“Trevor” was surprised when a California state investigator and two sheriff’s deputies rang his doorbell. They were armed with a search warrant authorizing them to search his garage and to seize his cell phone. The garage search located exactly what they knew would be there — a high-dollar sports car with Montana license plates. The investigator explained that Trevor was in violation of the California law that required him to register the car in California, and to pay a use tax for that privilege. He should expect substantial penalties and criminal charges to follow. It was also suggested that Trevor find […]
“Trevor” was surprised when a California state investigator and two sheriff’s deputies rang his doorbell. They were armed with a search warrant authorizing them to search his garage and to seize his cell phone. The garage search located exactly what they knew would be there — a high-dollar sports car with Montana license plates.
The investigator explained that Trevor was in violation of the California law that required him to register the car in California, and to pay a use tax for that privilege. He should expect substantial penalties and criminal charges to follow. It was also suggested that Trevor find a good criminal-defense lawyer.
Dodging the taxman
High-end cars sporting Montana plates are a common sight in California. Go to any Cars & Coffee and you’ll spot them. These are not Big Sky Country residents spending their vacations in California, but rather California residents trying to avoid one of the highest sales tax rates in the country. The state sales tax is 7.25%, but local add-ons often take the rate over 10%. The overall statewide tax averages 8.85%. Multiply that by the price of the car and add in the annual license fee (another 0.65% of its value), and it quickly becomes serious money.
“Legal Files” has addressed this many times before, but having your car owned by a Montana LLC has become a common dodge around these taxes.
Under Montana law, a business entity formed in Montana can title and register vehicles it owns in Montana no matter where the vehicles are located. Since an LLC is generally ignored for income-tax purposes, it is the entity of choice. Forming a Montana LLC is as simple as forming one in any other state. The only difference is that you need to hire someone in Montana to serve as its registered agent; however, there are numerous lawyers and companies that are happy to do that for a modest fee.
Once you have a Montana LLC, you make it the owner of your car. It can then get a Montana title, registration and license plates without any need for the car to ever turn a wheel on Montana soil. Montana does not charge sales or use taxes, and registration fees are pretty minimal, in the $300 to $1,000 range, depending upon the age of the car. Even factoring in the cost of forming the LLC, the total outlay might be between $1,500 to $3,000. Compared to paying California sales tax (or that of other high-tax states), this represents a pretty dramatic savings — compounded for those who have multiple cars.
Not so fast
Many collector car owners routinely use Montana LLCs in this manner to own their cars sales-tax-free. They slap Montana plates on them and drive them locally without much concern. Unfortunately, this is too good to be true.
Most all states require residents to register their cars immediately upon bringing them into the state. California is no exception. It requires residents to register their cars in California — and pay use tax, which is levied at the same rate as the sales tax — as soon as they are brought into California. To avoid any arguments, California law also provides that an LLC formed in another state but owned at least 50% by California residents is treated as a California resident for vehicle-registration purposes.
There is only one limited exception available: A foreign-state-titled car can be brought into California for repair or restoration without triggering the registration requirement. However, to meet the exception, the car must not be driven in California. It must be trucked in and out of the state via common carrier and it cannot stay in California for longer than 30 days. If the work takes longer, it must be shipped out of state, then brought back in to reset the 30-day clock.
Let’s put this in simple terms: If you live in California, there is simply no legitimate way for you to title and register your car in Montana and drive it in California. You can title it in Montana and drive it in other states, but once you bring it into California, you get hooked.
Devious discovery
Trevor thought he was flying under the radar. He didn’t take his car to any Cars & Coffees and he didn’t get pulled over for speeding, so he was surprised to get picked up in the investigation. It appears that his car came to light when the investigator visited a repair shop and discovered a number of high-end cars bearing Montana license plates there for service. That’s pretty sneaky!
Now, Trevor faces some major expenses to legitimize his car. Not only will he owe the unpaid tax, but also the unpaid license fees for every year since he bought it, plus penalties for non-payment, and interest. There is also clear potential for criminal charges. Although jail time is possible, this appears to be an isolated incident, so his greatest exposure probably lies with significant fines for willful violation of the law.
Why the cell phone?
It might seem odd that Trevor’s cell phone was seized — but consider how much evidence could be found on it. It’s an easy matter for the investigator to search through Montana DMV records and locate all the cars that have been titled in the name of any given LLC. Once other cars have been identified, it then becomes an issue of proving that they were driven in California. Many of us take pictures of our cars with our phones. The metadata that shows when and where the photo was taken could serve as the requisite proof.
We also keep emails and texts on our cell phones, possibly including communications with whoever assisted us in establishing the Montana LLC. In short, there could well be a lot of evidence there.
Big trouble?
It’s still quite early to hazard a guess, but many people are going to be wondering whether this is an isolated incident or the sign of much more to come.
First off, Trevor is not alone at the moment. A number of California residents are currently under investigation for the same violations. Reportedly, all of them are being investigated by the same state investigator, who is said to have a strong personal interest in combating Montana-licensed cars. It may just be him, or this may be the beginning of a tidal wave of enforcement.
There is also some speculation that the investigation is targeting individual car owners hoping to get evidence to go after the real targets — dealers who have been skirting the law. None have been charged as of yet, but there are rumors that some have been helping customers evade the licensing laws.
California has a very clear sales-tax obligation for dealers. If a dealer sells a car to a buyer, it is required to charge and collect a sales tax from the buyer and remit the money to the state. The sole exception for out-of-state sales requires the car to be delivered to a common-carrier transport company that takes the car out of California. That’s it; the law is quite strict. If the buyer drives the car off the lot, even just to deliver it to a transport company, sales tax must be charged. Even if the buyer is a legitimate resident of another state, they can’t take the car and drive it to their home state.
The dealer must have a copy of the bill of lading to document that the car was delivered to the transport company. Without the bill of lading, the dealer owes the sales tax to the state, whether they collected it from the buyer or not. “Legal Files” has heard rumors that some California dealers help their customers skirt the law with transport companies that are willing to provide a seemingly proper bill of lading in exchange for a fee. The transport company doesn’t take the car anywhere and the buyer picks it up from the dealer. However, on paper, it looks as though the transport company took the car out of state, and no sales tax appears to be owed.
It is doubtful that many dealers engage in such fraudulent conduct, but it wouldn’t take many of them to create some big headlines. ♦
John Draneas is an attorney in Oregon and has been SCM’s “Legal Files” columnist since 2003. His recently published book The Best of Legal Files can be purchased on our website. John can be contacted at john@draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.
2 responses to “California Cracks Down on Montana LLCs”
My father ran into the same problem when he arrived in California waters in the 1990’s. He was hanging/living aboard in San Diego and once a month he’d drop down into Mexico for a week, then return to his anchorage.
Living in WA we see this all the time with car purchased and having Oregon plates to avoid WA sales tax. Buy a car in Oregon pay no sales tax and put a PO box in the state for mail and drive it into WA. This too is seeing a thing of the past. Death and Taxes just saying.