California is cracking down on Montana tax cheats.
For years, a tax strategy that allowed luxury-car owners to save tens of thousands of dollars by registering their vehicles through shell companies in the sales-tax-free state of Montana has finally been outlawed by the state of California.
The so-called Montana loophole was a tax evasion practice where California residents created shell companies (usually a Limited Liability Company, or LLC) in Montana to purchase and register luxury cars, supercars, or RVs. Montana has no statewide general sales tax or heavy vehicle license fees, unlike California.
If you buy a car in California, and you do it legally, the state sales tax rate starts with a 7.25% statewide base rate, which includes a 6% state tax and a 1.25% mandatory local rate. However, with local city, county, and special district taxes added, the total combined tax rate typically ranges from 7.75% to 10.75% tax.
As an example, a new Ferrari 12 Cilindri starts with a base MSRP of approximately $464,000 for the Coupe and around $512,394 for the Spider. But there are no stripper Ferraris. Once factory options and dealer configurations are added, the actual transaction price can clear $600,000 or more. If you bought that in California you’d pay almost $64,500 in state taxes.
So, many buyers would simply form a Montana LLC and use it to buy the high-dollar vehicle, putting Montana (“Big Sky Country”) license plates on it. Even though the car was driven and stored primarily in California, owners claimed it belonged to the out-of-state business to dodge California’s steep sales and use taxes.
As a result, the state was losing $20 million a year, according to California State Senator Jerry McNerney (D-Pleasanton), chair of the Senate Revenue and Taxation Committee. So in March, McNerney introduced SB 1406 to close the “Montana Loophole.” That bill was signed into law by Governor Gavin Newsom this week.
In addition to the Senate bill, California officials cracked down on the scheme through criminal charges and other legislative action. The new law expands California’s resident criteria for use tax purposes so that an LLC is treated as a California entity if at least one member is a California resident. The California Department of Tax and Fee Administration can now hold individual members of those shell companies directly liable for unpaid sales taxes, interest, and penalties. And shell companies with no real business purpose, no physical location outside California, no W-2 employees, or missing tax filings are heavily targeted using automated license plate readers (ALPRs) and data analytics.
Aston Martins.
“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. “Closing the Montana Loophole will help restore some fairness to our sales tax system by ensuring that everyone pays what they owe. SB 1406 also enables the state to recover up to $20 million in lost revenue each year to pay for road repairs and other essential services.”
Mark Vaughn grew up in a Ford family and spent many hours holding a trouble light over a straight-six miraculously fed by a single-barrel carburetor while his father cursed the Blue Oval, all its products and everyone who ever worked there. This was his introduction to objective automotive criticism. He started writing for City News Service in Los Angeles, then moved to Europe and became editor of a car magazine called, creatively, Auto. He decided Auto should cover Formula 1, sports prototypes and touring cars—no one stopped him! From there he interviewed with Autoweek at the 1989 Frankfurt motor show and has been with us ever since.
Source: www.autoweek.com
