California cracks down on luxury car buyers evading taxes through 'Montana Loophole'

As California faces a billionaire exodus, state officials are continuing to target the wealthy, with a crackdown on individuals who register luxury vehicles out of state to avoid California taxes and registration fees.

Known as the "Montana Loophole," the practice involves California residents purchasing and registering luxury vehicles through a Montana-based limited liability company, LLC, because Montana has no statewide sales tax and has significantly lower registration fees than the Golden State.

Montana allows out-of-state owners to purchase and title vehicles there on paper, even when the vehicles are primarily used in another state, according to the California Department of Tax and Fee Administration (CDTFA).

On March 6, the CDTFA and the DMV announced they had opened more than 400 investigations into high-end vehicle buyers and begun nearly 300 audits of dealers in an attempt to recover millions in lost revenue.

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The state agency estimates that since 2023, about 2,500 sales across nearly 500 California dealerships to customers claiming to use the vehicle in Montana have cost the state more than $10 million annually in lost revenue.

California Attorney General Rob Bonta’s office also announced charges against 14 Bay Area individuals in an alleged tax evasion scheme involving more than $20 million worth of luxury vehicles registered out of state. According to Bonta’s office, none of the vehicles, including McLarens, Porsches and Ferraris, was shipped to or used outside California, and the defendants allegedly evaded more than $1.8 million in state taxes.

"CDTFA is working to close this loophole that erodes California’s revenue base," said California Department of Tax and Fee Administration Director Trista Gonzalez in a press release. "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."

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Under state law, residents owe California sales tax on vehicles that are not first used and kept out of state for at least 12 months, according to the CDTFA. Those who attempt to avoid these taxes can face significant penalties, including up to 50% of the tax due.

In December 2024, the state agency sent a warning letter to California auto dealers about the tax-evasion scheme, saying they could be held liable for taxes if they failed to keep proper shipping and delivery documents or if they did not actually ship the vehicle out of state.

"We’re talking about really large, hefty sales prices on these vehicles. So uncovering even a handful of them makes a large, large impact on our revenue for our state that provides vital services for Californians," Shannon Robinson of the CDTFA told the LA Times in a report published Friday.

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The tax enforcement comes as California's most wealthy are reportedly fleeing the state over concerns about a looming wealth tax that would impose a 5% tax on the net worth of residents with assets exceeding $1 billion.

California also faces a projected $18 billion deficit in 2026 and 2027, according to the Legislative Analyst’s Office.