10/06/2026
California just changed the rules around the so-called Montana loophole.
Gov. Gavin Newsom approved SB 1406 on September 30, 2026. The new law gives California more tools to pursue unpaid taxes when California residents use out-of-state shell companies to purchase, register, store, or use vehicles in California while avoiding California sales and use taxes or registration-related costs.
The state estimates the loophole costs California about $20 million each year in lost tax revenue.
SB 1406 changes the California-residency rules for this tax presumption. A shell company can now be treated as a California resident if any shareholder, partner, member, or beneficial owner is a California resident.
The law also allows personal liability for unpaid taxes, interest, and penalties in certain shell-company cases. The bill applies to vehicles, vessels, and aircraft.
Under SB 1406, evidence that an entity is a shell company used to evade tax can include when it:
- Has no specific business activity or legitimate purpose
- Has no physical location outside California
- Has no employees receiving W-2 wage statements
Does not file required federal or out-of-state tax returns
This does not mean every Montana-plated vehicle is automatically doing something wrong. The facts still matter, including ownership, use, storage, purchase timing, and whether the business is legitimate.
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