‘The Big Money Show’ examines blue state tax policies as the wealthy flock to low-tax states.
As California faces an exodus of billionaires, government officials continue to target the wealthy, cracking down on individuals who register luxury vehicles out of state to avoid California taxes and registration fees.
This practice is known as the ‘Montana Loophole’ and 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 if the vehicles are primarily used in another state, according to the California Department of Taxation and Expenses Administration (CDTFA).
On March 6, the CDTFA and the DMV announced that they had opened more than 400 investigations into luxury vehicle buyers and initiated nearly 300 audits of dealerships in an effort to recover millions in lost revenue.
California AG Rob Bonta has announced charges against more than a dozen residents involved in alleged tax evasion involving the purchase of luxury cars registered out of state. (Vivien Killilea/Getty Images for Athletes vs. Cancer/Getty Images)
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The state agency estimates that since 2023, about 2,500 sales at nearly 500 California dealers to customers claiming to use the vehicle in Montana have cost the state more than $10 million annually in lost revenue.
Also, California Attorney General Rob Bonta’s office announced accusations 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, were 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 is eroding California’s revenue base,” Trista Gonzalez, director of the California Department of Tax and Fee Administration, said in a news release. “Our department identifies questionable transactions through state partnerships to protect the integrity of California’s tax system while ensuring its security tax is paid to support our schools, roads, public safety and essential services that all Californians depend on.”
The Capital of California, building on National Urban League California Legislative Advocacy Day on March 13, 2024, in Sacramento, California. (Arturo Holmes/Getty Images for National Urban League/Getty Images)
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Under state law, residents owe California sales tax on vehicles that are not used for the first time and are kept out of state for at least 12 months, the CDTFA said. Those who attempt to avoid these taxes may face significant fines, including up to 50% of the tax owed.
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 maintain proper shipping and delivery documents or if they did not actually ship the vehicle out of state.
“We’re talking about very high retail prices for these vehicles. So uncovering even a handful of them has a big, big impact on our revenues for our state that provides essential services to Californians,” CDTFA’s Shannon Robinson told the LA Times in a report published on Friday.
The Ferrari Testarossa 849 (Ferrari)
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The tax enforcement comes as California’s wealthiest residents 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.
