Can I Avoid State Sales Tax by Using a Montana LLC?
This may sound promising but in most states, an LLC created solely for the purpose of avoiding sales tax will be viewed as a sham.
When you buy an expensive item of personal property like a top-grade motorhome or RV, the sales tax can be enormous. For example, if you live in Louisiana, which has a 9% sales tax, and purchase a $350,000 motorhome, you’d have to pay over $31,000 in sales taxes. This was the situation faced by a Louisiana taxpayer. However, instead of paying all that sales tax in Louisiana, this taxpayer decided to form a limited liability company (LLC) in Montana, which has no sales taxes. He had the LLC purchase the motorhome in its name and registered it in Montana. He paid no Louisiana sales tax at all. In fact, all he paid was a $174 fee to register the motorhome in Montana.
Did this scheme work? Well, sort of. The Louisiana Department of Revenue found out about the purchase and claimed that the buyer personally owed the state over $30,000 in sales taxes, and tacked on an additional $16,000 in fines and penalties. The Louisiana taxpayer fought the tax assessment all the way through the Louisiana Supreme Court, where he was ultimately victorious. The court held that he had formed a valid LLC under Montana law. The fact that it was formed solely to avoid sales tax on a motorhome purchase did not make the LLC invalid under Montana’s LLC law, according to the court. Additionally, since he kept the motorhome garaged in Mississippi, not Louisiana, no state use tax was due (the use tax would have been in the same amount as the sales tax). (Thomas v. Bridges, 2013-C-1855 (Sup.Ct. LA May 7, 2014).) Of course, fighting his case through the courts probably cost this taxpayer more than $31,000; so it must be viewed as something of a Pyrrhic victory. Moreover, other Louisianans should think twice before following in his footsteps. First of all, the Louisiana Supreme Court practically begged the Legislature to change state law to make the scheme illegal; something it may very well do. Second, the state Department of Revenue didn’t do a very good job prosecuting its case.
The Montana LLC scheme used by the Louisiana taxpayer has been around for years and continues to be promoted by Montana-based lawyers. It can only work with LLCs formed in Montana because Montana is the only state which imposes no sales tax on the purchase of vehicles by its residents, including resident LLCs.
If you form a Montana LLC and have it purchase and take title to a motorhome or RV, you won’t owe any sales tax in Montana. But this doesn’t mean you won’t owe such tax (or an equivalent amount of use tax) in your home state. The Montana lawyers who form these LLCs—at a cost of around $1,000--admit as much in the small print on their websites.
In most states, an LLC created solely for the purpose of avoiding sales tax will be viewed as a sham, and the state will assess sales taxes on the LLC’s owners personally. Even if you can avoid your state’s sales taxes, you’ll be subject to an equal amount of use tax if you use the vehicle in your home state for more than a very limited amount of time. In many states, you’ll avoid use tax only if you don’t use the vehicle in your state of residence for a full year after you buy it. Others require that you don’t use the vehicle in your state for more than 90 consecutive days.
The states are well aware of the Montana LLC scheme and many are actively trying to get the people who use it to pay state sales or use taxes. For example, the California Highway Patrol has a special website that people can use to report vehicles with Montana or other out-of-state plates. Other states reportedly have their inspectors who check out RV repair facilities look for vehicles with Montana plates. Some revenue-hungry states also check RV storage facilities for vehicles with such plates.
Even if you don’t get caught by your home state and avoid paying sales or use tax, forming a Montana LLC to own a motorhome can present special problems. For example, many financial institutions won't finance an RV or motorhome titled in an LLC’s name, especially a Montana LLC. Also, many insurers won't insure such a vehicle. Thus, you’ll probably be better off in the long-run paying the all the tax you owe in your home state.