Utah Is Using Insurance Records To Catch Montana Loophole Tax Evaders Which Other States Could Follow

In previous columns, I have covered the “Montana Loophole,” where car owners would deliberately register their car outside of the state they reside in. People did this to avoid their home state’s sales taxes, annual registration fees, regular smog checks in some states, and in California’s case, to avoid mandatory and expensive emissions modification

While this strategy was initially used by owners of expensive sports cars and trailers, a recent Utah Tax Commission study showed that these days some of their residents are using this tactic for regular cars. Although only a tiny fraction of the population use this tactic, people publicly boasting on social media and online forums about never getting caught risks encouraging others to try.

As state legislatures become aware of the Montana Loophole, they have passed or proposed legislation to close it. For example, in California, Senate Bill 1406 (SB 1406) has passed the state legislature and Gov. Gavin Newsom is expected to sign it into law. SB 1406 would close the Montana Loophole by expanding California’s definition of who is a resident under state use tax law to include a shell company when at least one member of the business is a California resident. SB 1406 would also authorize tax agencies to impose tax liability on the individual members of a shell company.

The problem with SB 1406 and similar laws proposed in other states is that it requires the government to know that the improperly registered car exists, which is mostly done through law enforcement stopping suspicious vehicles. But police are reluctant to pull over people for simply having out-of-state plates because in most cases they have legal reasons for not doing so.

But Utah recently passed a law that has taken the police out of the equation and instead looks at a driver’s insurance records. Under this new law, if the Utah Tax Commission finds that a driver’s car is insured in Utah but is registered in another state, they will contact the owner and demand that the car be registered in Utah and pay registration fees and taxes. Alternatively, they can reply explaining why they are exempt. If they fail to do either, they will be subject to fines.  

In about five months of work, the tax commission has brought in $1.6 million in sales tax and $32,540 in fines and that number is expected to double in another six months. Jason Gardner, deputy executive director of the Utah State Tax Commission believes even if this is not a huge moneymaker, it is worth it to make the system more fair.

If Utah’s law is successful in closing the loophole, expect other states to follow their lead. In California, it is estimated that cars fraudulently registered out of state is costing the state approximately $20 million per year in lost tax revenue.

States may also implement other strategies that rely less on police. States may establish a multistate reciprocity agreement where a car registered in one state but garaged in another could impose an additional fee equivalent to the registration fee in the home state. But some states (like Montana) probably won’t participate since the loophole benefits them financially. States could also implement automated license plate readers to track the number of days the car is in the state.

This column serves to warn people with out-of-state license plates solely for evading taxes and emissions rules (and those thinking about doing it) to reconsider. Eventually, more efficient enforcement mechanisms such as Utah’s will be coming to other states. Police may step up enforcement efforts either through direct traffic stops or indirectly by targeting street takeovers, noise regulation violations, or in car accidents due to dangerous driving.

I understand that some people think the laws are oppressive or even unconstitutional. I also understand that it may be unfair to tax some cars that are only driven a few times per year due to its collectible status or historical significance. If that is the case, organize your car enthusiast friends and contact your state representative or challenge the rules in court.

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Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.