zamudio | The Southbound 105 | Oct. 16, 2026

A new California law aims to close what lawmakers call the "Montana loophole," a tactic in which wealthy buyers use out-of-state shell companies to buy luxury vehicles and avoid California sales and use tax.

What the loophole is

Montana has no statewide sales tax. Under California law, a vehicle bought in another state generally must stay out of California for at least a year to avoid California use tax. According to Sen. Jerry McNerney, D-Pleasanton, who wrote the bill, some buyers get around that by setting up shell companies to buy and title vehicles in Montana and then use them in 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 in a statement.

What SB 1406 does

Gov. Gavin Newsom signed Senate Bill 1406 on Sept. 30, 2026, according to McNerney's office. The bill's legislative summary says it would:

  • Treat a "shell company" as a California resident if any shareholder, partner, member or beneficial owner is a California resident, for purposes of a presumption that a vehicle, vessel or aircraft brought into the state within 12 months of purchase was bought for use here.
  • Hold any officer, manager, partner, beneficial owner or member of a shell company personally liable for unpaid tax, interest and penalties on the purchase. The summary notes that nonpayment may constitute a crime.
  • Define a shell company as a closely held entity used for the purpose of evading tax, with factors that can show an entity is one.

The state tax agency's description of the practice is similar. The California Department of Tax and Fee Administration says buyers who fraudulently claim a vehicle is used outside California can face penalties that include 50% of the tax on the purchase price.

How much money is involved

McNerney said the loophole costs California about $20 million a year and that SB 1406 "enables the state to recover up to $20 million in lost revenue each year" for road repairs and other services. That is the senator's estimate. A news release from the tax agency says the state loses more than $10 million a year from sales to customers claiming to use vehicles in Montana.

That release says the agency has identified close to 500 California dealers involved in more than 2,500 sales since 2023 to customers claiming to use the vehicle in Montana. The top city on its list was Beverly Hills, with 416 sales, followed by Costa Mesa, Van Nuys with 273, San Diego and Murrieta. Santa Monica was seventh, with 128.

The Department of Motor Vehicles says it has pursued 81 criminal investigations since June 2023, identified 601 fraudulently registered vehicles and recovered $2.3 million in registration fees and taxes.

Why it matters

Los Angeles County dealers show up prominently in the agency's list, and the new law gives tax officials another way to reach buyers who hide behind shell companies. McNerney says the change will "restore some fairness to our sales tax system." Whether it recovers the amounts lawmakers cite will depend on enforcement.

What's next

  • Enforcement: the tax agency and DMV have said they are continuing audits and investigations of dealers and buyers.
  • Effective date: check the bill text and the tax agency's guidance for when the new presumption applies.

Want more local news? Read more at The Southbound 105.

Cover photo: Handelsgeselschaft, CC BY-SA 4.0, via Wikimedia Commons.

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