CDTFA and DMV are Cracking Down on Auto Dealers Who Help Buyers Evade California Taxes

What you need to know: CDTFA is taking action against the use of the “Montana Loophole.” In partnership with the Department of Motor Vehicles (DMV), CDTFA is targeting high-end automobile dealers and their customers through investigations and audits. California loses more than $10 million a year due to this scheme.

SACRAMENTO — The California Department of Tax and Fee Administration (CDTFA) and Department of Motor Vehicles (DMV) are investigating auto dealers suspected of enabling customers to use the so-called “Montana Loophole” — a scheme where buyers create out-of-state limited liability companies (LLCs) to register their high-end automobiles to avoid paying California taxes and registration fees.

CDTFA and the DMV are examining all sales made to Montana purchasers, not just those involving LLCs. CDTFA has identified close to 500 California dealers involved in more than 2,500 sales since 2023 to customers claiming to use the vehicle in Montana. These sales, many of which involve luxury or exotic cars, cost the state more than $10 million a year in lost tax revenue.

“CDTFA is working to close this loophole that erodes California’s revenue base,” said California Department of Tax and Fee Administration 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.”

CDTFA has opened more than 400 investigations into high-end automobile purchasers and begun nearly 300 audits of dealers related to vehicle sales to no-tax states, including Montana.

“The partnership between DMV and CDTFA quickly produced results that will recover critical taxpayer dollars to the State,” said DMV Director Steve Gordon. “We encourage all Californians to do the right thing and register their vehicle here if they are operating it in California.”

The DMV has pursued 81 criminal investigations dating back to June 2023, identifying 601 fraudulently registered vehicles and recovering $2.3 million in registration and taxes for the state. DMV investigators are continuing to pursue those who are evading the law by filing criminal charges, assessing penalties and collecting past-due registration fees.

While sales tax is a larger amount in year one of a car sale, the lost annual vehicle registration fees add up quickly over the lifespan of the vehicle. DMV knows that much more revenue to the state has been lost over the past few years due to fraudulent registrations in Montana, along with Alaska, Delaware, New Hampshire, and Oregon, and is tirelessly working to recover that for California.

Under state law, residents owe California sales tax on vehicles that are not first used and kept out of state for at least 12 months. Dealers are obligated to keep detailed records to make sure vehicles sold to buyers in another state are delivered to that state.

In December 2024, CDTFA ramped up its efforts to discourage the use of this scheme by issuing a warning letter to California auto dealers, cautioning that they could be liable for taxes if they fail to keep proper shipping and delivery documents. This initial outreach urged dealers to discourage their customers from using out-of-state LLCs while informing them of their potential tax liabilities.

In addition to contacting dealers, CDTFA is using detailed vehicle sales reports from the DMV to identify and investigate dealerships that are assisting customers in falsely registering vehicles out of state.

The penalties for Californians fraudulently registering a car out of state are not insignificant. Buyers who use the Montana loophole and fraudulently claim their vehicles are being used outside California can face substantial financial penalties, including 50% of the tax on the purchase price.

The “Montana Loophole” refers to the practice of buying and registering vehicles — often expensive luxury cars and RVs — through a Montana-based limited liability company to avoid paying sales tax and higher registration fees. Because Montana has no statewide sales tax, it allows out-of-state owners to legally purchase and title vehicles there on paper, even when they are primarily used in other states.

For more information on how California’s Sales and Use Tax Law applies to the sale, lease, or use of a vehicle, see the Department’s Tax Guide for Motor Vehicle Dealers.

The California Department of Tax and Fee Administration (CDTFA) administers California's sales and use, fuel, tobacco, alcohol, and cannabis taxes, as well as other taxes and fees that fund specific state programs. CDTFA-administered programs accounted for more than $97.8 billion last fiscal year, supporting essential local services such as transportation, public safety and health, libraries, schools, social services, and natural resource management programs through the distribution of tax dollars going directly to local communities.