Sacramento, CA — State officials have been increasing efforts to investigate those using out-of-state loopholes when registering vehicles, to avoid paying California taxes.
It is often called the “Montana Loophole,” where people create limited liability companies (LLCs) in sales tax-free states to avoid paying both the taxes and higher registration fees.
The California Department of Tax and Fee Administration, in partnership with the DMV, is currently examining all sales made to Montana purchasers, not just those involving LLCs. CDTFA 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 sales, many involving luxury and exotic cars, cost the state over $10 million a year in lost tax revenue.
“CDFTA is working to close this loophole that erodes California’s revenue base, says CDTFA Director Trista Gonzalez. “Our department is identifying questionable transactions through state partnerships to protect the integrity of California’s tax system while ensuring the tax is paid to support our schools, roads, public safety, and essential services that all Californians depend on.”
CDFTA has opened more than 400 investigations into high-end automobile purchasers and begun nearly 300 audits of dealers related to vehicle sales to no-tax states.
DMV Director Steve Gordon adds, “We encourage all Californians to do the right thing and register their vehicle here if they are operating it in California.
The DMV has pursued 81 criminal investigations dating back to June 2023, identifying 601 fraudulently registered vehicles and recovered $2.3 million in registration and taxes for the state. Violators can face various charges.
DMV investigators report that they are continuing to pursue those who are evading the law by filing criminal charges, assessing penalties, and collecting past-due registration fees.
Under state law, CDFTA reports that residents owe California sales tax on vehicles unless they are kept out of the state for at least 12 months. Dealers are obligated to keep detailed records to make sure vehicles sold to buyers in another state are delivered to that state.
California also started sending warning letters about a year ago to dealers to discourage the scheme and explain the penalties.
