Can I Avoid State Sales Tax by Using a Montana LLC?

When you buy an expensive item of personal property, like a motorhome or RV, the sales tax can be enormous. In an attempt to avoid paying this tax, some out-of-staters set up an LLC in Montana to buy their RV or motorhome. Montana doesn't impose a sales tax on vehicles purchased by its residents, and a Montana LLC would be considered a resident.

But you should think twice before taking this tactic. If you form a Montana LLC to circumvent paying taxes in another state, you might still owe sales tax (or an equivalent amount of use tax) in your home state. Also, the practice might violate your state's laws.

What Is a Montana LLC?

Small business owners in Montana often choose to create a limited liability company (LLC). An LLC has many advantages, including limited liability protection for owners.

However, in the scheme discussed in this article, forming a Montana LLC has nothing to do with protecting a business owner from liability. Instead, it involves dodging sales taxes.

How the Montana LLC Scheme Generally Works

This Montana LLC scheme has been around for years and continues to be promoted by Montana-based lawyers. Basically, the Montana LLC scheme works like this: If you live in another state, you hire a Montana law firm or company to form an LLC in that state and have the LLC buy a motorhome or RV (or other expensive vehicle). The firm registers and titles the vehicle in the LLC's name and sends you the Montana license plates for the vehicle.

This tactic to get around paying sales taxes is used with Montana LLCs because Montana doesn't impose sales tax on the purchase of vehicles by its residents, including resident LLCs. (Mont. Code § 61-3-311 (2024).)

Case Involving Forming a Montana LLC to Avoid Sales Tax

At one time, Louisiana had a 9% sales tax, which meant purchasing a $350,000 motorhome resulted in a buyer paying over $31,000 in sales taxes. One Louisiana taxpayer faced this exact situation. However, instead of paying all that sales tax in Louisiana, this taxpayer decided to form an 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.

But Did This Montana LLC/RV Scheme Work for Avoiding Taxes?

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.

In this case, the court held that the RV purchaser had formed a valid LLC under Montana law. The fact that it was formed solely to avoid sales tax on a motorhome purchase didn't make the LLC invalid under Montana's LLC law, according to the court. Additionally, because 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. Second, the state Department of Revenue didn't do a very good job prosecuting its case.

What Are the Legal Risks?

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.

These websites also recommend you consult with an attorney to review your state's laws and regulations, as well as Montana's laws, to ensure this tactic is legal in your situation. If your main residence is in another state, the practice might be considered tax evasion or tax fraud, or it might violate other laws, such as vehicle registration laws. You could face fines or penalties or even criminal charges.

What Happens in Most States

In most states, an LLC created solely for the purpose of skirting 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 some 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. In some states, like California, Colorado, Texas, and Florida, tax authorities are particularly aggressive in pursuing tax dodgers. 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. Colorado has a fraud hotline to report fraudulent activity concerning vehicle registration.

Other states reportedly have inspectors who check out RV repair facilities and look for vehicles with Montana plates. Some states also check RV storage facilities for vehicles with such plates or monitor online forums where people discuss using this tactic to avoid paying sales taxes.

Again, you could also face fines, penalties, or criminal charges if you're caught violating the law.

Other Issues With Forming a Montana LLC to Avoid Taxes

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 or pay a claim for an improperly registered vehicle.

So, you'll probably be better off in the long run paying all the tax you owe in your home state.

Alternatives For Paying Less

There are some legitimate ways to reduce what you have to pay when buying a vehicle without risking legal trouble. You might qualify for a credit or incentive that would lower the overall price or taxes you have to pay.

Talk to a Lawyer About Vehicle Taxes

If you're considering forming a Montana LLC to avoid paying sales taxes on a vehicle in your home state, you should first consult with a lawyer where you live before doing so. The practice might be illegal, and you could be subject to other taxes. Generally, it isn't a good idea. It's a shady tactic at best, perhaps against the law, and if you can afford a motorhome or an RV, you can probably afford the sales tax on it.