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California is pursuing suspected vehicle use-tax evasion tied to Montana LLC registrations—and a new law broadens how the state can treat certain shell companies for sales-tax purposes. The crackdown does not make every Montana plate or LLC illegal: liability depends on facts such as residency, where and how the vehicle is used, ownership structure, and whether an exemption applies.
What California means by the “Montana loophole”
The phrase describes arrangements in which a California buyer forms or uses a Montana LLC to purchase, title, and register a vehicle in Montana, while the vehicle is principally used in California. The arrangement may be intended to avoid California use tax and registration costs. California agencies characterize fraudulent versions as evasion; an LLC or Montana registration by itself does not establish wrongdoing. CDTFA’s March 6, 2026 announcement describes the enforcement effort.
The central issue is not simply the state printed on the plate. California tax and registration obligations can turn on the owner’s residency, the vehicle’s first use and subsequent location, and whether the owner can document a specific exemption. DMV guidance also says that nonresident registration under a home-state grace period does not necessarily prevent California registration from becoming due if the owner becomes a California resident or the vehicle otherwise becomes subject to registration. See the California DMV reciprocity manual.
What California agencies say they are doing
In its March 6, 2026 release, the California Department of Tax and Fee Administration (CDTFA) said it and the Department of Motor Vehicles (DMV) were examining all sales made to Montana purchasers, not only transactions involving LLCs. CDTFA identified close to 500 California dealers involved in more than 2,500 sales since 2023 to customers claiming Montana vehicle use. It reported more than 400 purchaser investigations and nearly 300 dealer audits related to sales to no-tax states. These are agency-reported enforcement counts, not findings that every transaction was improper.
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The same release reported that DMV had pursued 81 criminal investigations dating back to June 2023, identified 601 fraudulently registered vehicles, and recovered $2.3 million in registration and taxes. Those figures describe investigations, vehicles identified, and recoveries—not final criminal convictions. DMV Director Steve Gordon said, “We encourage all Californians to do the right thing and register their vehicle here if they are operating it in California.” CDTFA Director Trista Gonzalez said, “CDTFA is working to close this loophole that erodes California’s revenue base.” Both statements appeared in the agency’s March announcement.
Why published revenue estimates differ
CDTFA estimated in March 2026 that the practice cost the state more than $10 million a year in revenue. After the law was signed, Senator Jerry McNerney’s office reported an estimate of approximately $20 million a year. The estimates come from different sources and dates; the available information does not explain a methodology that would establish that one replaces the other. McNerney, identified in the release as chair of the Senate Revenue and Taxation Committee, said, “Closing the Montana Loophole will help restore some fairness to our sales tax system by ensuring that everyone pays what they owe.” His statement and the later estimate are in the October 2026 post-signing announcement.
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What SB 1406 changes
Governor Gavin Newsom’s September 30, 2026 legislative update lists SB 1406, concerning vehicles and shell companies under Sales and Use Tax Law, as signed. The bill author’s office says it took effect immediately. Its summary says the measure expands California’s sales-tax-law definition of a resident to include a shell company when at least one member is a California resident, and authorizes CDTFA to impose tax liability on members. See the sponsor’s post-signing explanation.
Factors the sponsor identifies as shell-company evidence
The senator’s office lists these as evidence that may indicate a shell company:
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- No specific business activity or purpose.
- No physical location outside California.
- No employees receiving W-2 wage and tax statements.
- Failure to file federal returns or required state returns outside California.
These are evidence factors in the sponsor’s summary, not an automatic checklist under which one item alone proves fraud or an individual’s tax liability. The outcome for an entity or member depends on the law and the facts of the particular arrangement.
When California use tax or registration may apply
CDTFA’s March enforcement announcement says California residents owe tax on vehicles not first used and kept outside California for at least 12 months. It warns that buyers who fraudulently claim out-of-state use can face financial penalties, including 50% of the tax on the vehicle’s purchase price. This is an agency summary, not a determination of any individual owner’s liability. The applicable tax treatment depends on the purchase, delivery, use, residency, and other facts.
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California’s rules also provide specific exemptions. The CDTFA vehicle exemption FAQ describes an interstate-commerce rule that requires first functional use outside California and continuous interstate or foreign commerce, rather than exclusive use in California. It also describes a 12-month test for vehicles first used outside California and brought into the state within 12 months, subject to qualifying mileage and commerce conditions. The details matter; a Montana title alone does not establish that an exemption applies.
Records and registration clearance
CDTFA says records supporting the interstate-commerce exemption should be retained for at least eight years. Its FAQ also says new owners generally need a CDTFA use-tax clearance certificate for DMV to complete registration without collecting use tax. A clearance certificate does not relieve a person of tax later determined to be due. Check the current CDTFA FAQ for the relevant documentation and conditions.
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What owners should review
Because tax and registration conclusions are fact-specific, an owner should not assume that an out-of-state plate, an LLC, or a single indicator of limited business activity settles the question. Relevant issues include:
- Whether the owner is a California resident, and whether a California resident is a member of the LLC.
- Where the vehicle was first functionally used, where it was kept during its first 12 months, and how it was used.
- Whether the LLC has a genuine business purpose, an out-of-state location, employees, and required tax filings.
- Whether California registration is due under the applicable rules and any nonresident grace period.
- Whether the owner qualifies for a specific exemption and has records supporting it.
Anyone who has received an agency inquiry or needs a conclusion for a particular purchase should consult current CDTFA and DMV guidance and consider getting advice from a California tax attorney or CPA experienced in vehicle use tax.
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