California Closes “Montana” Loophole That Has Cost It $20 Million in Sales Taxes

California has closed a loophole that cost the state over $20 million in tax revenue.

The California Legislature passed Senate Bill 1406, signed into law by Gov. Gavin Newsom on September 30, targeting wealthy residents who avoided paying sales taxes on luxury vehicles. This structural reform aims to prevent tax evasion through out-of-state shell companies, primarily those registered in Montana.

The new law broadens the definition of company residency to include ownership by California residents and other considerations, allowing the state to hold individuals behind shell companies liable for unpaid taxes and penalties. Over the past two years, more than 2,500 vehicle sales exploited this so-called Montana Loophole, according to the California Department of Tax and Fee Administration, which also estimates the state’s losses at over $20 million. State Senator Jerry McNerney emphasized that the reform restores fairness to California’s sales tax system and funds essential services like road repairs.

While the legislation marks a decisive step, the details of enforcement and ongoing monitoring remain to be clarified.

Montana businesses and policymakers may watch closely as this move could influence how other states address cross-border tax avoidance linked to Montana’s regulatory environment.

California cracks down on ‘Montana Loophole’ used by luxury car owners
By Noe Padilla, USA TODAY