California tax investigators review documents and surveillance footage for luxury car tax evasion.
California is intensifying its efforts to crack down on wealthy individuals exploiting the “Montana Loophole” to avoid paying sales tax on luxury vehicles. State authorities have initiated audits targeting both high-end car buyers and dealerships, aiming to recoup millions in lost revenue.
The “Montana Loophole” involves California residents registering luxury vehicles in Montana, which has no statewide sales tax and lower registration fees. This is often done through a Montana-based Limited Liability Company (LLC), even though the vehicles are primarily used in California, according to the California Department of Tax and Fee Administration (CDTFA).
On March 6, the CDTFA and the DMV announced they had opened over 400 investigations into high-end vehicle buyers and nearly 300 audits of dealers. 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, were shipped to or used outside California, and the defendants allegedly evaded more than $1.8 million in state taxes.
Under California law, residents owe sales tax on vehicles not used and kept out of state for at least 12 months. Those attempting to avoid these taxes could face penalties up to 50% of the tax due. In December 2024, the CDTFA warned California auto dealers they could be liable for taxes if they failed to maintain proper shipping documents or did not actually ship the vehicle out of state.
This tax enforcement effort comes as California faces a projected $18 billion deficit in 2026–2027 and as wealthy residents reportedly flee the state over concerns about a potential wealth tax.
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