Since September 30, anyone who owns or runs an out-of-state shell company that bought a car for use in California can be billed personally for the unpaid use tax, plus interest and penalties. Governor Gavin Newsom signed Senate Bill 1406 by Sen. Jerry McNerney (D-Pleasanton) that day, and because the Legislature passed it as a tax levy, it took effect immediately as Chapter 1036, Statutes of 2026.
That one provision goes after the piece of the Montana plate scheme that made it pay. California could already presume that a car bought out of state and brought home within a year was bought for use here. What it often couldn’t do was collect. The Montana LLC that held title usually owned nothing but the car, and the car had no California registration to hang a bill on. SB 1406 lets the tax department skip the empty company and send the bill to the people behind it.
Three code sections, one new definition
The chaptered bill amends Sections 6247 and 6248 of the Revenue and Taxation Code and adds Section 6829.5. It passed the Senate 31-8 on May 19 and the Assembly 59-19 on August 26.
Section 6248 is the 12-month rule. A vehicle, boat or aircraft bought outside California and brought into the state within 12 months of purchase is presumed to be subject to use tax if a California resident bought it. The presumption is rebuttable; an owner can still show with documents that the vehicle was bought for use elsewhere. Under the old wording, an LLC or closely held corporation counted as a California resident only if Californians held 50 percent or more of it. SB 1406 extends that 50 percent test to partnerships, limited partnerships and limited liability partnerships, which the old wording didn’t cover.
Then it adds a new category. A “shell company” is deemed a California resident if any shareholder, partner, member or beneficial owner is a California resident. Any one of them is enough. A Californian with a sliver of the company, or a beneficial owner whose name never appears on the Montana paperwork, now pulls the whole entity under the presumption.
The statute defines a shell company as an entity “used for the purpose of evading the payment of taxes,” and lists four kinds of evidence the state can point to:
- it has no specific business activity or purpose;
- it has no physical location outside California;
- it doesn’t employ anyone who gets an IRS Form W-2;
- it doesn’t file federal tax returns, or skips a required state return in a state other than California.
That list reads like a description of a registration-only LLC: a registered agent’s mailing address, no staff, no business, one asset with a VIN. The Assembly analysis quotes a Bloomberg Tax investigation that found a Kalispell-based agent offering the service for as little as $1,049, with neither the buyer nor the car needing to be in Montana.
New Section 6829.5 makes any officer, manager, partner, beneficial owner or member of such a shell company personally liable for the unpaid tax, interest and penalties on a vehicle, boat or aircraft, “notwithstanding any provision in the Corporations Code,” the body of law that normally keeps an LLC’s debts off its members. The state has to show the company stored or used the vehicle in California within 12 months of buying it and never paid the tax. The California Department of Tax and Fee Administration (CDTFA) then has three years to issue a deficiency notice. That clock doesn’t start at purchase. It starts after the quarter in which the department “obtains actual knowledge, through its audit or compliance activities,” that the vehicle was used here.
Personal liability for a car buyer is new ground for California tax law
California’s use tax is old. The state adopted it in 1935, two years after the sales tax, to protect California merchants from out-of-state sellers whose customers could buy tax-free, according to the Assembly Revenue and Taxation Committee’s June 26 analysis of the bill. It has always been the buyer’s tax, owed at the same rate as sales tax, which for a vehicle is set by the address where it’s registered. The Montana arrangement attacks that last link: register at a Montana agent’s address and, on paper, there’s no California address at all.
The same analysis explains why California’s existing tools fell short. Section 6829 already lets the state chase responsible people personally when a business that collected sales tax shuts down or walks away. That logic fits a retailer that pocketed tax from customers. It doesn’t fit a Montana LLC that never sold anything. Committee staff wrote that putting personal liability on someone who buys a vehicle through an LLC to avoid use tax, but never collected tax in the ordinary course of business, “represents a novel tool for taxing authorities.” The presumption tells the state who owes the tax. Section 6829.5 gives it a person with a California address and a bank account to collect from.
What a $600,000 car costs to register in each state
The Attorney General’s office filed a 56-count criminal complaint in March against 14 people over an alleged scheme to avoid more than $1.8 million in tax on more than $20 million in luxury car purchases. According to the Assembly committee analysis, one text quoted in the complaint has a defendant telling his wife: “Paid 3k to own a 600k car for 5 years— lol in Cali that’s like 75k for 5 years.” Charges are allegations, and the defendants are presumed innocent. The arithmetic in the message can be checked, though.
Here is The Auto Wire’s math for a $600,000 car registered in California. At the 7.25 percent statewide base rate, sales or use tax comes to $43,500. Local district taxes, which cities and counties can add with voter approval, push that higher in many places. Then there’s the vehicle license fee, the part of a California registration bill most owners never look at closely. Under Revenue and Taxation Code Section 10752, it’s 0.65 percent of the vehicle’s value every year. Section 10753.2 sets that value on a fixed depreciation schedule: 100 percent of the purchase-price class in year one, then 90, 80, 70 and 60 percent, falling to 20 percent in the 10th year. On a $600,000 car, that schedule works out to about $3,900 in year one and roughly $15,600 over five years.
