A newly enacted California law will make it harder for residents who want to avoid paying taxes on their high-priced supercars and sports cars. Senate Bill 1406 authorizes the state to pursue residents who create phony shell companies designed to circumvent the state’s tax code.

The new law effectively closes the "Montana Loophole," a legal strategy owners across the country use to avoid paying taxes on cars, RVs, and aircraft. The state is attractive because it lacks a statewide sales tax on vehicle purchases.

Montana’s loose rules for forming a limited liability company allow out-of-state owners, like those from California, to buy and title vehicles in the state without living there. This allows owners to avoid paying thousands of dollars in taxes on their new vehicle purchase at home, and California is cracking down.

California’s new law expands the state’s definition of who is a resident for tax purposes. It now includes shell companies with at least one business member who is a California resident, and it also allows the state to impose tax liability on individual members.

The law also adds a list of criteria that could be used as evidence of a shell company attempting to evade taxes. A company that lacks business activity, fails to maintain a physical location outside California, fails to employ individuals receiving W-2s, or fails to file federal or out-of-state tax returns could run into trouble.

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

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