The California Department of Tax and Fee Administration (CDTFA) and Department of Motor Vehicles (DMV) announced on March 6 that they are investigating auto dealers suspected of enabling customers to use the “Montana Loophole” to avoid paying California taxes and fees.
The loophole refers to the practice of buying and registering vehicles—often expensive luxury automobiles—through a Montana-based LLC. Montana has no sales tax and allows out-of-state buyers to avoid paying sales tax and higher registration fees, even when they primarily use their vehicles in other states.
“CDTFA is working to close this loophole that erodes California’s revenue base,” said CDTFA Director Trista Gonzalez. “Our department is identifying questionable transactions through state partnerships to protect the integrity of California’s tax system while ensuring the tax is paid to support our schools, roads, public safety, and essential services that all Californians depend on.”
On the same day, California Attorney General Rob Bonta, working with the DMV and CDTFA, announced charges against 14 California residents allegedly involved in a scheme dating back to 2018 to avoid paying more than $1.8 million in taxes to the state from more than $20 million in luxury vehicle purchases.
The vehicles included a $1.8 million McLaren Elva, a $1.5 million Porsche 918 Spyder, and a $1.2 million Ferrari F12TDF, among others. The individuals were charged with conspiracy, filing false sales tax returns, failing to file tax returns, perjury, and money laundering.
“When bad actors abuse legal loopholes and submit fraudulent documents to evade their obligations, the California Department of Justice will not stand idly by,” Bonta said.
Under state law, California residents owe state sales tax on vehicles owned by out-of-state persons or entities, unless they are first used and kept out of state for at least 12 months, or a use tax exclusion is granted.
Vehicles furnished to California residents for regular use in California under Montana LLCs must be registered in California within 20 days of their first use, and are subject to annual state registration fees.
The defendants allegedly used false tax returns and false CDTFA-448 forms to claim certain vehicles were delivered outside California in order to evade state taxes and registration. Prosecutors allege that these cars were picked up, stored, and used in California.
Text messages obtained by authorities include defendant Mohammad Hawari telling defendant Andre Charles Wetzell, “We need to ship a 488 pista from San Mateo to Campbell but on the bill Of lading put it’s going to Montana” and “Is that doable lol.”
Another message by defendant Harminder Singh Dhaliwal told defendant Parham Karbassi regarding a DMV investigator: “Definitely move the cars. Or get them registered. This guy isn’t playing around.”
Rows of seized luxury cars are seen at the Central Investigation Bureau in Bangkok on Oct. 17, 2024. (Lillian Suwanrumpha/AFP via Getty Images)
CDTFA and the DMV said they are examining all sales made to Montana purchasers, not just those involving LLCs. The department said it has identified over 2,500 sales since 2023 involving California dealers where customers claimed to use the vehicle in Montana and that these sales cost the state more than $10 million a year in lost tax revenue.
DMV Director Steve Gordon said the DMV has launched over 80 investigations since 2023 and has recovered $2.3 million.
CDTFA said buyers who fraudulently claim their vehicles are being used outside of California can face penalties including a 50 percent levy on the purchase price of their vehicle.
Although Montana has become a popular location for this loophole, in part because of its convenience in setting up an LLC, the CDTFA said there have also been many false registrations in Alaska, Delaware, New Hampshire, and Oregon, other states that have no statewide sales tax.
