The short answer
California's SB 1406 (Chapter 1036, Statutes of 2026) was signed and took effect on September 30, 2026. If a California resident owns any part of an out-of-state "shell company" that buys a car, the car is now presumed to be bought for use in California, so California use tax is due. The company's officers, managers, partners, members and beneficial owners can be personally liable for that tax, plus interest and penalties. The same rules cover boats and aircraft.
What the Montana license plate loophole was
Montana has no statewide sales tax. The scheme: a Californian sets up a Montana LLC, the LLC buys an expensive car and registers it in Montana, and the car is driven in California on Montana plates. That skips California's use tax and its yearly value-based registration fees.
It was never really legal. California already presumed that a vehicle brought into the state within 12 months of purchase was bought for use here, and it already treated a closely held company as a California resident if California residents held 50% or more of it. The problem was enforcement: proving who stood behind the company. According to the bill's author, the California Department of Tax and Fee Administration (CDTFA) counts at least 2,500 such vehicle sales involving Californians since 2023 and estimates about $20 million a year in lost revenue.
What SB 1406 changed
- Any California owner is enough for a shell company. A shell company is treated as a California resident if any shareholder, partner, member or beneficial owner lives in California. The old 50% test still applies to other closely held companies.
- "Shell company" is defined. It means a closely held corporation, partnership or LLC used to avoid the tax. Signs the state can point to include: no specific business activity, no physical location outside California, no employees receiving W-2s, and no federal tax returns (or missing required tax returns in another state).
- Partnerships are covered. Partnerships, limited partnerships and limited liability partnerships now count as California residents when California residents hold 50% of the partnership interests.
- Personal liability. A new section (Revenue and Taxation Code §6829.5) makes the people behind a shell company personally liable for unpaid tax, interest and penalties on a vehicle, vessel or aircraft. CDTFA has to show the company used or kept it in California within 12 months of purchase and didn't pay the tax.
- A longer reach back. CDTFA can bill those people within three years after the end of the month following the quarter in which it actually learns of the use in California, not three years from the purchase.
When it took effect
Governor Newsom signed SB 1406 on September 30, 2026, and the Secretary of State filed it the same day. As a tax levy it took effect immediately. It passed the Senate 31–8 on May 19, 2026 and the Assembly 59–19 on August 26, 2026.
Is there a grandfather clause? We found none. The Legislative Counsel's Digest, which lists everything the bill changes, mentions no transition date, and the bill's own text sets none for the new shell-company rules. If you already own a car through an out-of-state LLC, don't assume you are exempt; talk to a California tax professional or CDTFA.
What it would cost: use tax on a typical purchase
Use tax is charged at the sales tax rate where the car is registered in California: at least 7.25%, and up to 11.75% in some cities on CDTFA's list effective October 1, 2026.
Worked example: a $200,000 car bought through a Montana LLC
| Use tax at the 7.25% statewide base rate (0.0725 × $200,000) | $14,500.00 |
| Use tax at 11.75% (Lancaster or Palmdale) (0.1175 × $200,000) | $23,500.00 |
Interest and penalties come on top when the tax is paid late, and California registration fees still apply, including the Vehicle License Fee of 0.65% of value ($1,300 on $200,000). See our California registration fee guide or run the California calculator.
Is any legitimate use left?
Yes. The law targets companies used to avoid the tax, not real businesses or real non-residents:
- The 12-month presumption can still be rebutted with documents showing the car was bought for use outside California during its first 12 months, such as registration in another state with the proper authority.
- Vehicles used in interstate or foreign commerce under CDTFA's regulations remain outside this section.
- A company with real business activity, its own location outside California, employees and filed tax returns doesn't match the shell-company signs in the law. Whether a particular company qualifies is a question for a tax professional.
What this guide doesn't cover
We don't cover Montana's own rules, criminal penalties, or the rules for boats and aircraft in detail. CDTFA had not published SB 1406 guidance on its vehicle tax guide page when we checked; we'll add it when it does.
Frequently asked questions
Can I still register a car in Montana through an LLC if I live in California?
You can form the LLC, but if it is a shell company and you or any other owner lives in California, a car it buys and brings into California within 12 months is presumed subject to California use tax, and the owners can be personally liable for it.
Is SB 1406 a Montana law?
No. It is a California law. It changes California's Sales and Use Tax Law; it doesn't change anything in Montana.
Does it apply to RVs, boats and planes?
The rules cover vehicles, vessels and aircraft. For vessels and aircraft, the 12-month presumption also applies when they were subject to California property tax during the first 12 months.
Who pays if the company doesn't?
Any officer, manager, partner, beneficial owner or member of the shell company can be held personally liable for the unpaid use tax, interest and penalties.
Run the numbers
- California Legislature – SB 1406 bill status (Chapter 1036, Statutes of 2026)
- California Legislature – SB 1406 chaptered text and Legislative Counsel's Digest
- California Legislature – SB 1406 floor and committee votes
- Sen. Jerry McNerney – Newsom signs SB 1406 (press release, Oct 1, 2026; CDTFA estimates)
- CDTFA – Tax Guide for Purchasers of Vehicles
- CDTFA – City & County Sales and Use Tax Rates (effective Oct 1, 2026)
General information, not tax or legal advice. Fees and tax rules change; confirm with the agency listed before you pay.