Add it up and the five-year bill is about $59,100 before local taxes and California’s flat registration fees. Once local rates are added, the “75k” in the text is a reasonable estimate.
Montana’s side of the ledger is set by Montana Code Section 61-3-321. A light vehicle four years old or newer pays a $217 annual registration fee. If its manufacturer’s suggested retail price is more than $150,000 and it’s 10 years old or less, Montana adds $825, for $1,042 a year. Montana already charges supercars a premium. It just doesn’t charge sales tax, and its fee doesn’t climb with the car’s value the way California’s does.
The joint March 6 release from CDTFA and the DMV made the point about recurring fees: sales tax is the bigger number in year one, but lost annual registration fees “add up quickly over the lifespan of the vehicle.” For the state, a Montana-plated car in Beverly Hills is a sales tax check it never got plus a license-fee check it won’t get any year after.
Nearly 300 dealer audits were already under way
The law lands on top of an enforcement push that was already under way. In the March release, CDTFA said it had identified close to 500 California dealers involved in more than 2,500 sales since 2023 to customers claiming to use the vehicle in Montana. The agency put the cost at more than $10 million a year in lost tax revenue. It had opened more than 400 investigations of buyers and nearly 300 dealer audits. The DMV reported 81 criminal investigations since June 2023, 601 fraudulently registered vehicles and $2.3 million recovered in registration fees and taxes.
CDTFA’s list of where those sales happened ran from Beverly Hills (416) and Costa Mesa (359) through Van Nuys, San Diego, Murrieta, Irvine, Santa Monica, Newport Beach and Mill Valley to Carlsbad (97). “CDTFA is working to close this loophole that erodes California’s revenue base,” Director Trista Gonzalez said in the release.
Two revenue figures are circulating, and they measure different things. The $10 million is CDTFA’s estimate for the car sales it flagged. The Assembly analysis cites CDTFA for a figure of approximately $20 million a year, and that number covers luxury vehicles, yachts, RVs and aircraft. McNerney’s office used the $20 million figure when the bill cleared the Legislature.
Dealers have their own exposure. CDTFA warned California dealers in December 2024 that they could be liable for the tax if they fail to keep proper shipping and delivery documents, and it says it is using detailed DMV sales reports to find stores that help buyers register out of state. When a dealer ships a car to Montana, the bill of lading is the paperwork that keeps the store out of trouble, and in the case the Attorney General filed, prosecutors say the bills of lading were false. California isn’t the first state to go after a dealer over this: Minnesota pursued a Twin Cities dealer group over Montana LLC sales this summer.
The law isn’t limited to Montana, cars or exotics
Nothing in SB 1406 mentions Montana. The shell-company test applies to an entity formed in any state, and the DMV’s March release named Alaska, Delaware, New Hampshire and Oregon alongside Montana as places it has seen fraudulent registrations. The personal-liability section covers vehicles, vessels and aircraft. A motorhome, a sport-fishing boat or a light plane held by a no-sales-tax LLC is covered the same way as a Lamborghini.
Business groups pushed back on how far the liability reaches. The Capitol Business Alliance, which opposed the bill unless it was amended, wrote that “Passive owners, minority members, family participants, and beneficial owners should not face personal liability unless they actually controlled, authorized, participated in, or knowingly benefited from the transaction at issue.” The group also objected that facts like having no W-2 employees or no out-of-state office could be read as evidence of evasion. The bill was not amended after the April 23 version the Assembly analyzed.
The objection has some weight. Plenty of legitimate family LLCs that hold a collector car or a vacation boat have no employees and no office. The statute’s guardrails sit elsewhere: the entity has to be one “used for the purpose of evading” tax, the vehicle has to have been used or stored in California within its first 12 months, and the tax has to be unpaid. A family LLC that paid California use tax when it brought the car home has nothing to worry about. A minority member of an LLC that didn’t pay may find the liability provision doesn’t care how passive they were.
Open questions for owners of Montana-plated cars in California
The chaptered text doesn’t say whether the personal-liability section reaches purchases made before September 30. That question matters most to owners of cars bought since 2023, the period CDTFA’s investigations cover.
The three-year deadline runs from when CDTFA learns of the in-state use, not from the purchase date. A buyer who has been driving Montana-plated for several years without hearing from anyone gets no help from the calendar under this section. The DMV’s residency rule in Vehicle Code Section 516 is broad too. Voter registration, a California driver’s license, a homeowner’s property tax exemption or kids in a local school all count as evidence that the person behind the LLC lives here.
DMV Director Steve Gordon’s advice in March was blunt: “We encourage all Californians to do the right thing and register their vehicle here if they are operating it in California.” For an owner sitting on a Montana plate, the cost of taking that advice is the tax that should have been paid at purchase. The cost of ignoring it can now include a personal tax bill with interest and penalties attached. CDTFA’s March release says buyers who fraudulently claim out-of-state use face penalties that include 50 percent of the tax on the purchase price.
Should a passive member of a shell company be personally liable for a car tax bill the company never paid, or should California only go after the people who set up the deal?