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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Clear out junk files and repair common Windows errorsFree Scan →Scan for outdated or missing drivers - takes under a minuteDriver Scan →California is pursuing alleged vehicle-tax evasion tied to Montana LLC registrations through both enforcement and a newly signed law. SB 1406 was signed on September 30, 2026, and the bill author’s office says it took effect immediately. It expands how California treats certain shell companies under sales and use tax law; it does not make every Montana-registered vehicle or LLC illegal.
What the “Montana loophole” means
The phrase describes arrangements in which a California buyer forms or uses a Montana limited liability company (LLC) to buy, title and register a vehicle in Montana, while the vehicle is principally used in California. The aim may be to avoid California use tax or registration costs. California agencies characterize fraudulent versions of the arrangement as tax and registration evasion, but a Montana plate or LLC by itself does not establish wrongdoing.
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The key questions are the owner’s residency, where and how the vehicle is first used, its use during the first year, who actually owns it, and whether the claimed tax treatment is supported by records. An out-of-state registration is not, by itself, a categorical exemption for a California resident.
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California was investigating vehicle sales and registrations before the new law. In a March 6, 2026 announcement, the California Department of Tax and Fee Administration (CDTFA) said it and the Department of Motor Vehicles (DMV) were examining all sales to Montana purchasers, not only those involving LLCs. CDTFA identified close to 500 California dealers involved in more than 2,500 sales since 2023 to customers claiming Montana vehicle use. It also reported more than 400 purchaser investigations and nearly 300 dealer audits related to sales to states with no sales tax. CDTFA’s March 6 enforcement announcement describes these as agency enforcement figures, not final findings against every purchaser or dealer.
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In the same announcement, CDTFA reported that DMV had pursued 81 criminal investigations dating back to June 2023, identified 601 fraudulently registered vehicles and recovered $2.3 million in registration and taxes. Those figures describe investigations, identified vehicles and recoveries; they are not a count of criminal convictions.
Why published revenue estimates differ
CDTFA estimated more than $10 million in annual state revenue loss in its March 2026 announcement. In an October 2026 post-signing release, state Senator Jerry McNerney’s office reported a CDTFA estimate of approximately $20 million a year. The releases give different estimates; neither explains a change in methodology, so they should not be treated as directly comparable or averaged.
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- What You Will Receive: you will receive 2 pieces of car mileage and expense notebooks, each notebook contains plenty of pages, which are enough for your daily use and record keeping needs
- Size Information: small expense tracker notebooks measure approximately 12.7 x 20 cm/ 5 x 7.87 inches, the right size is suitable for you to carry around and put in your suitcase
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- Detailed Introduction: each page of car mileage and expense notebooks is designed with date, business use, odometer reading and total mileage for you to keep a detailed record of your car's mileage and expenses
- Practical gadgets: car mileage and expense notebooks are practical and useful for those drivers, which helps you record your car or truck's business use with year start and year end odometer readings
What SB 1406 changes
Governor Gavin Newsom’s September 30, 2026 legislative update lists SB 1406, concerning vehicles and shell companies under Sales and Use Tax Law, as signed. The Governor’s signing list establishes enactment. The bill author’s office says the measure took effect immediately and expands the law’s definition of a resident to include a shell company when at least one member is a California resident. It also says CDTFA may impose tax liability on individual members of a shell company. These details are summarized in Senator McNerney’s post-signing release.
The senator’s office lists evidence that may indicate a shell company:
- No specific business activity or purpose.
- No physical location outside California.
- No employees receiving W-2 wage and tax statements.
- Failure to file federal returns or required state returns outside California.
These are evidence factors in the sponsor’s summary, not a rule that any one factor automatically proves fraud or establishes an individual’s tax liability. The result for a particular owner depends on the facts and applicable law.
When California use tax may apply
CDTFA says California residents owe use tax on vehicles not first used and kept outside California for at least 12 months. The department warns that buyers who fraudulently claim out-of-state use can face financial penalties, including a penalty equal to 50% of the tax on the vehicle’s purchase price. That is an agency summary, not a determination of what a specific owner owes. The vehicle’s delivery, first functional use, location over time, and actual use can affect the analysis.
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- What You Will Receive: you will receive 2 pieces of car mileage and expense notebooks, each notebook contains plenty of pages, which are enough for your daily use and record keeping needs
- Size Information: small expense tracker notebooks measure approximately 12.7 x 20 cm/ 5 x 7.87 inches, the right size is suitable for you to carry around and put in your suitcase
- Quality Material: auto mileage tracker notebooks are made of quality paper, strong and reliable, not easy to break or deform, they are large enough to fill comfortably
- Detailed Introduction: each page of car mileage and expense notebooks is designed with date, business use, odometer reading and total mileage for you to keep a detailed record of your car's mileage and expenses
- Practical gadgets: car mileage and expense notebooks are practical and useful for those drivers, which helps you record your car or truck's business use with year start and year end odometer readings
California’s rules include specific exemptions and conditions. CDTFA’s vehicle exemption guidance describes, among other things:
- An interstate-commerce rule requiring first functional use outside California and continuous interstate or foreign commerce, rather than exclusive use in California.
- A 12-month test for vehicles first used outside California and brought into California within 12 months, subject to qualifying mileage and commerce conditions.
For the interstate-commerce exemption, CDTFA says supporting records should be retained for at least eight years. New owners generally need a CDTFA use-tax clearance certificate for DMV to complete registration without collecting use tax; the certificate does not eliminate tax that CDTFA later determines is due. Check the current CDTFA guidance and the owner’s records before relying on an exemption.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Registration is a separate question from tax
Tax treatment and vehicle registration are related but distinct issues. California DMV’s nonresident vehicle registration reciprocity manual says nonresident registration may be used during a home-state grace period, but California registration can become due if the owner becomes a California resident or the vehicle otherwise becomes subject to registration. A Montana plate alone does not settle either the tax or registration question.
What vehicle owners should do
- Establish the facts. Gather purchase and delivery documents, ownership records, evidence of where the vehicle was first functionally used, mileage and location records for the first 12 months, and records of its actual business or personal use.
- Check the specific tax rule. Compare those facts with CDTFA’s current vehicle exemption guidance; do not assume that an LLC, an out-of-state plate or a clearance certificate settles liability.
- Check registration separately. Review DMV’s current nonresident reciprocity guidance and determine whether California residency or the vehicle’s use makes California registration due.
- Respond carefully to an agency inquiry. Preserve relevant records and consult a California tax attorney or CPA experienced in vehicle use tax if the ownership structure, exemption or potential liability is disputed.
California DMV Director Steve Gordon said in the March 2026 enforcement announcement: “We encourage all Californians to do the right thing and register their vehicle here if they are operating it in California.” CDTFA Director Trista Gonzalez said: “CDTFA is working to close this loophole that erodes California’s revenue base.” In his post-signing release, McNerney said: “Closing the Montana Loophole will help restore some fairness to our sales tax system by ensuring that everyone pays what they owe.”
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