For years, California residents avoided state sales and use tax on high‑value vehicles by registering them through limited liability companies formed in Montana, a state that levies no sales tax on car purchases and does not require smog inspections. Under the prior rule, a business was considered non‑resident for California tax purposes if more than half of its ownership or operations lay outside the state, allowing owners to shell their cars in Montana‑based LLCs and dodge the use tax.
This image shows a Montana license plate, which residents previously used to avoid California vehicle taxes by registering cars in Montana-based LLCs.
Senate Bill 1406, signed into law on September 30, 2026, changes that threshold. The law now provides that, for the purpose of the presumption of residency, a shell company is a resident of California if any shareholder, partner, member, or beneficial owner is a California resident. It also expands the definition of covered businesses to include partnerships, limited partnerships, and limited liability partnerships, closing the previous exemption that applied only to corporations and LLCs.
The same provision imposes personal liability on officers, managers, partners, beneficial owners, or members of such shell companies for any unpaid taxes, plus interest and penalties, and notes that nonpayment may constitute a crime. By attaching tax responsibility to individuals rather than only to the business entity, the statute aims to make it “much harder to get away with the shell‑company shenanigans rich Californians have exploited for decades.