How to Avoid Sales Tax, Part II

A better alternative for Californians may be the use of a Montana business entity, because Montana would allow a legal, tax-free registration of the car

The March 2009 “Legal Files” regarding sales tax triggered two helpful responses from attorneys, which suggested the need for a follow-up on this subject of great interest to car collectors.

It’s not worth going to jail

Excellent advice came from Jon Ash, a Bend, Oregon, attorney with 37 years of experience in criminal law:

“I read your article with interest. It brought back memories of a federal investigation I was involved in which resulted in the indictment of my client and other upper-echelon employees of an RV company located here in Oregon. This particular dealer was billed as the largest RV dealer in the United States, promising no taxes if a purchase was made from their organization. The theory was similar to your article-buy an RV, license it in Oregon, and you were good to go. The sales people went so far as to let the buyers register the RVs at their or their family members’ addresses. The problems came when the RV owners took their vehicles back to their home states and their neighbors were offended by the tax dodge and turned them in. Several people were convicted of tax fraud and conspiracy and sentenced to jail time.”

Montana is better than you think

Another helpful counterpoint came from John Bennett, a Missoula, Montana, attorney with extensive experience licensing valuable collector cars:

“I read your article with interest, but would note that it contains an error in that, last October, California changed the ’90-day rule’ back to the same ‘one-year resident’ and ‘six-month non-resident’ rules as previously in effect.

“The ‘one-year resident’ rule requires a vehicle purchaser who is a California resident to take delivery of the vehicle outside of California and use (or use and store) the vehicle outside of California for the first twelve months following purchase before being able to register it in California without paying use tax.

“I would argue that a better alternative for Californians, and possibly others, may be the use of a Montana business entity to take title to a car, because Montana would allow a legal, tax-free registration of the car in Montana.

“Also, in the case of a California resident, the Montana entity creates a lower burden by means of the ‘six-month non-resident’ rule. If the vehicle is purchased by a non-resident of California (the California State Board of Equalization has acknowledged that a Montana business entity with no nexus to California is a ‘non resident’) and is used/stored outside of California up to six months during the first twelve-month period following delivery, then it can be registered, use-tax-free, in California after twelve months. This is better because the use of a Montana LLC allows the car to be legally registered in Montana and legally driven in California for up to six of the first twelve months following delivery.

“Oregon, as a state without a sales/use tax, is an excellent state to store the car, but Oregon doesn’t allow an Oregon ‘holding company’ to register/title a car in Oregon.

“Please also note that a vehicle, such as a collector car, can be registered in Montana for no more than $254 per year, and if the car is more than ten years old, can generally be permanently registered (one-time fee which registers the car until its ownership is transferred) for $126.

“As you’ve already probably guessed, my office has successfully assisted many clients to take advantage of Montana’s laws.”

Make up your minds

Alas, Bennett is correct about California law. The boat magazines carrying articles about how to skip tax by parking your boat in Ensenada for 90 days were still on the newsstands when the California legislature changed the law back to the old one-year rule. But the discussion in “Legal Files” is otherwise reliable. It’s just that you will have to drive more of Oregon’s beautiful roads during the twelve months in which you must keep your car out of California.

Three states’ laws to worry about

On a broader note, the comments from Ash and Bennett point out that, if you are going to skate this maze, there are potentially three states whose laws you have to deal with-the state that titles the car, the state where the car resides, and your home state. Think of these as three separate steps.

First step is you have to get the car titled and registered. As pointed out, Oregon is a helpful haven if the car resides in Oregon, but it won’t work well if the car doesn’t reside there. Montana is easier to work with in that regard. If you form a Montana business entity (say, a Montana LLC) to own the car, Montana will title and register the car no matter where it might be. It is relatively inexpensive to form a Montana LLC and, as Bennett points out, the Montana registration fees are quite reasonable. And, although Montana requires a physical VIN verification, you can get that from an appropriate officer in any state-the car does not have to go to Montana to be inspected.

Second, you have to park the car somewhere. If it’s in the same state where it is registered, there’s no problem. But if you want to store it elsewhere, you have to comply with that state’s laws. Most states have a relatively short window (often as little as 30 days) before the car is required to be registered in that state, which will trigger sales/use tax if the state has one. The clearest course is to title and register it in either Oregon, in your own name, or in Montana, using an LLC, and leave it in that state.

Third, you have to comply with your state’s law when you bring the car home. To avoid paying a use tax at that point, you will have to “season” the car by leaving it in the state where it is titled long enough to meet your state’s requirements. If you use Oregon as your host state and you live in California, that will mean leaving it in Oregon for twelve months. The Montana LLC relaxes that a bit by giving you the six-out-of-twelve-month option, which still requires a total of twelve months but allows you to drive it in California for up to six of those twelve months, although not consecutively. Note that California would apply the same six-out-of-twelve-month rule with an Oregon LLC, but Oregon would require that the LLC’s principal place of business be in Oregon, whereas Montana wouldn’t care. If you live in a state other than California, it will have similar rules, and you need to learn what they are.

Bennett is correct that Montana can be more attractive than Oregon in certain circumstances. In the end, however, the choice boils down to which state you want to leave the car parked in and, in the special case of California, whether the six-of-twelve rule makes a difference to you. And, Oregon treats RVs differently; for them, use a Montana LLC.

No perfect answer

There are some significant limitations to all of this. If your plan is to bring the car to your home state, using a haven state may avoid the use tax, but once you bring the car “home” you will have to start paying your state’s annual licensing fees, which can be as much as 2% of the car’s value each year. Simply stated, there is no legal way to keep the car registered in another state while you are regularly driving it in your home state.

And that brings us back to the point made by Jon Ash. Being caught cheating can have serious repercussions. If neighbors become jealous about a wealthy car collector avoiding vehicle taxes they pay every year, it’s not uncommon for them to make a phone call to the authorities. And going to jail is no fun, no matter how nice the cars you have parked at home are. Consequently, if you’re going to go this route, make sure you do it the right way.