California has strengthened its ability to challenge Montana limited liability company structures used to purchase and register vehicles, vessels and aircraft. Senate Bill 1406 (SB 1406) expands the circumstances under which an out-of-state entity may be treated as a California resident for use tax purposes and permits the state to impose personal liability on individuals associated with an entity determined to be a shell company.
Individuals and businesses using these structures, particularly for high-value property stored or used in California, should review their tax positions and supporting documentation before the California Department of Tax and Fee Administration (CDTFA) initiates an examination.
What’s changed?
SB 1406 is intended to address arrangements in which a California resident establishes an out-of-state entity, often a Montana LLC, to purchase and register a vehicle, vessel or aircraft without paying California sales or use tax.
Under the new law, a shell company may be treated as a California resident for use tax purposes if any shareholder, partner, member or beneficial owner is a California resident. The law also authorizes CDTFA to hold an officer, manager, partner, beneficial owner or member personally liable for unpaid tax, interest and penalties associated with the purchase.
The legislation took immediate effect as a tax levy.
How CDTFA may identify a shell company
In determining whether an entity was formed or used to avoid California sales or use tax, CDTFA may consider whether:
The entity lacks a specific business activity or purpose.
The entity does not maintain a physical location outside California.
The entity has no employees receiving Forms W-2.
The entity fails to file federal tax returns or required state tax returns outside California.
Other facts indicate that the entity exists primarily to hold title to the property.
No single factor necessarily determines the outcome. However, these indicators provide CDTFA with greater authority to examine whether an ownership structure has meaningful business substance.
Potential personal liability
The personal liability provisions of SB 1406 create significant additional exposure.
If CDTFA establishes that a shell company stored, used or consumed a vehicle, vessel or aircraft in California without paying or remitting the required tax, the agency may pursue certain individuals associated with the entity for the unpaid tax, interest and penalties.
Taxpayers should not assume that holding property through an LLC will, by itself, insulate the entity’s members or beneficial owners from California tax liability.
California has already increased enforcement
SB 1406 builds on an enforcement initiative already underway.
In March 2026, CDTFA reported that it had identified nearly 500 California dealers involved in more than 2,500 sales since 2023 to purchasers claiming that vehicles would be used in Montana. The agency had opened more than 400 investigations involving high-end vehicle purchasers and initiated nearly 300 dealer audits involving sales to states without a sales tax.
Dealers and other businesses involved in these transactions may also face exposure when a sale does not satisfy California’s requirements for an out-of-state delivery exemption.
Actions to consider now
Individuals and businesses that own or operate vehicles, vessels or aircraft through Montana LLCs or similar out-of-state entities should consider taking the following steps:
Review the entity’s business purpose.
Determine whether the entity conducts substantive business activity beyond holding title to the property.
Assess where the property is used and stored.
Document where the vehicle, vessel or aircraft is regularly located, operated, maintained and garaged or stored.
Confirm California tax compliance.
Evaluate whether all applicable California sales and use tax obligations have been satisfied.
Identify potential historical exposure.
Review prior transactions and determine whether any open tax periods may be subject to examination.
Preserve supporting documentation.
Maintain purchase agreements, delivery records, storage and maintenance records, travel logs, registration documents and evidence supporting any claimed exemption.
Review transaction procedures.
Dealers, brokers and other businesses facilitating these purchases should reassess their documentation, reporting and exemption-verification processes.
How UHY can help
SB 1406 reflects a broader state tax enforcement trend: tax authorities are increasingly looking beyond an entity’s legal form to evaluate its business purpose, economic substance and the location where property is actually used. Taxpayers with multistate ownership structures should expect closer scrutiny and monitor similar developments in other jurisdictions.
UHY’s State and Local Tax professionals can assist individuals and businesses with:
Evaluating existing ownership and registration structures
Assessing California sales and use tax exposure
Reviewing documentation supporting an exemption
Preparing for or responding to a CDTFA examination
Advising dealers and facilitators on transaction and compliance procedures
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Author
LEO VARNER
Partner, UHY LLP Managing Director, UHY Inc.
Leo Varner leverages more than 23 years of experience in state and local tax matters to lead UHY's National State and Local Tax practice. He assists clients from a broad range of industries and has a proven track record in navigating complex regulatory landscapes, providing strategic state tax solutions, and optimizing tax structures for clients. Leo specializes in tax controversy, helping clients to mitigate tax exposure and to recover tax overpayments.