California Closes Montana License Plate Loophole with New Tax Law

New Law Enacted

California State Bill 1406, titled "Sales and Use Tax Law: vehicles: shell companies," became law on September 30, 2026. This legislation aims to prevent California residents from using out-of-state shell companies to avoid paying sales and use tax on vehicles.

Previous Loophole Explained

Under prior California law, vehicles, vessels, or aircraft brought into the state by a resident were subject to sales and use tax. However, a loophole existed for businesses: if more than half of a business was located outside California, vehicles registered to that business could avoid California's use tax, even if operated in the state. This led to residents registering vehicles with shell companies, often in states like Montana, which do not charge sales tax on vehicle purchases.

Changes Introduced by SB 1406

The new law broadens the types of entities subject to the state's residency test for tax purposes, now including partnerships, limited partnerships, and limited liability partnerships, in addition to companies and limited liability companies. The most significant change is that if any shareholder, partner, member, or beneficial owner of a shell company is a California resident, the entire shell company is considered a resident of California for tax purposes. This eliminates the previous 50% out-of-state business ownership test.

Impact on Vehicle Owners

This change means that if a California resident is involved with a shell company that owns a vehicle in California, that vehicle will now be subject to California sales and use tax. The law directly addresses the practice of registering high-value vehicles, such as Lamborghinis and Bugattis, through out-of-state entities to bypass state taxes.