If you’re a car aficionado with a fondness for luxury and exotic vehicles, you’re likely familiar with the significant expense of state sales tax that accompanies each car purchase. These taxes can significantly inflate the overall cost of buying a new or used vehicle: The tax is calculated as a percentage of the purchase price, meaning that the higher the price, the bigger the tax burden will be. This means that if you own multiple high-value cars or frequently make changes to your car collection, your tax burden can be quite substantial.
However, there is a clever and entirely legal strategy to navigate around these hefty sums: the Montana Loophole. But how exactly does this work?
The Issue:
When purchase a new or used car in most places in the US, you will be hit sales tax based on the purchase price of the vehicle. Rates vary by location, and typically range between 6-9% (you can easily look up your local state tax rates online). Some states have different rates depending on whether you purchase the car from a dealership or a private party, or based on the county in which you reside. For example, purchasing a car in California means paying both state and city sales tax, which can total over 10% of the car’s price. That’s a substantial amount, especially if you don’t plan on keeping the car for many years.
However, there are 5 states that don’t charge any sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. If you live in one of these states – you’re in luck. But what if you don’t?
Fortunately, savvy car buyers can bypass these hefty taxes by utilizing of the Montana LLC Loophole. But how does this strategy work exactly?
Understanding the Montana Loophole:
Simply purchasing a car in a tax-free state won’t exempt you from paying sales tax when registering the vehicle in your own state. Sales tax is based on the state where the vehicle will be registered, not where it was purchased.
You could technically establish a residency in a tax-free state and register your car there, but you’ll need the car to physically be there during registration and in subsequent renewals and annual inspections. However, there is one state that doesn’t require physical presence for registration or any annual inspections: Montana.
The Montana Loophole involves setting up a Limited Liability Company (LLC) in Montana, a state with no sales tax on both new and used vehicles, and registering your car under this LLC. It’s simpler than it sounds, with Montana law firms like 49dollarmontanaregisteredagent.com handling all the necessary paperwork for a small fee, in addition to the state’s registration fee. In total, you can expect to spend around $850-1000.
In plain terms: The cost to register your car through a Montana LLC will often prove far less expensive than the sales tax you’d otherwise be paying.
A Key Advantage:
The main advantage of the Montana Loophole is the ability to eliminate your home state’s sales tax. That’s right: zero sales tax.
Depending on the circumstances, this can lead to significant financial savings. For example, a California resident purchasing a new $250k Porsche 911 Turbo S would save approximately $25k.
Potential Drawbacks:
To make an informed decision, it’s important to consider potential disadvantages of this strategy:
1. Limited Financing Options:
Securing financing for a car owned by a Montana LLC can be more complex compared to personal ownership. If you’re paying cash, that is of course not an issue, but if you wish to finance your purchase, you will find that many financial institutions refuse to finance such cars, although there are exceptions. For instance, Woodside Financial and the financial arms of Ferrari and Lamborghini allow Montana registrations. Porsche Financial Services, on the other hand, does not.
If no financing options are available, you might need to get more creative. For example, you may take out a HELOC (Home Equity Line Of Credit) if you have equity in your home. Your Montana LLC may even be able to write off the interest.
2. Law Enforcement Attention:
Your Montana license plates may attract the attention of state police, particularly in states like California that are beginning to crack down on this practice in an effort to increase tax revenues.
One clever trick used by some is to choose a less flashy-colored plate style and add a bulky tag frame that obscures the word “Montana.” You will be less likely to be pulled over by highway patrol.
3. Clearing Insurance Hurdles:
Your Geico agent may be very confused by a Montana registration for a car driven in New York, for example. If you are having issues getting coverage, don’t worry. Seek out smaller insurance companies, especially those specializing in high-end cars like Hagerty, to find coverage options that will suit your needs.
4. Some Dealerships Disapprove of Montana Registrations:
Certain car dealerships may frown upon selling a car to a Montana LLC, potentially even refusing the sale (this is usually due to the dealership being less familiar with the strategy). It’s far from a universal obstacle, but could potentially lead to limited options if the car you are interested in is very unique and not available elsewhere.
Determining the Right Approach:
When does it make sense to utilize this strategy, and when should you suck it up and just pay the tax? The math is easy: at a representative tax rate of 6.5%, you’d be saving more than the $1000 it would cost you to set up the MT LLC for any car costing more than about $15k. Of course, things are not that simple when weighing in some of the potential challenges mentioned above, and each person will ultimately come up with their own individual risk/reward analysis. What can be be said generally is that the more of the following statements apply to you, the more appealing and lucrative the Montana Loophole becomes:
- You are buying a relatively expensive car (some consider $100k+ as a rule of thumb)
- You don’t plan to keep the car for more than 6-12 months
- You own multiple cars at any given time
- You don’t require financing
Overall, the Montana LLC loophole presents an attractive legal means for individuals looking to save the considerable amount of money in sales tax associated with purchasing luxury and exotic cars. By opting for this strategy, you can sidestep the hefty tax burden, but be aware of potential challenges that may arise along the way.