California residents for years have set up “shell corporations,” or companies with no or few business operations, in Montana in order to buy luxury cars or recreational vehicles without paying California sales taxes and vehicle license fees, according to the Office of California Attorney General Rob Bonta. On Friday, March 20, 2026, State Sen. Jerry McNerney, D-Pleasanton, introduced a bill that attempts to close this tax-evasion loophole.
A California lawmaker is attempting to reclaim millions in tax revenue through a bill introduced that targets a tax-evasion scheme involving high-end luxury car purchases.
California residents for years have set up “shell corporations,” or companies with few or no business operations, in Montana to purchase luxury cars or recreational vehicles without paying California sales taxes and vehicle license fees, according to California Attorney General Rob Bonta’s office.
The California Department of Tax and Fee Administration estimates that since 2023, about 2,500 sales tied to this tax-evasion scheme have occurred, resulting in more than $10 million a year in lost tax revenue. Early last month, Bonta’s office charged 14 people for their suspected roles in failing to report more than $20 million in luxury vehicle purchases, which would have required about $1.8 million in California taxes.
The scheme is known as the “Montana Loophole.”State Sen. Jerry McNerney, D-Pleasanton, introduced Senate Bill 1406, which aims to close the loophole.
The bill further defines shell companies and states that any shell corporation with at least one California resident as a “shareholder, partner, member, or beneficial owner” is subject to California tax law.
Under existing law, California has jurisdiction over any closely held company or limited liability company in which California residents have 50% or more of shares or membership interests. Under the new bill, the language would expand to include any “partnership, limited partnership or limited liability partnership” where half or more of the interests are held by partners who are California residents.
The bill would hold anyone involved with the shell company liable for unpaid taxes on vehicle, vessel or aircraft purchases, along with any interest or penalties associated with them.
The measure also creates a presumption that vehicles, vessels or aircraft brought into California within 12 months of purchase were bought for use in the state and are subject to taxation. The bill includes exemptions for vehicles, vessels or aircraft brought into California temporarily for repair or warranty work.
The legislation would require a two-thirds majority approval in both the state Assembly and Senate because it would change a state statute that ultimately results in a higher tax. If passed, the bill would take effect immediately as a tax levy, or a legal seizure of property to satisfy a debt.
“The Montana Loophole is widening, with increasing numbers of tax evaders creating bogus shell companies so they can avoid paying sales taxes on Ferraris, Porsches and pricey RVs, costing California tens of millions in revenue,” McNerney said in a statement. “SB 1406 will close the Montana Loophole for good and restore much-needed state revenues to fill potholes and make other essential road repairs.”
The bill was read with amendments on Monday and was sent back to the Senate Rules Committee to be assigned, like to the Committee on Revenue and Taxation in the days ahead.
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Madison Smalstig covers transportation for The Sacramento Bee. Before joining The Bee, she reported on breaking news, focusing on crime and public safety, in the North Bay for three years. Smalstig is a born and raised Hoosier and earned degrees in journalism and Spanish at Indiana University.