You Can Avoid Paying Taxes on Your New Car, Although It’s Risky Business

Image result for You Can Avoid Paying Taxes on Your New Car, Although It's Risky BusinessFrom the October 2017 issue

A few years ago, at a Kruse auction, I sat beside a bald bidder who’d already lost precious portions of his mind over a 2007 Ford Mustang GT-H, the black-and-gold Hertz clone. “I will get this car,” he assured, and he did, but for a sum greater than the Mustang’s original sticker. I asked about applicable auction fees and sales tax. “Oh, no sales tax,” he said. “Montana plates.”

Well, now I live in Montana and finally grasp the BB’s (bald bidder’s) boast. Right now, my adopted state is enjoying a humming cottage industry of people who, for fees ranging from $174 (no attorney) to $1500 (an earnest attorney), will create a limited liability company, or LLC, for nonresidents. That LLC is a “legal entity” and doesn’t need to stipulate your name or state of residency. In turn, your LLC can buy, well, let’s call it a “company car” that happens to be a pearlescent-mauve McLaren 570S costing $250,000. If the BB had purchased that McLaren in his state of residency—let’s say in Michigan— he’d pay 6 percent sales tax, or $15,000. But if he’d bought the car through his Montana LLC, he’d pay zero sales tax because Montana doesn’t collect any. Of course, once the BB had his car, he’d have to bolt on funky Montana plates, front and rear.

Let me be clear: This is 100 percent legal in Montana. The law was established in 1991. But we’re dealing with state law here, not federal, so whatever laws Montana enacts may not jibe with those of, say, California. In fact, there are state regulators in a foaming tizzy about their inability to collect sales taxes that have been nullified by Montana’s LLCs. Not only California but also Arizona, Colorado, Maryland, Massachusetts, Michigan, Nevada, Oregon, and Washington. Some have set up tip lines so that citizens can report suspected tax cheats. Last year, in fact, Californians reported 260 Montana plates to the CHiPs, who can say, “Please prove your established state of residency.” Montana-plated vehicles are said to be prized in California, where they can often obviate smog checks, unless the car is used primarily in California. Of course, who knows if it is?

The thing is, do you plan to insure your McLaren? Many insurers view LLCs as week-old fish. If you’re ethical, you’ll tell your agent that your true state of residency is Michigan, that you’ll drive the McLaren in Michigan and will store it in Michigan, but the car will bear Montana plates in the name of a Montana LLC. “Oh, really?” says your agent, pointing to the clause that says, “False statements on your insurance application are grounds for denying a claim.” Now what? You drive your uninsured McLaren to ­Mar-a-Lago for Vlad’s big birthday bash? Have you seen the valets at that place?

Avoiding taxes and evading taxes are not conjoined twins, because one of them can put you in prison. If your state decrees that it has primary jurisdiction and that you’ve formed the Montana LLC for the sole purpose of evading taxes, you’ve evaded taxes. They’ll apply the legal test of “piercing the corporate veil.” Did you, in good faith, establish your LLC as a business to make a profit? If not, it may be judged a shell corporation. Go tell Judge Judy, but you’ll likely dole out more than the $15,000 you saved in the first place.

I contacted attorneys Jared Heggen and John Bennett in Missoula, Montana, both substantial players in this business. Heggen can set you up with an LLC to buy a luxury vehicle—e.g., our mythical McLaren—for $1495, depending on services rendered during a mandatory one-hour consultation. Heck, I spend an hour just getting out of bed. Heggen told me: “We provide guidance whether the client would be compliant with tax and registration laws in his state of residence. Plus, we require him to seek independent counsel in his state.” Heggen enforces that by making you sign a notarized promise.

Heggen went on to describe a scenario unknown to me. “If the client’s state of residence has a sales-and/or use-tax clearance test period [my emphasis], I could assure him he’d not incur sales or use tax, provided the car was shipped to a Montana storage facility. The vehicle then must stay out of the state of residence during the test period.” For some states, such as California, Bennett says that can mean storing your luxury vehicle outside the state for up to 12 months but with 30-day windows for servicing. “It’s complicated. Florida and Massachusetts demand six months. Arizona, 90 days. Unless you spend a half million on a car, this is not for you,” he warns. By the way, Bennett drives a Ferrari F430 Spider and a 1967 Fiat Dino Spider.

Folks often establish Montana LLCs because they’re furious over their state’s steep taxes. Of course, the way to fix that is not to evade the tax but to change the law.

I hope the BB is right now performing burnouts in his Mustang and not studying contract law at Leavenworth. But I’ll tell you this: I plan to invest in Montana storage facilities, to which I’ll have all the keys. I’ve never driven a 570S.