- California’s new shell-company tax law took effect immediately after Gov. Newsom signed it.
- Officials can pursue individuals for unpaid taxes, interest, and penalties.
- Earlier charges involved a McLaren Elva, Porsche 918 Spyder, and Ferrari F12TDF.
Buying a supercar can involve plenty of creative accounting, but California is making one popular approach harder to pull off. Governor Gavin Newsom has signed a law targeting residents who use out-of-state shell companies to avoid taxes on their cars. For anyone relying on a Montana-based LLC to keep the tax collector at arm’s length, the company name may provide considerably less cover now.
SB 1406, authored by Senator Jerry McNerney, was signed September 30 and took effect immediately. McNerney’s office says the so-called Montana loophole costs California approximately $20 million annually. The new law gives officials additional tools to collect those unpaid taxes from the people behind the paperwork. Let’s break down what those tools are and how they work for the government.
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For years, wealthy buyers have exploited the lack of sales tax in Montana. A California resident could establish an LLC in Montana, put the vehicle in the company’s name, and register it in Big Sky country while driving it in the Golden State. California already had a law on the books that required dealers to keep records of sales to out-of-state buyers. That same legislation made a vehicle purchased out of state taxable if it entered the state within 12 months from the date of purchase. This new law goes far beyond that.
Under the new law, a shell company is considered a California resident for the relevant vehicle use-tax rules if any shareholder, partner, member, or beneficial owner lives in California. Officials can also hold a shell company’s officers, managers, partners, beneficial owners, and members personally liable for unpaid taxes, interest, and penalties.
That said, the government will still need to prove that the company used, stored, or consumed the vehicle in California within 12 months after the purchase and establish that it didn’t pay the tax. The law identifies potential evidence of a shell company, including no specific business activity, no physical location outside California, no employees receiving W-2 forms, and missing federal or required out-of-state tax returns. Those are indicators of tax evasion according to California.
The Crackdown Was Already Underway
California was pursuing these arrangements before the new law arrived. In March, Attorney General Rob Bonta announced charges against 14 people accused of concealing more than $20 million in luxury vehicle purchases and avoiding over $1.8 million in taxes.
The cars included a $1.8 million McLaren Elva, a $1.5 million Porsche 918 Spyder, and a $1.26 million Ferrari F12TDF. Investigators alleged that documents falsely portrayed the cars as destined for use outside California, although they remained in the state. It seems that now, far more supercar collectors in Cali will need to reconsider their tax calculations.